Microeconomics Principles and Policy Behavior

Question: Discuss about the Microeconomics for Principles and Policy Behavior. Answer: Introduction: Peak hours are considered as that time of the day when the frequency of cars is quite more than any normal time of the day. Large number of roads on a fixed supply of roads creates congestion traffics on road (Baumol and Blinder 2015). This raises the inefficiency on these route ways leading to heavy jams. The case of such congestion on public roads at peak hours is explained with the help of the following diagram below. In figure 1, it could be stated that marginal social cost curve, marginal private cost, marginal social benefit and marginal private benefit are MPS, MPC, MSB AND MSC respectively. The demand curve D is equivalent to the MSB and MPB curves, whereas, the supply curve S is equivalent to the MPC curve. The optimum number of cars that could be handles during any hours of the day would be Q1, whereas, the number of cars rises to Q. This rise in the level of cars creates an inefficiency of congestion on roads equivalent to the area of the green triangle on the road. This inefficiency could be termed as the external costs. In order to eradicate the inefficiency of congestion on the public roads on peak hours, it is quite vital for the government to change a congestion tax from the vehicles that would use the road at that time of the day. Both the inclusion of congestion charges, the demand for the use of various vehicles would reduce by keeping the negative relation between price and the demand of a particular product. This would encourage the people o using various other methods of carpooling and other schemes to avoid the payment of tax. It would reduce both the congestion on roads and the carbon emission creating air pollution thereby. The case of inclusions of congestion charges would be explained with the help of the diagram below. It is seen that in order to overcome the situation of excess vehicles on road leading to congestion, the government charges a congestion charge on the riders. The congestion charge shifts the supply to the left equivalent to MSC and causes the drivers to pay the social marginal cost of driving their vehicles on road (Frank 2014). As demand for these of road is elastic in nature, the new price to be paid by the consumers or riders rises to p2 from p1. This effect of congestion tax reduces the quantity of cars on roads from q to q1. The consumer surplus in the following case reduces to yellow triangle only and the producer surplus increases to the area of the blue triangle. The deadweight loss, which was earlier equivalent to the green triangle, indicating the external cost, is foregone, due to the application of congestion tax. Reference Baumol, W.J. and Blinder, A.S., 2015.Microeconomics: Principles and policy. Cengage Learning. Frank, R., 2014.Microeconomics and behavior. McGraw-Hill Higher Education.