Microeconomics

Table of Contents

1. Topic pack - Microeconomics - introduction
2. 1.1 Competitive Markets: Demand and Supply
3. 1.1 Competitive Markets: Demand and Supply - notes
4. 1.1 Competitive markets - questions
5. 1.1 Competitive markets - simulations and activities
6. 1.2 Elasticities
7. 1.2 Elasticities - notes
8. Section 1.2 Elasticities - questions
9. Section 1.2 Elasticities - simulations and activities
10. 1.3 Government intervention
11. 1.3 Government Intervention - notes
12. 1.3 Government intervention - questions
13. 1.3 Government intervention - simulations and activities
14. 1.4 Market failure
15. 1.4 Market failure - notes
    1. The meaning of externalities
    2. Types of externalities
    3. How do externalities affect allocative efficiency?
    4. Negative externalities of production
    5. Negative externalities of consumption
    6. The economic theory of traffic congestion
    7. Demerit goods
    8. Government responses - demerit goods
    9. Possible government responses to externalities
    10. Direct government provision
    11. Extension of property rights
    12. Taxes and subsidies
    13. Tradeable pollution rights
    14. Regulation, legislation and direct controls
    15. Positive externalities of production
    16. Positive externalities of consumption
    17. Merit goods
    18. Why might merit goods be underprovided by the market?
    19. Government responses - merit goods
    20. Public goods
    21. Common access resources & sustainability
    22. The tragedy of the Commons
    23. Common access resources in practice
    24. Sustainability
    25. Threats to Sustainability
    26. The threat to sustainability from the use of fossil fuels
    27. The threat to sustainability from poverty
    28. Government responses to threats to sustainability
    29. Cap and Trade Schemes
    30. Promoting Clean Technologies
    31. The 'dirty side' of cleaner technologies
    32. International responses to threats to sustainability
    33. Asymmetric information
    34. Abuse of monopoly power
    35. Inequality
16. Section 1.4 Market failure - questions
17. Section 1.4 Market failure - simulations and activities
18. 1.5 Theory of the firm
19. 1.5 Theory of the firm - notes (HL only)
20. Section 1.5 Theory of the firm - questions
21. Section 1.5 Theory of the firm - simulations and activities
22. Print View

The economic theory of traffic congestion

Figure 1 below shows how the analysis of externalities that we looked at in the previous section can be applied to the problems of traffic congestion.

Figure 1 Road transport, congestion and economic theory

Economic theory can be used to analyse the issues involved in traffic congestion as shown here. Figure 1 indicates the relationship between the cost of travel and the flow of traffic along a particular route. The essence of this theory is based on the fact that, when making a journey by car, a motorist only considers the marginal private cost (MPC). This is the cost directly attributable to him/herself, such as time, fuel and the maintenance of the vehicle, rather than the full cost of the journey, which may include costs imposed on society such as pollution, noise and time lost due to congestion. When added to the private costs, these are termed the marginal social costs (MSC), the difference between the two representing the externality imposed by the motorist.

In outlining the theory, it is assumed that, when making a journey, congestion is the only externality. The graph represents the demand for travel along a particular stretch of road over a period of time. Up to a flow of traffic F0, there is no congestion, thus there is no divergence between MPC and MSC, although in reality, such a situation only applies to extremely low volumes of traffic.

As the flow of traffic increases above F0, congestion is apparent and there is a divergence between MSC and MPC. Note that the MSC is equal to the MPC, plus the social cost of congestion.

If the demand for travel on this particular route is of the normal shape (represented by D on the graph) and is a measure of the marginal benefit, then the flow of traffic will be determined by the intersection of the demand curve and the MPC curve at F1 and the private cost to the motorist will be b. At a flow of F1, the external cost, not taken into account by the motorist, is ab (the difference between the MPC and MSC). This means that resources are not being allocated efficiently and that individuals are making more journeys than they would if they were aware of the full social costs.