Case Number: 5-206-257, Year Published: 2006
HBS Number: KEL193
Externalities, Market Solutions to Externality Problems, Social Welfare, Deadweight Loss
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.
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