Month: March 2013

London congestion charge

London’s traffic system has a notorious fame around the world. But can merely rely on the economic theory to charge on the congestion problem can solve it?

Normally, the economic theory can only applied in the optimal situations; any externalities or uncontrolled factors could ruin the idea.

However, there are more than one cities are implementing the charge on traffic, such as Singapore, Olso and Bergen in Norway[1]. So in this blog, I will introduce what is this charge, what’s it coverage and how it works.

 

The congestion charge is summarized as below:

Year of policy	Charging time	Charge amount
2003.Feb.17-2005	7:00am-8:30pm	5 pounds
2005.July-	7:00am-8:30pm	8 pounds

 

 

During the weekdays of charging time, whenever you enter into the charging area, which located in the central of London, you have to pay such amount of money, excluding exempted vehicles. Payment was made convenient to citizen, can be paid either by phone, Internet or buy the charge fee in an outlet. Thinking of how to escape from it? No way, city was spread with cameras, the vehicle plate number will be taken by the camera and compare with system of paid list. Motorists who haven’t pay will face a fine as high as 120 pounds.

 

This policy was expected to generate a revenue of 100 million pounds per year.

Effectiveness:

It is reported that this policy has largely increased the traffic speeds. Average traffic speed during the charge days (weekdays) has increased 37%. Peak hour congestions has decreased 30% and bus congestion delays has decreased around 50%. Bus ridership increased 14% and subway ridership increased 1%.  Overall amount of transport in London has decreased during the past years around 21%, which equal to 70,000 vehicles.  According to the source from Transport in London.[2] .

The statistics shows positive signs of the effectiveness of this policy scheme. There are also counter points that prove congestion charge does not necessarily works. Despite few cars, according to the statistics, congestion rose significantly during 2005-2006. And average traffic speeds in central London falls from 10.6mph in 2003 to 7,1 mph in 2006.

Although it was justified by the reason such as city fundamental facilities [3]constructions: such water and gas mains replacement. It raises the doubt in its effectiveness..

Nevertheless, there are ways to increase the effectiveness of this policy. For example: we can differentiate the charges by the miles driven, and areas you are in and time that vehicles in the city Centre. Also, citizen’s transit option has been limited in some degree; London should provide a better substitution, such as the bus and subway. However, according to my friend in London, in certain area, he can walk faster than taking a subway. Revenues of the policy should be used to upgrade the public transportation to reduce the externalities caused by this policy.

Drawbacks of the charge:

1. Consumers may consider it as a suspicious charge. No one is willing to pay extra and living under the control of the surveillance camera.

1. This policy may reduce the social welfare in the way that it reduced the retail revenues of downtown, according to London Chamber of Commerce[4]. In the survey of 2003, the small retailers blamed this policy as the reason of recession of their business. And over time, the small retailers may consider moving out of the Center area.
2. No differentiate in the charging in aspect of rich people and poor.
3. No differentiate of charges in the time, area, and miles of driven. With these factors into consideration, congestion charge policy could be more effective.

Advantage of policy:

1. Create revenue for public transportation upgrading.
2. Decreased the overall motors on the street of congested area and furthermore reduce the pollution.
3. Put a price on the externalities of the congestion. According to Pettinger (2011)[5] Social cost of congestion is estimated as 20 billion pounds a year. It fixed the problem that petrol tax which cannot differentiate the portion of driving contribute to the congestion[6].

Analysis of the possibility to duplicate

There are certain qualities that a city should have to adopt this policy.

1. A city with circle routes, so that driver can choose other ways to circle around the charging area.
2. This policy requires large investment in research, installing and operation, so city with a smaller scale may not affordable.

Image retrieve from website[7]:

1. City should have other transport options. So that the policy won’t create unnecessary inconvenient to citizens which constitute another externalities.
2. This policy requires large investment in research, installing and operation, so city with a smaller scale may not affordable.

3.  The education level of the citizen should also be a precondition of the policy, So that the facilities won’t be wrecked frequently.  It seemed ridiculous, but from personal experience. This is really a serious aspect should be considered.

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Policy brief

On Chinese government’s purchasing policy of rice in 2012

 

For decades, china is the biggest rice producer, exporter and consumer in the world, now became an big importer in 2012. China has net import record of rice for four times in the past 50 years. 2011, china imported 575,000 tons of rice, while in 2012, it remarkably purchased 2.6 million tons of rice[i].

 

Last year, the Chinese government had increased minimum purchase price of paddy by around 9% to 17%. According to the UN’s Food and Agriculture Organization (FAO), rice prices in China have increased over 18% in the last two years and the purchasing price has been increasing 5 years in a row. Because of this policy, price of the indica variety in Hubei, China, is at $ 625 per ton in September, 2012. By contrast, Vietnam’s price is $451 and Thailand’s $598[ii].

 

To farmers: The purpose of minimum purchase price is to largely boost the domestic supply also pushed up the domestic price of rice. This indeed can increase the farm income on the consumptions of no import involved and all the rice output can be purchased at minimum price.

However, minimum purchase price wasn’t apply to every rice farmers. The scheme of purchasing policy is plan to be done by the ” market”[iii], government mandated the lowest price that processing companies ( not by government itself) pay for the farmers. While facing a much lower rice price from countries such as Thailand and Vietnam, Processing companies undoubtly choose to buy imported rice rather than local rice. This policy turnout pushed rice price down, rice farmers and small scale millers will be hurt by this. In this logic, government’s announcement about increase minimum purchase price will further hurt farmer’ welfare[iv].

 

To world market:

Rice consuming countries are normally large producing countries, hence the international trading volume of rice is only a small fraction of world production. According to FAO data[v], the world trading amount is 37.3 million tons which is 7.7% of world production.  Average rice consumption of china is 0.14 billion. Any surge or decline in major production/consumption country may lead to violate in world rice prices. A sudden increase of rice price in 2008 had caused prices of other agricultural commodities and lead to a food crisis.

Keeping this pace, people may worried that whether the rice production of other places can feeds the need of Chinese market. If exclude food security issue, not in a far future, international market price will reach to the same level of domestic price Importing may shrink.

To society:  Consumers now have access to larger amount of cheaper foreign rice, consumers’ surplus has been increased. However, for the farmer, larger output but lower sales leads to not only opportunity cost and inventory cost. The average storage loss is 7%~10% which equal to 300~340 million tons.  Thatr is a dead weight to the society.

 

 

 

 

This model illustrate the minimum rice purchase price policy (externalities and storage loss are not included).

Pw: representing importing price

Pp: represent purchase price

P: is the domestic price, which is the selling price from trader. The optimum selling price for trader is at pp with all information known. But which is impossible, I assume they sell at equilibrium price to meet market demand which on the other hand also pushed down domestic price assumed to be.

Stimulate by government policy, the producing amount increase from D to C.  With importing, market equilibrium is at O, making the ABCD the dead weight loss for the society. Traders get the amount of surplus POPw. Farmers’ loss the assumed surplus of PpABOP.

Recommend: aside of food safety issue, to make this policy benefit farmers, government should put a restriction on import such as quota or import tax. Or, the government should undertake the purchase responsibility, instead of “ market” . With direct payment from government, rice producers will have more incentive to push up output.

I found landfill tax would be very interesting and necessary for the society. In UK threw away a staggering 22.6 million tons of rubbish in 2004/5; in fact, Britain sent the same amount to landfill as the 18 EU countries with the lowest landfill rates combined, despite these places having twice the population of the UK. Many people in UK are concerning that we are running out of land for landfills.

 

Hence, in 2006 UK started to impose landfill tax by charge extra money per tons of garbage and landfill operators are the ones who responsible landfill tax. It was referred as the “the UK’s first tax with an explicit environmental purpose”[i][ii]. UK government promise to use the tax revenue on waste management system which can recycle 25% of household waste. An interesting thing is that the government cut employers’ national contribution insurance to soft the tax’s impact to society.

A tax or fee imposed on landfills or other disposal facilities normally is as a means of raising general revenues, to generate funds for inspection programs or recycling program, or as a means to make direct disposal not the most attractive ways to handling garbages. Landfilling is discouraged due to a number shortages[1]:

• Climate change caused by landfill gas from biodegradable waste
• Loss of resources
• Constraints on areas suitable for landfill sites
• Loss of recyclable components of waste landfilled
• Uncomfortable feelings of citizens: nimby issues.

In 1999, the UK government update its strategy with “a way with waste”. It increase the tax rate to 10 pounds per tonne and also introduced “Landfill Tax accelerator” which would raise tax rate 1 pound each year until 2004. Following that, 2004 to 2007 landfill tax increased 3 pound per year next three years. After 2008.the chancellor announced that there will be 8 pounds increase each year until 2013. Floor price for landfill tax is 80 pounds per tonne in the year from 2014 to 2020.

Allocation of Revenue
With regard to allocation of landfill tax revenue in the UK, its introduction was in alignment with a reduction in employers’ national insurance contributions which in case it’s only a transfer of welfare. As respect to the UK landfill tax credit scheme , it was aimed at encouraging landfill operators to support projects with environmental objectives, such that tax credits can be claimed in respect of funds used (up to a maximum of 20% of their tax liability).  This scheme was halted and the UK treasury has yet to decide what to do with the extra revenue generated (EEA, 2005).

Evidence and Effectiveness of UK landfill tax:

The successfulness of the landfill tax in diverting waste away from landfill sites is difficult to assess. There are also other instruments are introduced at the same time, such as landfill bans.  In the case of the UK, the tax has not been set high enough to result in a significant change, however in countries where the tax is high (for example Denmark) other instruments have also been introduced at the same time.  Landfill taxes have proved to be a useful source of funding for developing an effective infrastructure for the waste (EEA, 2005).

UK has the highest percentage of waste being landfilled, but the tax rate of landfill was among the lowest. The evidences to prove the success of UK landfill tax was mixed. In 2000, research shows that strong evidence of increase of recycling activities and significant decrease of construction and demolition wastes. But other articles, Martin and Scott (2003) states that UK municipal wastes kept a rising increase rate.

Undesirable outcomes also comes along with landfill tax. Because of the tax, many wastes went to unlicensed landfill sites. Local institutions are often constrained by long term contracts that they can’t accelerate the pace of change. Obviously, the institutional power was not strong enough to enforce every landfill sites obey from the law. Another odd things is, by only add burden to the landfill operator, landfill tax has least impact on citizens and non-construction companies who are the largest contributors to municipal waste. For citizens, landfill tax is integrated with council tax, which is a flat rate. It won’t provide enough incentive for citizens to reduce waste. To those companies, the landfill tax is too small that companies don’t even bother to care.  However, behaviors such as reducing over packaging or buying unnecessary products and recycling should be the ultimate purpose of tax.

Institutional power is also a concern.[iii] Loophole in the tax also provide incentives for unofficial dumps. But due to constrain of resources, this kind of behavior cannot be fined or forbid completely. Also, local authorities also can’t find its way to reduce tax liability if anyone increased amount of recycling.

Future

Besides increasing the tax rate for landfill, UK government also announced that landfill allowance trading scheme would be removed after scheme year of 203. This move is for small businesses who may not have advantage to have allowances.

Under the EU Landfill Directive, the UK is obligated to reduce the amount of biodegradable municipal wastes sent to landfill based on the amount of this material landfilled in 1995 to 75% by 2010, to 50% by 2013 and to 35% by 2020. The definition of municipal waste recently changed and the tonnage of the new targets is given below[iv]:

Landfill Diversion Targets (‘000 tonnes)
	2010	2013	2020
England	21,773	14,515	10,161
Scotland	2,697	1,798	1,258
Wales	1,378	919	643
Northern Ireland	919	612	429
UK	26,766	17,844	12,491

Following discussions with the European Commission, Defra has changed the definition of municipal waste, and now includes some Commercial and Industrial waste as well as most of the existing local authority collected waste.

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