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Congestion Pricing Basics Pricing Road Use to Address Congestion Congestion Pricing Basics JEFFREY N. BUXBAUM P HOTO olls have financed highway infrastructure : D The author is a Principal AVID since the Roman Empire. Although toll with Cambridge G revenue often may be used for other pur- ONZALEZ Systematics, Inc., poses, many believe that financing high- , M Cambridge, Massa - N Tway infrastructure is the main function of tolls. Tolls /DOT chusetts. He is a member for congestion pricing are different. They generate of the National Research revenue, but with the intent of changing travel behav- Council–appointed ior to make more efficient use of the transportation Committee on Equity system, by shifting some drivers to less congested Implications of periods, or to other modes, routes, or shared-ride Alternative Trans - vehicles, so that the traffic flows more freely. portation Finance Most products and services supplied in the mar- Mechanisms and of the ketplace rely on pricing to align demand with sup- TRB Congestion Pricing ply. If demand exceeds supply, prices will rise, and Committee. some customers will choose not to buy. Highways, however, are not priced this way, and the prices on the few facilities that are tolled are seldom allowed to vary according to changes in demand. Motivations for Congestion Pricing From the beginning of automobile travel, the U.S. system of paying for highways has relied largely on motor fuel taxes, excise taxes, sales taxes, and tolls. Motorists have grown accustomed to these methods of paying for the cost of building, maintaining, and operating highways. A system that sets a price for highway use as a way of reducing congestion would be a major change, potentially affecting where peo- ple live and work, locate businesses, and socialize. Until recently, the congestion pricing of high- ways mostly had been an academic concept, because the necessary technology did not exist. Recent advances in electronic toll collection, how- ever, have prompted greater interest in congestion pricing. Yet when the topic is discussed in public policy arenas—from state legislatures and gover- nors’ offices to the radio and blogs—the motiva- tions often differ from the efficiency concerns that interest academics. TR NEWS 263 JULY–AUGUST 2009 TR NEWS 263 JULY–AUGUST Reducing congestion during peak periods and Minnesota’s I-394 uses electronic toll collection on its 4 improving travel time reliability are important moti- high-occupancy toll (HOT) lanes. P vations, but so are encouraging transit use, reduc- technological develop- HOTO William Vickrey, a Nobel : J Laureate, advanced the ing vehicle emissions and energy consumption, and ments renewed interest OE P especially providing a funding source for trans- in road congestion pric- INEIRO idea of congestion pricing. portation programs and projects. Some may view a ing. , C OLUMBIA system of congestion pricing as a means of chang- Technology was not U ing urban form and promoting regional economic the only impediment to NIVERSITY development. congestion pricing, how - A ever. Changing the sta- RCHIVES Pricing Signals and Congestion tus quo of highway According to basic microeconomic theory, the funding and use would demand for a good is directly responsive to the price create winners and of the good. If the supply of a good is fixed, the losers. Vickrey had recognized that this would need prices can be raised when demand peaks. Examples to be addressed if congestion pricing were to be of time-based pricing include airline tickets on hol- implemented. iday weekends, daytime cell phone use, and midday Although congestion pricing can produce an electricity use. In each case, customers who cause economically efficient solution to road conges- the peak congestion must pay a premium, while tion—so that society as a whole gets the most value users who are willing to purchase at off-peak out of its expenditures—travelers may be made times—when the resource is less scarce—pay less. worse off on average if the revenues are not used to Moreover, the higher prices signal that addi- increase mobility. Consider these examples: tional investment in production capacity may be profitable. An airline will raise prices on a popular Some motorists will choose to pay the con- route to manage demand for the limited number of gestion charge and continue to use the same road seats, but at some point the airline may decide that at the same time as before. They will pay more as a adding another flight to the route would be prof- consequence. These motorists place a high value on itable. Some proponents emphasize that a key time, and some will be better off because of the advantage of congestion pricing is that it would travel time savings. Because all motorists pay the identify places in the transportation system that charge by choice, all presumably are better off doing warrant investments in more capacity. this than taking advantage of other options, such as But the mostly private users of roads and the driving at a different time or on a different route, mostly public suppliers of road capacity do not taking transit, or forgoing the trip altogether. On receive pricing signals. State and local governments net, however, many still will be worse off than they largely have been responsible for the building and were before congestion pricing. operation of roads in the United States, so that the Those who choose an alternative road or highway system is perceived as a public good. In an mode or who cancel the trip are worse off, because economic sense, no one can be excluded from the they are not traveling when, where, or how they use of a public good, and one person’s use of the want. good does not diminish its value to others. Those who were using other routes or modes Under conditions of high volume, however; one before may be worse off, because new travelers now additional vehicle entering a road system may cause may be competing with them for the capacity. If the flow of traffic to slow, creating congestion and congestion pricing increases the throughput of the delay for others—so that highways are not strictly priced highway, however, congestion on other public goods. When there is no charge for entry, routes and modes may be reduced. Only a detailed motorists do not consider that they are imposing a analysis can reveal the traffic impacts. cost on others; the resulting market failure is 2009 TR NEWS 263 JULY–AUGUST known as congestion. The distribution of winners and losers, and whether society as a whole is better off with con- Pricing for Social Efficiency gestion pricing, will depend on several factors, Nobel Laureate William Vickrey advanced the idea including who pays the tolls, the net effect on travel of congestion pricing during the 1950s and 1960s. conditions, how the revenue is spent, and changes Implementation of his ideas was impractical, how- in other areas of concern, such as fuel consumption, ever, because of the primitive nature of toll collec- emissions reduction, and safety. tion. By the 1990s, tolls could be collected The current system of financing highways electronically without stopping vehicles, and sev- through fuel taxes and vehicle fees creates its own eral toll roads operated without tollbooths. These winners and losers, but the social fabric has been 5 to a broader system of priced roadways introduces OLLWAY T additional technical and political complexity. LLINOIS Obtaining an economically efficient outcome is : I only part of the equation. Perceptions of fairness are HOTO P another, evident in establishing urban transit fares. Transit systems often charge a flat rate, regardless of time of day or of distance traveled. Although some systems—like the Washington, D.C., Metro— charge per distance traveled, with higher prices dur- ing peak hours, most systems have constant rates all day. No system charges higher rates on more con- gested or more popular routes—although the higher rates may be economically efficient. Many travelers would consider this treatment to be unfair by a government-run system. One option that perhaps is more practical than setting a different price for each minute of the day and each road on the system is a simplified system of user charges based on the time of day, type of Open road tolling built around this system. The transition from one road, and general location—for example, central lanes at the Irving system to another will be disruptive, with the out- business district, suburb, or rural area. After polit- Park Road Toll Plaza comes dependent on how the revenues from con- ical compromises, however, the resulting system on the Tri-State gestion pricing are used. may not be the most economically efficient but, if Tollway (I-294) in done well, still would be more efficient than the sta- Illinois. Getting Prices Right tus quo. Congestion pricing can be carried out in many ways. One option is to price one or more lanes on Effects on the System a freeway, offering patrons a higher level of service Unless all roads are priced, motorists will have on the tolled lanes. Another option is to price an opportunities to shift travel to other parts of the sys- entire road or collection of roads. A third approach tem to avoid the charges. These motorists will incur is to establish prices for access to—or travel the cost of using a less appealing route or mode. In within—all roads in a specified zone, such as a cor- addition, motorists who previously used the alter- doned central business district. A fourth is to price nate route may experience the negative effects of the entire roadway system. higher traffic volumes and possibly more conges- Congestion pricing on a large scale requires tion.
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