Case Detail

Case Summary

London's Congestion Charge

Case Number: 5-206-257, Year Published: 2006

HBS Number: KEL193

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Authors: David Besanko; Johannes Horner

Key Concepts

Externalities, Market Solutions to Externality Problems, Social Welfare, Deadweight Loss

Abstract

The case describes the events leading up to the imposition of the London congestion charge. Views about the congestion charge, both pro and con, are presented. The case also discusses, in general terms, the economics of traffic congestion, pointing out that an unregulated market for driving will not reach the social optimum. The case contains sufficient data for students to estimate the deadweight loss in an unregulated market. Students can also estimate the reduction of the deadweight loss due to the imposition of the congestion charge in 2003. The case provides a good illustration of how an unregulated market with negative externalities can lead to an overprovision of a good (in this case driving). It also shows how an externality tax (in this case, London’s congestion charge) can lead to an improvement in social welfare.

Number of Pages: 10

Extended Case Information

Teaching Areas: Economics, Strategy

Geographic: London, UK

Industry: Government, Transportation

Organization Name: City of London

Organization Size: Large

Year of Case: 2006