Question 4

(a)In 2003, London established a congestion charge for cars and vehicles entering the central London area. Today, motorists entering the charge zone area pay a flat rate of 11.50 (around $22AUD), debited through a scanner. Failure to pay the charge results in a penalty of 130. Currently, electric cars and some low-emmission hybrids receive free entry to the zone. Net revenue from the charge is used to invest in public transport, improved roads and bridges, and create walking and cycling paths. What economic problem (or problems) do you think the congestion charge is trying to solve? Explain how the congestion charge might help to solve these problems. (10 marks)

[Start your answer here]

(b)After the charge was introduced, the number of vehicles entering the zone fell by about one-third, riders on buses increased by 15%, and bicycle use increased by 30%. Using principles of microeconomics, what explanations can you give for these changes in the behaviour of drivers? (7 marks)

[Start your answer here]

(c)Suppose the charge is increased by 15%, and revenue from the charge scheme increases by 20%. Explain why revenue has increased at a faster rate than price in this case.(8 marks)