To an extent, this form of taxation does work, however there becomes a point where those who have not been priced out of the market will not change their consumption at any conceivable price level, either due to their price elasticity of demand for the consumption of road travel, or because the extra price to be paid represents a negligible amount of their income.
It has been said that this type of pricing causing the two-tiered economy that we already live to be increased further, with the less well-off condemned to having no choice, and the well-off being distanced from those less well-off even more, and enjoying greater choice.
There are some limitations to the congestion charge, although it does help to eliminate some overconsumption.
The elasticity of the good or service being taxed affects its effectiveness. Road travel has a highly inelastic demand and marginal private benefit curve, and so a large increase in price could lead to only a minute decrease in the quantity demanded. A way of trying to correct this could be to improve the quality of service given by substitutes to road travel, so that the elasticity of road travel becomes more elastic, giving a more responsive change in consumption when there is a change in price.
The improvement of substitutes would also naturally decrease the consumption of road travel simply because there would be other alternatives that are just good as road travel.
For instance in London, the Underground and bus systems in place are seen as some of the best in the world, and so road travel has been noted as inferior in the busy city that London is. However it was still seen as necessary to implement a congestion charge in 2003. This further decreased the demand for road travel for a period; however since this decrease the demand has been constant and steady. The reason for this may be as I mentioned before; less well-off members of society may have been priced out of the market, however those who could afford to pay the charge yet still maintain the same lifestyle have remained in the market.
There is also ambiguity as to the magnitude of the charge, since we do not know the exact external cost, although we can estimate using cost-benefit analysis (CoBA), the exact cost cannot be measured and so the charge to be passed on to consumers is therefore an estimate.
There are also extra costs associated with implementing a congestion charge, for instance in Singapore in 1975 individuals were stationed at city entry points to detect cars not displaying a valid ticket, this was inefficient and costly, and so it was replaced by an electronic system using microchips fitted in cars and a detector at the city entry points. This is also costly due to the level of technology being used, and also, there are car drivers who remove their chip so as to avoid paying the charge. Officials have to assess CCTV footage and detect those who do this; another cost to the process. In London there are costs in charging individuals, through postage, fines, and issuing of permits, as well as tracking those who refuse to pay.
Overall, congestion charging does decrease the consumption of road travel and so to an extent does aid in the correction of market failure, however the operation of congestion charges alone would not have the desired effect. With increasing quality of substitutes, we will see decreased consumption of road travel, however there will always be a demand for road usage, and this will increase at peak times; with finite and limited resources congestion is something that we will have to learn to live with, especially with increasing populations, and so it is vital that substitutes improve.
