Chapter 17, Problem 8P

To determine

1. Draw a graph that illustrates the overuse of London roads, assuming that there is no fee to enter London in a vehicle and that roads are common resource. The cost of travel should be on the vertical axis and the quantity of cars should be on the horizontal axis. Draw a typical demand, individual marginal cost, marginal social cost curves and label the equilibrium point.
2. In February 2003, the city of London began charging a 5 pounds congestion fee on all vehicles travelling in the central London. Illustrate the effects of this congestion charge on your graph and label the new equilibrium point. Assume that equilibrium point is not optimally set.
3. The congestion fee was raised to 9 pounds in January 2011. Illustrate the effects of this equilibrium point on your graph assuming that the new charge is optimally set.

Concept Introduction:

Marginal Social Cost - It is the change in the total cost to the society by the production of an additional unit of a commodity. It is the sum of marginal private cost and marginal external cost.

Marginal Social benefit - It is the change in the total benefit to the society by the consumption of an extra unit of a commodity.

Pigouvian Tax - It is a tax on those activities taking place in the market economy that cause negative externalities.

Excludable goods - Those goods to which one could be excluded for consumption, if not paid for example - railway ticket.

Rival in Consumption - Those goods which can be consumed by only one person at a point of time. No sharing is entertained such as an ice-cream.