Summer Congestion Charge in a Coastal Town
A coastal town receives 18,000 tourist cars per day in summer. The marginal private cost of a trip is €6.00; the marginal external cost from congestion, pollution and road wear is estimated at €3.50 per trip. The local council proposes a €3.00 congestion charge during July and August. Opponents say it will hurt small hotels and shift traffic to nearby villages; supporters cite a pilot in a similar town where traffic fell 18%. Demand is price-inelastic in the short run (−0.4) because most visitors have already booked. The council's legal advice says charges must be ring-fenced for transport improvements. Retailers fear lost sales. The council needs to decide before the summer season. The town has no resident parking permits and limited public transport.
1. Using the marginal cost figures, calculate the likely short-run reduction in car trips from a €3.00 charge. Is the charge set at the efficient level?
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The private trip cost is €6.00; a €3.00 charge raises it to €9.00, a 50% increase. With PED −0.4, quantity falls by 0.4 × 50% = 20%, from 18,000 to 14,400 cars per day. Revenue is about €43,200 per day if charged per car. The efficient Pigouvian charge equals marginal external cost, €3.50, so €3.00 is below the efficient level and leaves some congestion externality unpriced. A €3.50 charge would raise private cost by 58.3%, cut trips by about 23.3%, to roughly 13,800. The charge is second-best: it applies only in summer, may displace traffic, and has administration costs. The pilot's 18% fall is consistent with the estimate, not proof of it.
2. Evaluate the distributional and environmental case for the charge versus a daily tourist tax or parking levy, given the ring-fencing rule and risk of traffic displacement.
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A congestion charge targets the externality directly and can fund public transport through ring-fencing; it is more efficient than a flat tourist tax, which raises revenue but does not price road use. A parking levy is similar but only affects parked cars and may encourage cruising. Distribution: tourists bear much of the charge, but small hotels may lose price-sensitive visitors; residents and workers need exemptions or discounts. Displacement to villages is a real risk; coordinate with neighbouring councils or set a wider zone. Ring-fencing can build acceptance if revenue visibly improves buses, walking and cycling. Recommend a summer congestion charge, initially €3.00 with a planned move to €3.50 after evaluation, resident and worker discounts, village coordination, and published monitoring of traffic, air quality and hotel occupancy. A tourist tax could supplement but not replace it.