Reference no: EM1315304

Q. Prior to 2003, the city of London was often one big parking lot. Traffic jams were common also it could take hours to travel a couple of miles. Each additional commuter contributed to the congestion which measured by the total number of cars on roads of London. Although each commuter suffered by spending valuable time in traffic nobody of them paid for the inconvenience they caused others. The total cost of travel includes the opportunity cost of time spent in traffic also any fees levied by London authorities.

a. Draw a graph illustrating the over utilizes of London roads, assuming which there is no fee to enter London in a vehicle also which roads are a common resource. Put the cost of travel on the vertical axis also the quantity of cars on the horizontal. Draw typical demand, individual marginal cost (MC) also marginal social cost (MSC) curves also label the equilibrium point. The marginal cost takes into account the opportunity cost of spending time on the road for individual drivers but not the inconvenience they cause to others.

b. In February 2003, the city of London began charging a £5 congestion fee on all vehicles traveling in London. Illustrate the effects of this congestion charge on your graph also label the new equilibrium. As new equilibrium point is not optimally set (which is, assume which the £5 charge is too low relative to illustrate what would be efficient).

c. The congestion fee was raised to £8 in July 2005. Illustrate the new equilibrium point on your graph also assuming new charge is now optimally set.