Sense and senselessness in transport policy

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.

31 thoughts on “Sense and senselessness in transport policy

  1. I have long been a fan of congestion tolling but it is not a magic bullet. Population growth is driving a lot of congestion and cost – I would start there.
    Autonomous electric vehicles will increase demand for road space. Congestion tolling and other charges may be inevitable to manage this demand, to substitute for fuel excise lost to EVs and, in Australia, help fund the disproportionate transport costs of population growth. Tolling could also be linked to pay by km insurance and registration.

  2. @hc, @rog

    As always in economics, it depends on the assumptions. Within the closed version of the basic monocentric city model (i.e. a city of fixed population size and a single central employment location), internalising congestion externalities and raising travel costs to the marginal cost level increases the housing price gradient. But this is a good thing and improves welfare overall—by raising prices, it creates opportunities for extra housing supply close to the city centre and reduces total transport costs. Households now make the socially optimal trade-off between housing and travel costs; these choices are distorted when travel is artificially cheap. Welfare is maximised when the price of housing is equal to the social marginal cost of housing, not when housing is artificially subsidised because travel is mispriced.

    The key contribution to the literature here is:

    Wheaton, WC. 1998. ‘Land use and density in cities with congestion.’ Journal of Urban Economics 43: 258-272.

    Things are more complicated in the real world, since firms and workers have a multitude of potential employment and residential locations, not just within a given city but across an entire economy. The key point to remember here is that, in equilibrium, housing costs vary spatially according to local wages and amenities in order to make households indifferent between alternative locations. This is true within cities just as it is across cities, with the extra complication that, within a city, people can commute from low-wage locations to high-wage locations. In reality, congestion represents the exhaustion of arbitrage opportunities by residents in low-wage locations, and travel costs will be determined by the wage differentials that exist between low-density, low-productivity fringe locations and high-density, high-productivity central locations.

    If productivity and hence wage differentials are unchanged by the introduction of tolls or full-blown congestion charging, there will simply be a change in the nature of transport costs, but not their quantum. Commuting will reduce until the fall in travel time costs offsets the newly introduced tolls or taxes, and there will be no change in relative housing prices. (The same fate would befall efforts to reduce congestion and/or housing prices by making improvements to the transport network—the sole effect would be to facilitate more commuting.)

    But changes in the spatial distribution of employment would be expected to affect spatial variation in wages, since productivity is endogenous to the local concentration of economic activity. Dispersal of employment could reduce productivity, wages and housing prices in central locations. But in such a scenario, the existence of a second externality—agglomeration economies—means that congestion charging could potentially reduce rather than improve welfare; by discouraging commuting, it could create a socially excessive degree of employment dispersal. On the other hand, improvements to the public transport network are, at least politically, a necessary accompaniment to the introduction of congestion charging, and facilitating extra commuting by public transport instead of simply discouraging it could avert such a scenario.

    An interesting paper that explores some of these issues is:

    http://www.ieb.ub.edu/files/PapersWSUE2014/Brinkman.pdf

  3. My assumption, that property prices would increase inside the congestion tax zone, seems to have been way off target.

    Congestion charging in London was introduced in February 2003 to reduce traffic levels in the centre of London. Postcode sector level property prices for sectors both inside and outside the zone are investigated under the premise that the benefits of transport innovation can be captured by property prices. If housing markets are efficient, residential property prices should capture all the benefits and costs to commuters that a location offers. The aim of this investigation is to firstly compare property prices inside and outside the congestion charging zone, and secondly to measure the sensitivity of house prices to distance from the zone boundary both inside and outside the zone. The main analysis is based on the quasi-experimental differences-in-differences approach. It is found that the gap between property price inside and outside the zone has actually reduced as a result of congestion charging. Also, after the implementation of the congestion charge, the sensitivity of house prices with respect to distance from the boundary has fallen for sectors inside the zone relative to sectors outside the zone.

    https://mpra.ub.uni-muenchen.de/4050/

  4. @rog
    Appears very counter-intuitive. Haven’t read the paper, but I wonder if there might have been other factors skewing the results like a substantial increase in supply and/or an anticipation of such.

  5. You realise john that this post occurs on the 200th anniversary of the death of Jane Austen? How quirkily apposite! 🙂

  6. Tolls are very regressive in that a toll will represent a higher percentage of a low income earners income compared with that of a high income earner. A byproduct of this is that tollways can become a road system for the privileged. The regressiveness can be made worse in that poor people often have to live further way from their workplace because of accommodation.
    Brisbane has a brilliant toll system. All the toll roads, bridges and tunnels are congestion bypasses. This means that the tolls encourage people to drive through congested areas instead of using the bypass. Would make sense to use a congestion toll with a daily cap and use the income to remove the tolls on congestion bypasses and/or improve the public transport system.
    If you want to reduce the average emissions per km for new cars you might consider using offset credit trading (See: http://pragmatusj.blogspot.com.au/2011/08/using-offset-credit-trading-to-drive.html) It avoids the endless arguments that come with setting up emissions standards and is a more sensible place to use offset credit trading than the RET scheme.

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