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Microeconomics Assignment -Congestion charge

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Microeconomics Assignment -Congestion charge

When driving into central London nowadays, vehicles are subjected to a charge which is known as the congestion charge. The congestion charge came into force on February 17th 2003 and is applicable between the hours of 7am and 6.30pm Monday to Friday excluding bank holiday.

        The Original purpose and introduction of the congestion charge was to reduce congestion in London which in turn will hopefully reduce pollution and to use the revenue generated from the charge to increase the quality and quantity of London transport system.

        In this essay I will discuss the positive and negative externalities that have arisen from the congestion charge and whether or not it has been a success

When the congestion charge was first introduced in Feb 2003,it main aims were as stated in the congestion charge guidelines document to reduce congestion, make improvements in bus services, improve the journey time for car users and to make the distribution of goods and service more efficient and use the revenue generated to improve London transport system. When first introduced the congestion charge was £5 but since July 2005 has been increased to £8.Certain vehicles are exempt from paying e.g. taxis, emergency services, licensed minicabs, blue/orange badge holders and alternative energy sources. Residents are permitted to a discount.

The congestion charge is eight square miles in distance in the heart of London and drivers can pay the charge through several sources, e.g. telephone, text, internet, post. Drivers that travel into London charging zone on daily basic can experience a discount by purchasing weekly, monthly or annual passes.

        A positive externality that has arisen from the congestion charge is that all the revenue generated from the charge must be reinvested in transport for London. It reported that 130million a year is raised from the charge .Of  which 84million has being spent on new buses,36million on increased road safety e.g. street lighting and 4million on CCTV cameras on buses to enforce bus lanes and cut down on crime on buses. Since last spring 300 new buses, and 6 new routes and night routes have been introduced using the revenue generated from the congestion charge.

It is widely agreed that the introduction of the congestion charge help correct the negative externalities that congestion has caused. As before the charge was introduced many individuals used vehicles mainly cars (see figure3 below) as there mode of transport into London which caused major congestion, which can causes severer problems. Pollution is a major problem that is caused by congestion, as cars release dangerous pollutants and chemical into the nearby atmosphere, the introduction of the congestion charge helped reduce these chemicals/pollutants.


As shown in the graph above since the introduction of the congestion charge, the number of cars entering the charging zone has considerably decrease and the amount of taxis, bus and pedal cycles has increased.

Furthermore waste is another problem that is caused by congestion, “as cars are using petrol while at a standstill and engines are being used inefficiently”, the congestion charge has also helped decrease waste in the form of petrol.

        Furthermore before the congestion charge was introduced, businesses were losing around £50million a year due to congestion, due to the fact that “traffic movement in and around London was severely hampered by congestion” with the reported average speed being below three miles per hour. The reason businesses were losing so much money due to congestion, was due to the  fact deliveries and collection were late which in turn would increase the cost of wages of the drives, fuel consumption etc. The introduction of the congestion charge has saved businesses millions of pounds, therefore resulting in the economy of businesses in London which were affected by congestion running more productively and economically.

        However there have been several negative externalities that have arisen since the introduction of the congestion charge. There have been numerous business shop complains that the charge has lead to a noticeable change in consumer shopping habits .There has been a noticeable change in the amount of individuals “coming into London to do their shopping” Those who still come into London to do their shopping, have change what they buy, with fewer people buying large, bulkier items as it hard to transport them home via public transport.

        Furthermore estate agents have reported when business shops owners are renewing lease negotiating, that they have asked for lower lease prices. Due to the fact that businesses are resulting in a lost of revenue which is affecting the local economy of local businesses since the introduction of the congestion charge due to lack of passing trade.

        Even though millions of pounds have being raised since the introduction of the congestion charge, which has help improved public transport enormously the scheme has not created as much revenue as the Mayor of London had predicted. It was estimated the scheme would bring in revenue in excess of £200million a year, but only £130million a year is generated. This is due to a cut in the number of vehicles on the road in the charging zone which is reported to be around a third. This has resulted in the investment in public transport not being as high as predicted before the scheme was introduced. Additionally there are problems with paying the charge and fines of people being chase-up for non-payment. Even though there are various different methods of paying for the charge, there is a problem of chasing and ensuring “Transgressors are chased up and pay their fines”

        Overall many people would argue including myself that the congestion charge has been a success due to numerous factors. Firstly there are several negative externalities that are associated with congestion. To name a few: pollution, waste, and money wasted for companies while drivers are stuck in congestion, these have all severely decreased since the introduction of the congestion charge and improved the quality of life in the city centre. Furthermore the revenue generated from the charge have been used to make massive improvements in public transports with over 300 new buses in circulation.1.1.million people are now taking the bus into central London everyday and the trains have seen an increase of around 10% in terms of passengers.

Overall city productivity has increased due to decrease in congestion, which can only help businesses economical activities. Taxi drivers are also major winners since the implementation of the congestion charge as people are more likely to use them.

        However local residents have argued that congestion seems to have increased on local roads near the charging zones, due to divert traffic from the city centre. This effect seems to be minimal and could easily be addressed by charging a small fee for surrounding roads around the congestion zone. Local businesses also seem displeased with the congestion charge as there was a lack of passing trade which they blamed on the charge. However this was probably due to the fact, that when the charge was first introduced in Feb 2003, London was experienced problems due to the knockdown effects of the Iraq war and the closure of the central tube line. Considering the reductions in local congestion which has helped the local economy in terms of money saved and productivity and massive improvements in public transport, the congestion charge has been a success, so much so that they are thinking of implementing the system in Manchester.  








John Sloman, (2003), Essentials of economics 3rd edition , London

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