Economics (AS & A Level) · May / June 2021 · Paper 23 · Question 1

Luxembourg’s answer to resource misallocation in the transport market Congestion is unfortunately a very familiar feature of most road transport networks. It occurs when there is too much traffic relative to road capacity or more simply, when demand exceeds supply. Congestion means longer journey times and wasted fuel, which adversely affects car drivers and bus passengers. Roads are scarce resources, but usually there is no price for using them. This represents a misallocation of resources. Fig. 1.1 shows the changes in passenger journeys by public transport in Great Britain (GB) since 1997/98. The government has tried various policies to encourage more use of bus transport in the capital city, London, as well as in the rest of GB. These policies include privatisation along with increased bus subsidies and higher taxes on car users. All have failed to improve the allocation of resources and the cost of all travel continues to rise at a faster rate than the cost of living (See Fig. 1.2). The price of using cars has risen by less than other forms of transport since 2010 and some experts have suggested that a minimum price for fuel should be introduced. 1997/98 2001/02 2005/06 2009/10 2013/14 2017/18 Buses (outside London) Buses (London) Trains 5 Billion 4 3 2 1 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2010 2011 2012 2014 2015 2016 2009 2013 2017 Bus Car Train 250 200 150 100 50 All items CPI Fig. 1.1: Passenger journeys by type Fig. 1.2: Transport components in of public transport in Great Britain, the Consumer Prices Index, 1997/98–2017/18 (billions) 1997/98–2017/18 (base year 1997 = 100) It is therefore interesting to see what Luxembourg, a relatively small European country, plans to do about its transport problems. From March 2020, the Luxembourg government has decided that all prices for public transport use (including buses and trains) will be removed, making travel by public transport free to consumers. The cost to its government is forecast to be almost US$1 billion per year. Luxembourg’s radical policy is one that should be given serious consideration in Great Britain and in other countries that face similar resource misallocation in their transport markets. Source: Transport Statistics for Great Britain, 2018

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