Traffic congestion

An externality is a spillover cost or benefit that affects the third parties involved in the consumption or production of the goods and it is incurred without compensation and outside the operation of the market. In the case of traffic congestion, negative consumption externalities are incurred. Negative consumption externalities refers to an external cost which is the consumption of a good, incurred without compensation, to third parties and which the consumers do not need pay fully. As a result, market failure occurs as there is over consumption of the use of vehicles if it is left complete to the free market. When an individual decides to use the road, they would only take into account the marginal private cost (MPC) and marginal private benefit (MPB) of driving. The MPB of having a vehicle is that it will be more convenient for the owner to travel and reach their destination faster. The MPC of having a vehicle is that the owner will have to pay for their maintenance and the parking charges. In the free market, consumers will only take into account their MPB and MPC and will consume at MPB=MPC, where his net private benefit is maximized. Hence the consumer will consume Qe units of vehicles as shown in the diagram. However, this is not the socially optimal level of consumption . This is because there is a negative external cost involved in the usage of roads resulting in traffic congestion. As a motorist uses the road, he inadvertently reduces the road space available for the other road users. This will lead to a buildup of traffic on the road and cause the roads to be congested. When roads become congested, the road user will have to take a longer time to reach their destination. This will also cause the motorists to suffer from higher stress and frustration. Moreover, as the vehicles spend a longer time on the road, there will be greater pollution. As a result of the negative externalities, there are MEC involved in the usage of an additional until of road space too. This means that there is a divergence between the MSC involved and MPC of driving due to the external cost generated. Hence, MSC lies above MPC as shown in the diagram. As a result, the socially optimal amount of road usage is at Qs where MSC=MSB. The net benefit of driving to society is maximized at Qs. Since the consumers in the free market consume up to Qe units of road space, which is more than Qs, this results in over usage of road space in a free market and leads to a deadweight loss to society as shown in the diagram. At Qe, the additional cost of using road space is greater that the additional benefit. Allocative inefficiency arises and thus market fails.

(Insert diagram) Government interventions are needed to reduce the over consumption of road space. Singapore government reduces the over consumption of road space through the use of taxation policy and legislation and regulation policy.

The Singapore government has introduced taxation policy such as the electronic road pricing (ERP). It is the imposing of tax on certain stretch of road during certain period of time especially during the peak hours. This increases the MPC of driving as drivers are made to internalise the externalities. The quantity demanded of the usage of road space will fall as drivers are not willing nor able to use that stretch of road. To be successful, the amount of road pricing must be equal to the external marginal cost (MEC) at socially optimum output level making them pay for the full amount of MSC. However there is a limitation to the use of this policy. It is difficult to estimate the exact monetary value of the MEC as the adverse effect of continued congestion may be a long term problem. It will be difficult to estimate the optimal level of road pricing to impose. Government may either over tax or under tax the motorists. If the government under tax the motorists, it will not deter the motorists from using the road enough. There will be little impact to reduce the driving on these roads, especially if there are no alternatives and if demand is price inelastic. Congestion at those roads will still take place. If government over tax the motorists, they may avoid using that stretch of road and switch to other roads The other roads may then be clogged up while the tax-ed road is being under utilised. Allocative inefficiency occurs either way. Furthermore,the construction and maintenance of the ERP gantry will cost the government money which may result in more market failure as the money may not be spent efficiently due to the government failing due to bureaucracy. The Singapore government has also introduced legislation and regulation policy such as the use of Vehicle Quota System (VQS) which include the use of Certification of Entitlement (COE). The price of the COE is determined by the demand and supply of COE. The government will control the supply of the COE. In this case they may restrict the supply of the COE. This causes the price of the COE to increase and hence and increase the MCP of buying car ownership. Quantity demanded will fall as people are discourage to buy cars. To be successful, the amount of COE issued should be equal to the optimal level of cars allowed on the road. However, there are limitations to this policy. Using this policy alone may not be able to deter usage. This is because drivers who pay a high amount for the car may want to use it more frequently, hence the pollution problem still remain unsolved. In addition, cars are not demerit goods. Too much control on the ownership of the car may lead to resentment among the people. This will then have adverse political and economic impacts. Furthermore, the policy controls car ownership instead if car usage which is the crux of the issue,this means that the policy is not addressing the root of the problem. The Singapore government has also improved the quality and quantity of the public transport. This helps to increase efficiency and convenience of taking public transport. This aims to change the taste and preference by increasing the MPB of taking public transport.

This would increase the demand of public transport and ensure the optimal level of people taking public and private transport. However, it has its limitation. It takes time to improve the public transport system and the improvement may not be seen immediately. Not only that, it also takes time for the consumers to change their taste and preferences,cars are seen as a sign if affluence in singapore, resulting in the desire to own a car rather than take public transport, a businessman would much rather prefer to receive a client with a car rather then squeeze with him into public transport during the rush hour. Moreover, the cost of improvement and upgrading may translate into higher price of public transport. The poor may then be adversely affected if no subsidies are given. As they would be unable to afford the cost of transport without significant changes to their lifestyle as more of their income goes to simply travelling.

Market failure occurs for traffic congestion because there are negative consumption externalities associated with the road usage and the resulting traffic congestion. But the individual ignores the external cost imposed on the society when deciding on the amount of road space to consume. Hence, there is an over consumption of road space. As the market fails, government intervention is required to internalities the negative externalities. The Singapore government has used the above few policies to curb the problem. However, the policies cannot be used alone. They need to be used together to complement each other.

Written by:Lee Ngai Han Edited by:Zachary Ng