Some would argue that the goal of public policy is not to reduce congestion but, rather,...

     

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Some would argue that the goal of public policy is not to reduce congestion but, rather, to eliminate congestion. In the graph below, we see that congestion sets in at traffic flow T₁. Existing demand equals Do. The market attains an equilibrium at T3. Suppose that a road tax were levied on travelers that reduced traffic flow to its uncongested level T₁. Generalized cost D U Do Marginal Cost Average Cost T₁ T₂ Traffic flow (1) What would be the loss in consumer benefits from such a tax? (2 points) (2) What would be the resource savings from this tax? (2 points) (3) What congestion revenues would be collected from such a tax? (2 points) (4) Assuming that all congestion revenues were returned to a city's residents, what would the net welfare effects of this policy? (2 points) In general, if too many resources are currently allocated to trip-making because of congestion policies, how much congestion should be eliminated if we want an efficient allocation of resources to trip-making? (2 points) Explain to people with plain language why a congestion charge will not (fully) eliminate the congestion. Avoid using jargons such as marginal cost, social welfare, etc. (9 points) Some would argue that the goal of public policy is not to reduce congestion but, rather, to eliminate congestion. In the graph below, we see that congestion sets in at traffic flow T₁. Existing demand equals Do. The market attains an equilibrium at T3. Suppose that a road tax were levied on travelers that reduced traffic flow to its uncongested level T₁. Generalized cost D U Do Marginal Cost Average Cost T₁ T₂ Traffic flow (1) What would be the loss in consumer benefits from such a tax? (2 points) (2) What would be the resource savings from this tax? (2 points) (3) What congestion revenues would be collected from such a tax? (2 points) (4) Assuming that all congestion revenues were returned to a city's residents, what would the net welfare effects of this policy? (2 points) In general, if too many resources are currently allocated to trip-making because of congestion policies, how much congestion should be eliminated if we want an efficient allocation of resources to trip-making? (2 points) Explain to people with plain language why a congestion charge will not (fully) eliminate the congestion. Avoid using jargons such as marginal cost, social welfare, etc. (9 points)