Economics for Managers Assignment - Trimester 2, Deakin University

This economics assignment delves into the issue of road congestion in Australia, examining its multifaceted impacts. The assignment begins by analyzing the economic and environmental inefficiencies caused by congestion, including increased pollution, business costs, and reduced productivity. It uses data from 2013 to 2018 to illustrate the decline in average driving speeds in major cities. The assignment then explores the concept of competitive equilibrium and the implications of road space as a public good, contrasting the outcomes with and without road pricing. It further investigates the effects of increased fuel prices, car prices, and road construction on congestion levels. The assignment also discusses road pricing systems as a tool to manage congestion. The analysis considers demand-side and supply-side factors influencing congestion and reviews the projected costs of congestion in Australia, advocating for policy interventions to improve the country's liveability and productivity. The assignment highlights the need for effective traffic management and infrastructure improvements to mitigate the negative economic effects of congestion.

Running head: Economics for Managers
Economics for Managers
Name of the Student
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Student ID

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Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................4
Answer 3..........................................................................................................................................8
Answer 4........................................................................................................................................10
References......................................................................................................................................12

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Answer 1
The article “Road Congestion in Australia” discusses about the inefficiencies caused due
to the congestion occurred in the road space. The report considers a time period from 1st January
2013 to 30th June 2018 that is 5.5 years to assess the congestion problem in Australia with
emphasis on the growth of the road congestion in the capital cities. It is been observed that the in
the considered period of time in the capital cities of Australia the average driving speed has
declined noticeably. In the major three cities namely Brisbane, Sydney and Melbourne the
average driving speed declined by 3.7%, 3.6% and 8.2% respectively. It is evident from the data
that condition of Melbourne was worse among all. Due to the increase in the congestion in the
road there will be increase in environmental and economic inefficiency in Australia (Stenneth
2016). The environmental problem that occurs due to the rise in the congestion in the roads is
increase in pollution. It happens because due to rise in congestion, cars spend more time in road
and thus consumption of fuel increase and thus air pollution rises. Therefore, increased road
congestion increases the magnitude of negative externality caused by the cars (Hörcher, Graham
and Anderson 2018). Thus, it can be said that this increase in social cost is an induced effect of
rise in road congestion. Social cost or negative externality is an economic inefficiency and
therefore it can be said that congestion does impact environment as well as economy in adverse
ways (Demir et al.2015). Other issues that occur due to congestion are increased cost of business
that arises owing to increase in time spent by the people in the road due to congestion (Whittles
2017). Therefore, due to congestion the productivity of employees’ fall and thereby output of
companies fall as well. Hence, economic output of Australia declines. Apart from fall in
productivity the goods get stuck in the traffic for longer hours that increases the cost of transport
of the goods and in addition to that inventory cost of goods increase too and the that put pressure

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on the price of the goods and as a result the price level of economy increases and thereby
contributes in rise in inflation of the economy. The article predicts that without effective policy
implementation the economic cost due to increase in congestion might increase above $27.7
billion and it may reach as high as $37.3 billion by end of 2030. Thus by making standards of
road congestion the report aims to regular reporting of the road congestion in Australia and
thereby help the respective authority to perceive the traffic condition of the country such that the
sufficient investment is made in the traffic sector in order to improve the infrastructure of the
traffic sector and improve the traffic management of the country. The report discussed the traffic
performance of Darwin, Perth, Adelaide, Canberra, Melbourne, Brisbane, Hobart and Sydney. In
order to find the performance of traffic of the said cities the parameters that have been selected in
the report are average speed, percentage of speed limit, free flow speeds and percentage of free
flow. National congestion measurements during the year 2017 to the second half of 2018 show
that average speed of vehicles in the road in Australia decreased by 1.1%, percentage of free
flow has declined by 0.3% and the variability in the performance of the road has also declined.
The data indicates that the traffic performance of all the mentioned cities have declined over the
years except in the case of Darwin. In the last year traffic parameters in Darwin has improved.
However, all the other mentioned cities has seen fall in traffic performance owing to the decline
in the important parameters of the traffic. Hence, in Australia economy is suffering due to
increase in congestion and thereby increase in air pollution and increase time spent on road.
Thus, congestion in road is a problem of scarce resource and the amount of road is limited and
the thus it is difficult to solve the problem of congestion any increment in the road space requires
more land. Thus, it is better to reduce the use of cars in the road and the promotion of bus
services would help the increasing congestion of the country, since it is hampering the overall

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Q
C
PC
SD
Road space quantity
Road space
price
productivity of the country by killing the efficiency of the human capital of the country. Thus,
the report reflect the issues of the cities specifically and allows to understand each traffic
parameters in particular.
Answer 2
(a) In a competitive equilibrium market price of road will the tax paid for using the road for
driving vehicles. Government charges road tax during purchase of car and that charge is the price
of using road for driving vehicles (Budish et al. 2016). This price is also considered as the
perfectly competitive price because at this price point there is no excess demand and excess
supply. The graphical illustration of the competitive pricing for road space is given in the below
diagram.
Figure 1: Competitive price for road space
Source: (Created by the Author)

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Excess
demand
Free
Q
C
PC
SD
Road space quantity
Road space
price
At competitive equilibrium price PC, the demand for roads meets the total supply of the
road. Hence, the amount of road congestion occurs at this price point is the marginal level of
congestion beyond which there roads will be more congested.
(b) Road space is public good and thus it is freely available to the people. Therefore, when there
is no tax on road and is completely free to access then people would use more cars for
commuting and thus there will be more demand for road space and thus excess demand in the
market will occur as the road space is limited (Wang 2016). Thus, a disequilibrium will occur
due to supply and demand mismatch and congestion in the roads will increase. The graphical
illustration of the situation where road space is a public good is given in the diagram below.
Figure 2: Road space as free public good
Source: (Created by the Author)
Free public good means people do not need to pay for using the good and is open to all
for use and thus people prefer to use free goods and this will increase the demand over the

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Q
C
QP
Free Q
P
SD
Road space quantity
Road space
price
supply. However, unlike the general theory of supply and demand, characteristic of the public
good is that it is non-excludable and can be used by as many users’ wishes to use it even if it is
over used (Donier and Bouchaud 2016). Thus, excess demand for road space resulted in
increased congestion in roads and thereby increases the negative externality to the society.
(c)
Figure 3: Congestion due to excess demand
Source: (Created by the Author)
In this case road space is assumed as a pure public good and thus it is available to the
people for free and they are allowed to use the road as much as possible without paying any price
(Allouch 2015). Thus, when the price is zero, that is use of road space is free, then the excess
demand is denoted by the difference between QC and QP, whereas QC is the amount of road space
available to the users that can be used and QP is the amount id demand amount of road when it is
freely available as public good. Now, increase in fuel price and cars increases the price of the of

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P1
S1
Q1 QP
Free Q
P
SD
Road space quantity
Road space
price
the road as using road will demand cars and fuel both, therefore purchase of cars and running
cars in roads both will decline. It happens due to indirect increase in price of road space and as a
result people tend to lower their road space demand and congestion in the road reduces
(Cramton, Geddes and Ockenfels 2017). The demand for roads reduces to Q from QP and the
new excess demand in the market is lower than the previous one as the price level increased from
zero to P. Therefore, excess demand reduced with increase in price for fuel and cars and thus the
congestion in the road is much lower than previously.
(d)
Figure 4: Increase in road space
Source: (Created by the Author)
Building more roads will increase the amount of available road space and thus given the
number of vehicles an increase in road space will reduce the overall congestion because vehicles
have now more space to move. The graphical illustration is given in the above diagram where
increase in road has shifted the supply curve to the right from S to S1 resulting increase in
available road space from Q1 to Q (Xu, Yin and Ye 2019). However, this increase in the road

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space has decreased the price of the roads and it decline to P from P1. Hence, it is evident that
with fall in price of roads there will be more people who will opt to purchase vehicles and
increase using roads more and hence demand will also increase and thus the equilibrium level
congestion will be achieved. Thus eventually if price is not increased further demand for roads
will increases and thus excess demand might occur again and congestion might further increase
proportionately.
Answer 3
Road pricing system is an instrument that is used to control the road space congestion.
Congestion causes environmental and economic inefficiencies and that affect the economy of a
country adversely (Runhaar 2017). Major problems that arises due to road congestion are going
air pollution, increased time in road that reduces efficiency of workers and thereby fall in output
level. Thus, continuing congestion results in adversity in the economy and thus it is required to
counter the effects of congestion. Like every other countries in the world Australia also needs to
take measures to control the rising road congestion in the country
In a report by KPMG regarding congestion in Australia discusses that the country is
facing congestion problem that is reducing its liveability and productivity. The rise in congestion
is occurring due to the immigration of people from outside the country and increasing level of
income of the people (Assets.kpmg 2019). Thus, with increased number of population and the
road will be more crowded as increased amount of people will use more vehicles that increases
the congestion in the roads and thereby air pollution will rise disrupting environmental balance
of the country and along with that increased traffic jams will pull down the economic
productivity of the country (Litman 2017). In the article, it is shown that the six largest cities in
Australia will face 300% rise in cost generated due to congestion from 2011 to 2031. According

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to a survey it is found that congestion and infrastructure and public transport comes at the second
and third important problems that requires effective government intervention (Somuyiwa, Fadare
and Ayantoyinbo 2015). Thus, to solve the congestion problem of the country can be solved by
the effective road pricing policies. It is identified that the main causes of the congestion can be
categorized in to demand side factors and supply side factors. Demand side causes are rise in
number of cars used, increased population, under-priced roads and increase in use of roads due to
increased amount of tourism and business travels. On the other hand, the supply side causes are
insufficient infrastructure that is level crossing and traffic lights and uses of roads as parking
areas (Talari et al. 2017). Thus, to address the congestion problem the government suggested
several pricing models for encountering the congestion problem in the country and are Location
specific, Corridor specific charging schemes, Whole-of – network schemes and partial network
schemes. Therefore, the road pricing strategy aims to increase the productivity of the steamed.
Alternatively, it is argued that road pricing increases the economic efficiency and it is
discussed based on article that pertains to economic efficiency of the road pricing and its effect
on equity. As per the literature on the road pricing and economic efficiency it can be said that
distribution of road pricing revenue is one of the important aspect of road pricing strategy as it
decides the efficiency of the strategy to improve the economic efficiency and equity. There are
two types of equity namely horizontal equity and vertical equity (Caggiani et al. 2017). In
horizontal equity revenue is reverted to the vehicle users and in vertical equity the revenue is
distributed to the whole society and is used in the improvement of the traffic system and
management to improve the road facility and reduce the congestion problem. However, there are
both disadvantages and advantages of the pricing strategy used in Australia. The most popular
road pricing strategy in Australia is the toll tax. The advantages of road pricing in Australia it

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reduces the congestion of the road and thereby reduces the air pollution and other business cost
that occurred due to increasing congestion. Thus, road pricing is effective strategy to mitigate the
direct adversities caused by the congestion (Litman 1996). However, as the road pricing is not
well targeted and its direct taxing policy affects the poor drivers who run their vehicle on road
and apart from that due to road pricing many avoid road with tools and increases the congestion
in some particular roads where there is no tolls and makes the congestion problem more
concentrated than distributed. Ultimately the road pricing strategy in order to reduce the
congestion problem all over the country it push the problem to some specific regions. Thus, the
road pricing in order to solve the congestion problem gives rise to several other problems just by
solving the congestion problem which is less relevant to the problem.
Answer 4
Moscow, Russia and Istanbul, Turkey are the two most congested cities in the world are
being implementing policies that turned out to be quite effective for both the cities. Moscow has
implemented smart transportation policies. Under this policy the traffic system in Moscow
government has equipped the city with surveillance cameras, traffic sensors and ample amount of
traffic lights on the street of the city to improve the traffic monitoring system of the city. Public
transport facilities are improved and the people are encouraged to use bicycle for transportation
such that pollution related problems can be solved and space per person in road reduces as using
car increases the same by manifolds in comparison to bicycles. The government has improved
the public transport vehicles such as trains and buses significantly so that more number of people
take public transport instead of private vehicles and as a result the number of vehicles in the road
reduces and congestion in the road decreases (EJ Insight 2018). To ease up the congestion
problem the city also introduced new routes and improved the commuters’ journey comfort. To

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help the commuters new mobile phone has been used to improve the transportation experience.
With the help of mobile app the commuter are able to hire bicycle, parking spaces, parking fees
and can plan other journey related activities. The policies that used by the Moscow government
to reduce the congestion problem has been proved to be quite effective.
Alike Moscow, Istanbul government has also implemented several policies to mitigate
the problem of the congestion in the city and those proved to be functional that improved the
road conditions of the city. To solve the congestion problem of the city the government of
Istanbul focussed on the infrastructure of the city and built many new tunnels and bridges in the
city. It is still working on many other mega projects to improve the traffic conditions of the city.
It has made separate lanes for different types of vehicles that is there are different lanes for buses
and cars to improve the average speed of the road (Intertraffic.com 2018). The new tunnels and
bridges that are recently built or soon to be opened for public use are Eurasia tunnel, Great
Istanbul tunnel and Yavuz Sultan Selim Bridge. Construction of tunnels and bridges improved
the traffic conditions of the country with by supporting large number of commuters daily. The
government assured that Eurasia Tunnel would serve 25.6 million commuters every year. Thus,
infrastructural development made in Istanbul has been successful to improve the traffic
conditions so far.
Taking note from the above discussion on policies that Istanbul and Moscow have taken
to improve the condition of the traffic in the respective cities that were successful enough to
solve the problem of congestion. The policies were investment in infrastructure and development
of service oriented apps. Thus, Australia should improve its public transport facilities along with
development of new mobiles apps like Moscow to provide transport related information and
services that will make the road system much more efficient and less congested.

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References
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Budish, E., Cachon, G.P., Kessler, J.B. and Othman, A., 2016. Course match: A large-scale
implementation of approximate competitive equilibrium from equal incomes for combinatorial
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Caggiani, L., Camporeale, R., Binetti, M. and Ottomanelli, M., 2017. A road network design
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Cramton, P., Geddes, R.R. and Ockenfels, A., 2017. Markets for Road Use–Eliminating
Congestion through Scheduling, Routing, and Real-Time Road Pricing.
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EJ Insight (2018). What HK can learn from Moscow on tackling traffic congestion. [online] EJ
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Research Part B: Methodological.