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Congestion Charge

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Submitted By km13756
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Question 2

I will firstly define concepts of efficiency and equity. We say that particular allocation if efficient if resources (which are scarce) are allocated towards those who get greater utility from them. If those individuals are receiving greater utility for them, the maximum price at which these resources will still be bought (MPC=MB) can be pushed higher raising the total social utility (greater utility of consumers and greater utility of sellers due to higher prices). Equity (also known as economic equality) refers to the idea of fairness in economics. This principle can be easily demonstrated of example of taxation. Only those taxes are seen as economically fair which take away same proportion of individuals income: both poor and rich are affected in the same way. However, if we speak about fixed amounts taxes then certain theoretical sum can take up to 50% of income of some families, while for more wealthy individuals this sum ay amount only to
1%: as the result their life chances are affected differently.
The interaction between equity and efficiency will depend on the way we define utility in our model. The congestion charge assessment is built around value of time. We want to put monetary value on the time we lost in journey times: that way we can derive benefit from saved time due to car journey. The value we put on time is opportunity cost of that time: in case of work-related travel that will be money that could have earned over that time = Wage rate/ hour * time (in hours).
In terms of people which are more likely to pay the congestion charge we can say that they will be people with higher earnings: people’s willingness pay is normally defined with their ability to pay. Those who receive benefits of saved time greater that the congestion charge are more likely to pay it: those with higher wage rates and incomes
consequently.…...

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