Why is road pricing a good idea?

What Americans mean by a 'McMansion'. Click for slideshow.

I’m not aware of anyone who disagrees seriously with the contention that car travel is underpriced. The consequence of this inefficiency is we drive more than we otherwise would and more than is socially optimal.

The idea of road pricing is that drivers should pay the real costs they impose on others through traffic congestion, pollution, noise and carbon emissions.

There’s also another force at play here which exacerbates the problem of excessive driving. There are some costs that drivers actually do pay – standing costs like depreciation, insurance and registration – that are “disconnected” from the perceived cost of travel.

A person deciding whether or not to drive somewhere will tend to take account of the cost of their time plus petrol, but they usually don’t perceive the standing costs. This under-estimation promotes more driving.

There have been various experiments with road pricing, such as the well known Singapore and London central city cordons (giving rise to amusing interpretations such as this one by Boris Johnson). However this is a technologically outdated approach – transponders and/or GIS technology mean it is now feasible to charge motorists in relation both to distance and traffic conditions i.e by location and time.

A driver who paid a price for a litre of petrol that included both external and standing costs would have a strong incentive to drive less. A gauge on the dash showing the total cost ticking over with every kilometre would provide an even more powerful nudge to think long and hard about the wisdom of driving.

Road pricing can be thought of in simple terms as a two-part per kilometre tariff that recovers both external costs and those standing costs that can be disaggregated. One part is a charge reflecting the general cost of using the roads. The other is a variable price reflecting specific costs like congestion in peak periods.

There are potentially some important benefits for the wider community from road pricing:

First, by making car travel more expensive, it should reduce the number and length of trips. Drivers will seek efficiencies by chaining trips and cutting down on long journeys. If the price is made a function of the environmental efficiency of the car, it should also encourage drivers to buy greener vehicles.

Second, road pricing increases the value of proximity. It can in theory promote a less sprawled, more compact city form and encourage higher density development around activity centres rather than in dispersed locations.

Indeed, it is doubtful that the objective of a compact city can be fully achieved unless the cost of travel is increased significantly, either by road pricing or by a massive hike in the price of fuel. Since the latter is uncertain, and since drivers have considerable scope to switch to fuel-efficient cars, it seems road pricing will be a more reliable strategy.

Third, road pricing should also make other modes, including public transport, more competitive relative to car travel. In fact, cars are so much more attractive at present than transit for most trips (the CBD is the major exception), it is unlikely public transport will become a major mode unless road pricing is introduced!

Fourth, perhaps the most familiar application of road pricing is the management of traffic congestion in peak periods. It will not increase speeds to the posted limit, but it will keep traffic moving, albeit at a moderate speed. The major benefit is that drivers who are making low value trips will find an alternative, leaving precious peak hour road space for those whose trips are sufficiently important they are prepared to pay a premium.

Most criticism of road pricing focuses on the vertical equity implications. Yet it is little different to the way we charge for public transport, or other services such as water, sewage, electricity and gas.  The more you use, the more you pay. Apart from concessions for those on the lowest incomes, tariffs for water and other ‘essential’ services do not take into account the capacity of the customer to pay.

Further, the affluent do not have a monopoly on “being in a hurry”. Working parents who have to collect an infant from day care by a deadline are likely to appreciate lower traffic congestion. Tradies and delivery drivers might feel they benefit from having a faster peak hour option. A worker whose job range is extended because of faster travel speeds might feel better off if it gives him or her access to a better job.

It is in any event likely that higher income drivers travel longer distances than lower income drivers and hence would pay more.

Travellers will also benefit if the revenue from road pricing is used to fund transport improvements. This is crucial to the political acceptability of road pricing. The size of this funding should not however be over-estimated.

Revenue that was previously collected in standing charges would doubtless be returned to its original purpose, which might be general government income. Further, congestion charging does not necessarily maximise revenue. If it did, the operators of toll roads would have implemented some version of peak period pricing long ago.

It might be argued that a price on carbon would render road pricing unnecessary, however there are two reasons why this seems unlikely. First, a carbon price won’t do much about congestion. Second, even a $40/tonne price on carbon will only increase the price of a litre of petrol by ten cents.

There are still areas of uncertainty related to road pricing. In particular, it is not clear how responsive drivers will be in the long term to rises in the cost of driving.


11 Comments on “Why is road pricing a good idea?”

  1. Joseph says:

    Road pricing is indeed a very good idea and essential in curing congestion. But does your justification not suggest going beyond what is socially optimal? The first 3 of your 4 reasons imply reducing car usage as an end in itself not because it increases welfare. If you price externalities into road transport and people still aren’t willing to use public transport for most trips then isn’t it the case that public transport is the wrong solution?

    • Alan Davies says:

      I’m not sure I get your drift. What I’m saying is that if you price cars efficiently, then theoretically the keey consequences should be (a) less car travel (b) closer land uses,and (c) public transport will be more competitive with the car.

      I’d expect (green) cars will well and truly remain the dominant mode in Melbourne for many decades to come, but PT will have a bigger, albeit still a minority, role.

      • Joseph says:

        I’m not convinced that is correct. Congestion charging could increase the capacity of the network which could facilitate more car travel rather than less. Currently too many people attempt to start journeys at the same time with the consequence that all are delayed. If you can stagger start times by differential charging then you can use the network more effectively. It may seem counter-intuitive that charging more means more use but perhaps a hypothetical example helps. Imagine someone living in the western suburbs that takes 1.5 hrs to drive to work currently so they take the train that takes 1hr. If congestion charging meant it would take 0.5hrs then they may be happy to pay perhaps a $10 congestion charge and use car travel more frequently.

        It is quite possible the the socially optimal outcome results in more car travel, less compact cities and less use of public transport. Indeed I think it is probable that inability to deal with congestion has made cities more compact than they would otherwise be.

        By describing less car travel, more compact cities and more use of public transport as ‘benefits’ implies an agenda rather than an optimal outcome.

      • Alan Davies says:

        Maybe our interpretations differ because you’re talking about congestion charging whereas I’m talking about road pricing (of which congestion charging is a subset)?

        Yes, congestion charging should increase capacity or throughput compared to the congested condition. But this is a relatively small effect – the traffic just has to be got moving to a (slowish) speed which minimises the time interval between vehicles. The value of congestion charging is in sorting out trips by value rather than in increasing significantly either capacity or speeds.

        Where the land use effects of road pricing will bite hardest is all those other trips which aren’t congested (at least 90%) because they will be more expensive.

  2. TomD says:

    Re McMansion photo: Yes the multi-millionaire sports stars may have ridiculously large houses, but they are way outnumbered by the barely living poor of America, many of whom either don’t have homes or live in unglorified trailer house – effectively low ceiling containers on blocks. The gap between rich and poor is astonishing and the middle class are now the new poor.

    • Alan Davies says:

      I put that up because I think we in Australia (me included) use the term ‘McMansion’ a bit loosely compared to how it’s used in the US (where I assume it originated).

  3. PrincessT says:

    Where do you get the idea that people on a higher income travel longer distances? I would suggest that this is completely not the case. Most affluent and desirable areas are closer to the CBD and most outer suburbs are inhabited by less affluent people. Most affluent people also have high-paying CBD corporate jobs, meaning they do not need to commute so far to get to work. Those who commute from the outer-suburbs are probably the least able to afford this sort of additional charge.

    It seems completely unfair that, first of all, the average family is being forced to live further from where they work because house prices in the inner-city areas are so high. Then second, there is little or no access to public transportation, therefore they are forced to commute by car. And now you’re suggesting that we “punish” them for their “choice” to drive to work?

    Not to mention the fact that public transportation in this city is already in shambles and can barely cope with the current levels of users at peak hour. Unless and until we have a viable alternative to driving for ALL the city’s residents, you cannot impose this sort of charge. It is completely unfair.

    Our tax system is essentially based on the premises of capacity to pay, not amount of use. Roads are a public service, which we pay taxes for; you can’t have it both ways. Either we only pay for what we use, and don’t pay tax, or we all pay tax and the government provides services like roads, police, firefighters etc. Are you suggesting that everybody pay per police call out? Or if you have a fire, you should pay the price to put it out? By your logic, I should also not have to fund someone else’s child’s education, or pay for someone else’s medical treatment too. That’s not the way the system works.

    Getting people off the roads is simple – if public transportation was efficient and reliable, people would use it! It’s not, therefore we have to drive. Fix the source not the symptom.

    • Alan Davies says:

      Re your first query – see Figure 1.3c in this report. It shows per capita travel increases with income in Australia’s capital cities (Figure 1.5c shows Melbourne).

      Re your last para – As I observed in the post, people won’t use public transport unless you also make cars more expensive, either through more traffic congestion, reduced road capacity or some form of road pricing. I don’t believe providing the quality of public transport you envisage is feasible unless you deal with the car as well.

      We already pay according to the amount we consume in relation to lots of essential services, like water, electricity, gas and public transport. If we don’t have a price on road space the demand will simply outstrip supply leading to traffic congestion and pressure to build more roads.

  4. […] ever form road pricing takes (I’ve talked about options and issues before, e.g. here and here), the key point is that drivers should be paying the full cost they impose on others, especially in […]

  5. […] congested – necessarily as part of a wider scheme – would be the “first-best” option. A congestion price would discourage low value trips and could keep traffic moving (although still well below maximum […]

  6. […] than passengers, but these are complex and politically difficult ideas. Congestion pricing is an essential initiative in Melbourne and I believe it will inevitably happen. But like the idea of levying land uses that […]


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