Case Study

Mr. Andrew Donald lives in the Ringwood which is located in the northeast side of the city and has to drive to his workplace in Altona which is located in the Southwestern side of the city. There is a highway that connects these two regions, which is the fastest route between these two regions. Other substitute roads may have longer trip times as they pass through the central business district. There is usually heavy traffic and congestion on the highway and Mr. Donald has to spend an extra 40 minutes in congestion every day, 40 precious minutes that he could spend with his family rather than waiting in traffic. He usually has to leave home early to get to work on time. But sometimes like today an accident makes the congestion worse. He may miss an important meeting at 9:00 am. Recently, the government has announced that it is considering building a new highway to transfer some of the congestion to the second road. However, this plan has been opposed by environmental groups. They believe that building a new road would affect the wildlife of the city, makes more noise and air pollution and would not solve the congestion problem in long term. Some opponents advocate the use of congestion charge. Under this system, drivers who use the highway during peak hours have to pay a price. Their argument is that by applying road pricing, some of the drivers would be encouraged to use the other roads, or even public transport. This will decrease the congestion on the highway.

Task 2: (10 Marks)In this task you are required to discuss the theory of congestion pricing, how prices should be set, whether different prices should be set for different groups and how to determine the different congestion prices. Provide numerical examples to illustrate and explain how they are calculated in your examples. What price Mr. Donald is willing to pay to reduce the time he spends in congestion? Assume he is paid $60 per hour. Compare his willingness to pay with a person with $15 per hour salary rates. State the assumption you made in your calculation and recommendation.