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Question 4-Exam Paper 2012

In: Business and Management

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There are several policies that can be implemented in order to reduce congestion on the roads, however all these policies with have opportunity costs, as well as negative side effects. One method of reducing congestion on roads could be to increase the tax on fuel, as this will reduce consumption, which will also reduce the amount of time a car spends on the road, therefore will reduce consumption. On the other hand, the reduction of consumption may not be a substantial amount, due to the fact that fuel has a low price elasticity of demand, and is therefore inelastic. Another factor that will hinder the effect an increase in fuel tax will have on congestion, is brought to light in Extract C. C mentions that “ as more cars become electrified and fuel-efficient, the amount of revenue raised from petrol an diesel taxes…will fall substantially in the future”. This suggests that even if an increase in taxes was to be implemented, it may not reduce congestion much as cars in the future will need less fuel, therefore the price increase will not have such an impact on consumers. A negative effect of an increase in petrol and diesel taxes is that it is a regressive policy; therefore it disproportionately affects those on lower incomes. Extracts C discusses this by mentioning, “ Fuel taxes also hit the poo the hardest”. Instead of increasing the tax on fuel, the government could increase the congestion charge, in order to decrease the number of cars entering a certain geographical area, such as the king the government imposed in London this method would likely lead to a reduction in traffic delays, congestion, decrease in pollution and an increase in public transport revenues. An issue with this policy is that it is a regressive solution, which would have a much greater impact on low-income workers who live out of that certain area. Extract C mentions that there are…...

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