A congestion charge is a form of tax imposed on cars driving into city centres. It is argued that driving into city centres creates significant negative externalities. Firstly, there is pollution; but a bigger problem is the congestion that is caused. Congestion is a significant external cost, because traffic jams increase journey times leading to higher costs for firms and wasted output.
The social cost of driving is much higher than the private cost and therefore there is overconsumption of car journeys into city centres (especially at peak hours) Petrol tax is not sufficient to include the external cost of congestion, therefore there is need for a congestion charge which makes drivers pay the full social cost of driving.
This will raise revenue for the government, which can be spent on improving public transport. It will also achieve greater social efficiency because drivers have to pay the social cost of driving. It may also encourage people to find different methods of travelling into work such as
cycling.
However, there are problems with a congestion charge. Firstly, it is not so easy to charge motorists. It requires taking a photograph of their number plate and making sure they pay. There are high administration costs involved so the tax raised will be less that hoped. Also, there is the danger that the congestion charge could lead to a loss of business for firms living inside the congestion zone. It may encourage out of town shopping, which would be bad news for the city centre and could lead to firms closing. It could also move the congestion from the city centre to outside the city.
Also, it could be argued the tax will increase inequality. People on low incomes will not be able to afford it, but people on high incomes will.
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