Task 1: Concept of road pricing is introduced by Arthur. C. Pigou in 1920. However, it took a long time until it was applied in a city. Do a research on the road pricing, its application, its benefits and disadvantages defined by both academic and regulators. Write your findings in no more than 1500 words.
Task 2: In this task you are required to discuss pricing, its concept and options of pricing available in
this example. Also, make sure to address the following questions:
What price Mr. Jones is willing to pay for toll in order to reduce the time he spends in
congestion? Assume he is paid $60 per hour.
Compare his willingness to pay with a person with $15 per hour salary rates.
As a consultant to the government, what pricing scheme would you suggest for the toll road
considering the Social Welfare of people? Consider all types of road users.
Task 3: Would you suggest application of fuel tax as a substitute for Electronic Road Pricing?
Compare their impact on road usage. Provide one practical example of using fuel tax as a strategy.
Mr Jones lives in the eastern side of a city. He has to drive every day to travel to his work located in
the western side of the city. There is a highway connects these two regions, which is the main
shortest connecting road between these two regions. Other substitute roads may have longer trip
times as they pass through the CBD.
There is usually heavy traffic congestion on the highway and Mr Jones has to spend extra 40
minutes in congestion every day, 40 precious minutes that he could spend with his family rather
than in congestion.
He should consider this time and leave home early to get to work on time. But sometimes like
today an accident makes the congestion worse. He may miss his meeting at 9:00 am.
Recently, the government has announced of considering building a new highway to transfer some
of the congestion to the second road. However, this plan has been opposed by environmental
groups. They believe that building a new road would affect the wildlife of the city, makes more
noise and air pollution and would not solve the congestion problem in long term.
Some opponents advocate the use of Electronic Road Pricing (ERP). Under this system, drivers who
use the highway have to pay a toll. Their argument is that by applying road pricing, some of the
drivers would be encouraged to use the other roads, or even public transport. This will decrease
the congestion in the highway.
2 | P a g e
Task 4: In the example, two solutions of building a new highway and using of ERP have been
suggested. You suggest a third solution, and then discuss pros and cons of all three options. Discuss
the price of your new solution and compare it with other options.
Task 5: Assume that the government has come up with the cash flow information for the project of
building a new road as shown in the table below. With the interest rate of 2% and the inflation rate
of 4% and using NPV method find out whether the project is worthwhile or not. Calculation of
discount factor and present value for each year is essential.
Year Cash Flow
0 -1,500,000
1 -1,000,000
2 -1,200,000
3 720,025
4 956,500
5 836,901
6 849,451
7 746,200
8 701,935
9 678,008
10 495,411
11 825,632
12 678,541
13 596,456
14 315,762
15 185,705
16 153,666
17 90,533
18 56,489
19 7,578
20 9,555
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