I’ve been doing various pieces of work on transport. Here’s a quick update:
* I’ll be speaking at a one-day seminar organised by the Institute for Sensible Transport in Sydney on 8 August. It should be a good event for those with a professional interest in road pricing and related topics.
* For those with a general interest, I have a section over the fold from my book-in-progress, Economics in Two Lessons. Comments and criticism much appreciated.
* While I was a Member of the Climate Change Authority, I put a lot of work into a report the Authority did on vehicle fuel efficiency standards. With the rejection of just about every other policy measure to reduce CO2 emissions in Australia, this was the government’s last chance to do something useful. Naturally, Turnbull and Frydenberg went to water the moment the denialists who dominate the LNP raised an objection. Perhaps, now that the laws of mathematics have been subordinated to Australian law, Turnbull can solve our problems by simply decreeing a change of sign, so that an increase in emissions becomes a decrease.
5.3 Road pricing
For much of the 20th century, the road was a symbol of freedom, at the centre of cultural productions as diverse as Jack Kerouac’s On the Road, Thornton Wilder’s The Happy Journey to Trenton and Camden and the vast Hollywood output of road movies. But roads are not free. The costs of road construction and maintenance represent a major share of the budget at all levels of government (local, state and national), and attract a fair amount of attention. Even larger, but more rarely considered are the opportunity costs of the road network.
The capital tied up in roads represents a large share of the stock of investments owned by governments. This capital investment comes at the expense of alternatives like schools, hospitals and, most notably, public transport systems. The opportunity cost of land dedicated to roads is larger still .
Turning from roads to vehicles, road users impose costs on each other in the form of traffic congestion and crash risks, as well as the general annoyance that has given rise to the term ‘road rage’. These costs aren’t symmetrical; big vehicles and fast drivers contribute more to crash risks, while slow vehicles may cause more congestion. A whole book could be written (and probably/inevitably has been) on the conflicts between motorists and cyclists.
Finally, road users impose costs on others through noise, air pollution and the crash risk faced by pedestrians and other non-motorists. We’ll discuss these ‘external costs’ in more detail in Part 3.
We pay for roads in many different ways: gas taxes, tolls, vehicle registration charges and through general government revenue. Typically, these systems have evolved through historical processes driven by the exigencies of funding, with little or no underlying rationale. As a result, a road built during a period of relatively flush public funding may be a freeway, while another nearby may be subject to tolling. Some jurisdictions tax gasoline, while others levy charges on vehicles. These prices usually bear little or no relationship to opportunity costs, a fact that helps to explain why driving is so often a source of frustration and socio-political dispute.
At present, the most common approach to road pricing involves the use of tolls to finance the construction of a new road. This is commonly undertaken through a ‘public-private partnership’ (PPP) also called a “Build Own Operate Transfer’ (BOOT) scheme, in which a private sector consortium agrees to construct the road in return for the right to collect tolls for a set period, typically around 25 to 30 years. At the end of this period, the road returns to public ownership and the toll is removed. Meanwhile, alternative routes, typically through residential streets, remain untolled.
It would be hard to design a pricing scheme more directly contrary to the lessons of opportunity cost. When a road is brand new, and uncongested, the opportunity cost of an additional driver using the road is almost zero. The relatively small number of drivers means that none of them are slowed down by the traffic flow they all generate. The fact that the road is of recent construction normally means that it does not pass through residential areas, where residents would be affected by noise and accident risk. (Some may have been demolished to allow its construction, but this is a ‘sunk cost’). The physical capacity of the road itself to bear traffic without incurring damage is the best it will ever be. So, if prices were set equal to opportunity costs, the road would be untold.
Fast forward 25 or 30 years to the day the toll is removed. By now, traffic on the road is heavy much of the time, and the removal of the toll will only make this worse. The availability of the road will have encouraged development of residential and business areas in its vicinity. Finally, even with careful maintenance (by no means assured), the road will be old and more easily damaged by heavy vehicles and traffic in general.
As well as failing Lesson 1, the standard system of road pricing is arbitrary and unfair. The question of whether a road will be tolled or free is almost entirely one of historical accident. If a community has always been well-served by good roads, perhaps because its residents are well-off and political influential, motorists travelling there pay nothing. Similarly, if the government’s budget is flush in the year a road project comes up, it may be provided for free. But, when budgets are tight, and new roads are needed, tolls are imposed.
Some cities have done a better job than most in putting prices in line with opportunity cost.The most striking example is that of London, which introduced a ‘congestion charge’ in 2003. The mayor who introduced the change was a member of the Labour Party, Ken Livingstone, often referred to as ‘Red Ken’ because of his left-wing views. However, the originator of the idea was the famous Chicago economist, Milton Friedman.
The London experiment is generally regarded as successful. It has reduced traffic on London roads when, in the absence of a charge, the number of vehicles would almost certainly have increased. Since the charge was introduced, numerous measures have been take to improve safety and amenity for pedestrians. Because the number of cars has been reduced, it has been possible to do this without increasing travel times for motorists
Despite the apparent success of the congestion charge, very few cities have followed London’s example. In large measure, this reflects the failure of policymakers and the public at large to understand the lessons of opportunity costs. People are unwilling to pay for something that was once ‘free’, even though as members of society we all bear the costs of congested roads.
Failures of understanding cannot fully explain this outcome, however. Charges have been introduced for a wide variety of public services that were formerly not priced and the public has mostly accepted the change, willingly or otherwise. The crucial difference with congestion pricing is that the people most directly affected are those who drive to work in the central business district of cities, such as businesspeople with access to office parking. These are among the people most likely to come into contact, on a regular basis, with the members of the state or local governments that commonly make decisions on road pricing. In Bastiat’s terms, their hostility to paying for access to the city will be highly visible, while the opportunity costs of free access are ‘that which is not seen’.
There is probably no way of bringing the prices paid by road users completely into line with the opportunity costs they generate. Nevertheless, it would be hard to do worse than the pricing systems commonly used in relation to toll road projects around the world. Increased use of road pricing, based on congestion and externality cost rather than historical cost accounting, would certainly help.