Road Pricing and Toll Financing with Examples from Oslo and Stockholm Road Pricing and Toll Financing with Examples from Oslo and Stockholm Farideh Ramjerdi Royal institute of Technology Institute of Transport Economics Department of Infrastructure and Planning Norwegian Centre for Transport Research S-100 44 Stockholm, Sweden PO Box 6110, Etterstad N-0602 Oslo, Norway Cover picture: Grindslanten (The gate-money). Painting by A. Malmström 1829-1901 ISSN 0802-0175 IBBN 82-7133-943-5 Cover design: Hansehaug Design, Oslo Printed in Norway by Nils J. Schriver AS, Oslo 1995 Contents Acknowledgements vii Introduction to the Thesis ix Essay no. one Road Pricing and Toll Financing in Urban Areas 1 1.1 Introduction 3 1.2 Provision and Financing of Roads 5 1.3 Efficient Pricing and Investment Rules 8 1.4 Second-best Pricing and Investment Rules 12 1.5 Impacts of Road Pricing 15 1.6 Competing Objectives and Toll Revenues 19 1.7 Some Implications for Practical Application 22 Essay no. two Cost-Benefit Analysis, Users' Benefits and Distributional Consequences of a Toll Scheme for Stockholm 31 2.1 Introduction 33 2.2 Measures of Users' Benefits, a Brief Review 33 2.3 Detection of Income Effects, Mode Choice 37 2.4 Description of Data 39 2.5 Application 42 2.6 An Alternative Approach 46 2.7 Users' Benefits from a Toll Ring in Stockholm 50 2.8 Summary and Conclusions 52 Essay no. three Road Pricing in Urban Areas: Financing Investment in Transport Infrastructure and Improving Resource Allocation, the Case of Oslo 55 3.1 Introduction 57 3.2 Road Pricing and Distortionary Taxes 58 3.3 Benefit-Cost Analysis and the Marginal Cost of Public Funds 62 3.4 The Marginal Cost of Public Funds through Road Tolls 67 3.5 Evaluations of Alternative Schemes for Oslo 69 3.6 Summary and Conclusions 81 v vi Essay no. four An Evaluation of the Impact of the Oslo Toll Scheme on Travel Behaviour 87 4.1 Introduction 89 4.2 The Oslo Cordon Toll Scheme 89 4.3 Panel Study of 1989-1990 91 4.4 Changes in the Oslo/Akershus Region, 1989-1990 93 4.5 Changes in Travel Behaviour, 1989-1990 95 4.6 Summary and Conclusions 111 Essay no. five An Evaluation of the Impact of the Oslo Toll Scheme on Destination Choices and House Prices 115 5.1 Introduction 117 5.2 The Panel Study of 1989-1990 118 5.3 Impacts on Destination Choices of Compulsory Travels 122 5.4 Impacts on Destination Choices of Discretionary Travels 126 5.5 The Impacts of The Oslo Toll Scheme on House Prices 136 5.6 Summary and Conclusions 144 Acknowledgements With the submission of this thesis I bring to a conclusion a process that I started at the University of California at Berkeley a long time ago. At Berkeley I was first introduced to the concept of congestion pricing by Richard Zettel, and I had the privilege of studying subjects such as network analysis, travel demand, transport economics and urban and regional economics with teachers such as Gordon Newell, Adib Kanafani, Daniel McFadden, Theodore Keeler, Bill Garrison, Roland Artle and Pravin Varaiya. In 1987, while working at the Office of Regional Planning and Urban Transportation, Stockholm County Council, I was assigned the responsibility for the evaluation of a road pricing scheme for Stockholm. My work at the Stockholm County Council turned out to be rewarding and challenging. Lars-Göran Mattsson and Lars Lundqvist, among others, created a stimulating environment by bridging the gap between theory and practice. Lars-Göran later formally became one of my advisors at the Royal Institute of Technology. Many people have contributed to the realisation of this work. I feel especially indebted to Lars-Göran Mattsson for numerous creative discussions and comments on draft papers and for his constructive and patient support of this work. I would also like to acknowledge my advisor, professor Folke Snickars at the Royal Institute of Technology for his continuous support of my research. I want to give special thanks to my colleague Lars Rand at the Institute of Transport Economics for his contributions and for sharing the frustrations and joys of empirical research with me. I would also like to thank Timothy Hau for sharing his knowledge of and enthusiasm for road pricing with me. I have benefited from the discussions and helpful comments of many people during this work and I take this opportunity to express my gratitude to them, especially to Staffan Algers, Rune Elvik, Sergio Jara-Diaz, Börje Johansson, Peter Jones, Odd Larsen, Harald Minken, Agnar Sandmo, Kenneth Small, Heinz Spiess, and Staffan Widlert. I gratefully acknowledge Anne Marie Hvaal and Astrid Ødegård Horrisland for library support, Unni Wettergreen for secretarial support, and Jurg Jacobsen and Torbjørn Rødvik for computer support. This work has been partly supported by the Research Council of Norway through the research programme PROTRANS, and partly by the Swedish Transport and Communications Research Board. I especially wish to thank Torstein Garnaas, head of the research programme PROTRANS, for his important support. Parts of essays 2, 3, 4 and 5 were presented at different international conferences and published in the proceedings from these vii viii conferences. I acknowledge Kluwer Academic Publishers who have kindly granted permission for the use of copyright material (essay number four). Finally, I would like to thank Per Åhrén for all his support and encouragement. This project would not have been completed without his acceptance of lost evenings and weekends. Oslo, August 1995 Introduction to the Thesis The five essays of this volume comprise my doctoral thesis at the Royal Institute of Technology, Department of Infrastructure and Planning. The topic of the thesis is road pricing and toll financing in urban areas, with examples from Oslo and Stockholm. The traditional response to congestion has been to increase capacity. When confronted by latent demand, however, increased capacity is quickly depleted, leading to renewed congestion and further deterioration of the environment. The prohibitive costs of the provision of additional capacity in urban areas and financial constraints at the different levels of government have revived the interest in road pricing and toll financing in urban areas. Road pricing requires road users to pay for their marginal social cost. If congestion is the only cause of externalities, then they should pay for the congestion they cause other users. In the short-run, road pricing reduces congestion to an optimal level. The theory suggests that, under certain assumptions, road pricing generates sufficient revenues to optimally expand the capacity to meet future demand (in the long-run). These assumptions - perfect competition, no economies of scale, and a specified income distribution - are not quite met in reality. A further issue about road pricing concerns those who are adversely affected by it. Road users are already paying for roads through road user taxes, which are regressive. Road pricing should at least reduce these taxes. Furthermore, it should make it possible to compensate for adverse effects, but not in a manner that compromises the purpose of road pricing. Road users adjust their behaviour through a number of choices in response to changes in transportation infrastructure and services and the pricing of the facilities. The aggregate of their responses determines the "optimal price", a key issue in road pricing. However, as easy as it sounds, this is a difficult task. Small (1992, p. 154) explains that there are "strong interactive feedbacks between supply and demand for transportation: demand depends on service levels and prices, while costs and service quality in turn depend crucially on demand through highway congestion and through waiting time for transit vehicles". In spite of the complexity of the subject, it has been necessary to use simplified models. Even so, rigorous theory is necessary if conceptual errors are to be avoided. This thesis comprises the application of a series of simplified models for the evaluation of the impacts of road pricing and toll financing in urban areas. ix x Road Pricing and Toll Financing Overview of the Essays In essay no. 1, Road Pricing and Toll Financing in Urban Areas, I have tried to present some important economic concepts that have a bearing on the provision of roads and pricing, including the efficient pricing and investment rules and the second-best rules. On the impacts of road pricing Newbery (1994, p. 396-97) states "If road users paid the true social cost of transport, perhaps urban geography, commuting patterns, and even the size of towns would be radically different from the present". Evaluations of some of these impacts are extremely difficult since they are caused by shifts throughout the economy that cause adjustments in land values and wages. The implementation of a transport policy such as road pricing and toll financing in urban areas requires public and political support. Issues related to the competing objectives of road pricing are also discussed. In essay no. 2, Cost-Benefit Analysis, Users' Benefits and Distributional Consequences of a Toll Scheme for Stockholm, alternative specifications of disaggregate logit models of mode choice are formulated and tested on commuting data for Stockholm. The main conclusions of this study are: (1) the marginal utility of income is not significantly different for different income groups. This implies that there is no income effect, and consequently the different measures of consumer surplus should coincide; (2) however, the value of travel time saving increases with income due to the higher marginal utility of time among high income groups. The implications of alternative model specifications are demonstrated by calculating the benefits to different income groups from a transport policy, in this case, a toll scheme.