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. “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.”

    A complication here is that often the congestion that big fast vehicles cause each other causes them to move more slowly on arterial roads during morning and afternoon peak hour than the speed a moderately fit cyclist can sustain over a typical commuter trip via the same roads. This was certainly my experience in the days when I commuted by bicycle to my workplace in an inner Brisbane suburb.

  2. Once roads are improved reduced transport times make new areas feasible for housing. These new subdivisions are car centric ie due to the distances within the development you need a car for the simplest of tasks.

    Increased traffic puts more pressure on other roads particularly at junctions further down the line requiring more and more investment just to maintain some semblance of flow. In the meantime investment in public transport is put to one side as its no longer a priority.

  3. Surely the biggest problem is just that we build too many roads tho? Main Roads has this enormous budget to waste on intra-town freeway widening and whatnot, but we struggle with basic maintenance of our rail system. CRR has been in planning for 7 years and hasn’t started.

    IMO, the name of the game is massively slashing the road budget and plowing the savings into heavy rail (also: planning reform). IMO state and fed governments really ought not be involved in funding roads.

  4. Thanks so much for the link to Turnbull and his contention that the laws of the land over-ride the laws of mathematics. It fits perfectly with John Howard ‘knowing’ that climate change is wrong based presumably on discussions with Nigel Lawson. Just remind me to not try crossing any bridges based on Turnbullian transformation algorithms.


    As to the madness of toll roads and “It would be hard to design a pricing scheme more directly contrary to the lessons of opportunity cost.”

    Surely government policy is not designed to promote efficient use of resources but rather to keep transferring more and more public moneys to mates with a view to long term rent extraction.

    Perhaps you could offer some thoughts on the implications of what appears to be such REAL government ideology driven policy, – and the complicity/involvement of (some?) finance economists in powerful positions in this push.

    My question is prompted by the following. Like many others I used to understand that the 2008 crash came largely from the blue and, public aside, only a few renegede economists like Roubini and Steve Keen appreciated that such a catastrophic event would occur. At least so went the narrative.

    But I now find that ‘Stress Testing’, the empirical methodology and (to a degree) science of understanding and predicting catastrophic events was well developed prior to 2000 – to judge for example by the IMF putting out these guidelines Blaschke, W., Peria, M. S. M., Majnoni, G., & Jones, M. T. (2001). Stress testing of financial systems: an overview of issues, methodologies, and FSAP experiences (Vol. 1): International Monetary Fund.

    The implication is disturbing here….that mainstream economists contrary to popular belief by in large did know for a long time before the crisis that was coming and yet they did nothing, suggesting there was another agenda at play here.

  5. One issue is why the authorities cannot renegotiate contracts based on flawed cost-recovery methodology to deal effectively with congestion. What you want are high tolls when roads carry a lot of traffic. This is what a monopolist road owner would seem close to preferring – they generate lots of profits by doing this and it is what society wants. Why don’t the states renegotiate these contracts to make them congestion tolls? At worst a lump-sum transfer would be required to make all parties no worse off and society would be the winner.

    We were close a few years back to time-distance-location pricing for heavy vehicle road damage costs. I am unsure whether it was the States or the Commonwealth which dropped this ball. The telematic software and hardware is now available for trucking fleets. It would provide big social gains.

  6. I think one area that has not been examined as much as it should is smart parking prices. Everyone’s had trouble finding a park at some point in their lives. The way to solve that problem is to charge higher prices to discourage use. You have much higher prices at peak times down to low or zero prices at low demand periods. Then there’ll always be a park.

    Then you can start eliminating parking minimums.

  7. @Lt. Fred

    I agree though Donald Shoup has an excellent book-length treatment of parking policies. There are two issues:

    In the absence of congestion parking spots shoulkd be priced so search costs are zero. You can park anywhere you like that is legal if you pay high enough prices. Maximum stays should be abolished.

    With congestion parking policies have long been derided as a poor “second-best” option because they target terminating traffic and leave “through” traffic untouched. But a large proportion of inner city congestion is people searching for a spot so you can get rid of that by following the first precept. If you want to discourage city entry you can set prices above their efficient levels but, as mentioned, this gives a green light to “through” traffic.

    There are purely technological solutions to congestion caused by parking such as identifying all vacant spots in an area using satellite technology and sensors on roadside – now done in San Francisco. Information can be beamed to a mobile phone. Result: No searching for parking spots. Shoup estimates this can eliminate 1/3 of all congestion in many US cities.

    Of course “on street” parking should also be priced the same as off street parking to avoid impulses to search for cheap spots.

  8. I don’t necessarily want to eliminate congestion though. It’s the one frame that actually works to justify needed public transport investment.

  9. Australian cities are not London, where you can draw a boundary around the CBD and fix your congestion problems by charging anyone who goes inside. In Australian cities some of the most congested roads are way out in the suburbs with drivers moving in a straight line point to point. Start charging for those and drivers will move to streets running parallel.

  10. You could charge people commuting from the exurbs to the city. For instance, if you want to go from Ipswich to the Brisbane CBD, you’re not going to have many alternatives to the Ipswich Motorway. Putting a huge toll on the road would earn revenue, and discourage long commutes, at the cost of putting more pressure on Brisbane’s housing market (which can be resolved easily). It would also put pressure on the rail system, but give you the money to resolve that problem (not that you should).

  11. There is probably no way of bringing the prices paid by road users completely into line with the opportunity costs they generate.

    I suggest this is overly pessimistic. A possible, not-too-distant future, is one in which truly autonomous vehicles, operating on a per-trip payment system, displace a great portion of private vehicle ownership.

    (Imagine the advantages in terms of cost – most private vehicles are parked the vast majority of the time, a vast stockpile of underutilised capital. And the practical benefits to travellers would be enormous – instead of a family needing to own one or two vehicles that meet all their needs, they could dial up the vehicle best suited to the current trip – a ute to go to Bunnings, a small car for a trip to the shops, a larger car for a family outing on the weekend…)

    Under such a scenario people would be habituated to the idea of automated, per-trip payment for use of vehicles (or perhaps more complex subscription based plans for usage, c.f the current – albeit very clunky – arrangements for car share programs).

    It would be technically very achievable for Governments to build in a road pricing scheme closely corresponding to congestion, usage costs and externalities, as a small surcharge to the price charged by the operators of vehicles (which would in any event have a complete record of trips, including location and time).

    It’s speculative, but I think it’s premature to abandon all hope given how much change we could see in the market for private transportation in the next couple of decades.

  12. All of this might become a non-issue with driverless cars. If they become ubiquitous, parking spots won’t be needed. They should also improve traffic flow by choosing the best routes and optimising speed, distance to the car in front, and so on.

  13. John

    a dimension of this discussion which is probably outside the scope of your book is the value of a road. It almost seems at times that new roads have infinitely high value, and so the only economic question is whether we can scrape up the cash (or appear to) to pay for it.

    It seems to me that the same goes for more people ie increased population. We pretend that the marginal cost of more people is negative despite plenty of evidence to the contrary.

  14. John – a couple of comments based on years of consulting on transport economics.

    The London congestion pricing example is often cited, but even more effective is the Singapore system because it is smarter: variable pricing for different times of day and levels of demand, monitored carefully, based on a mandatory tracking device in every vehicle. That technology is available at low cost and easy to implement. Arguably Sydney already has it (an e-tag is not exactly compulsory, but so universal it might as well be, and used for toll roads; there would be savings in a smarter tag that could also be used for congestion pricing). Using this in conjunction with GPS positioning services would enable it be done anywhere, not based on artificial city boundaries but based on actual congestion. One flaw with the London system is that pricing is not related to observed congestion, but to a now quite old assumption about what congestion would have been otherwise without the price. So for example, it assumes congestion charging is needed only Monday to Friday, within the congestion zone; if there’s a huge public event on a Saturday or Sunday that causes congestion (and would be better dealt with by encouraging greater use of public transport) that’s just bad luck, the charge does not cope with that situation.

    Another thought, prompted by comments from Lt Fred and hc in this thread, you could also use smart tags for parking fees. Indeed, there’s no reason why they could not include a screen showing parking fees that varied by time, location and demand, together with location of cheaper alternatives.

    In your narrative about externalities from roads you mention air pollution but not other forms of pollution (especially contaminated water runoff) and also omit wildlife deaths: which although not priced as such, would be seen as a negative externality by many in the population.

  15. The point about the low costs imposed on those best able to make their pain visible to the government is well made, and well taken.

    One amusing use of this is protest action which quite deliberately uses that same avenue to affect people normally oblivious to the costs they impose. It amuses me to see politicians suddenly face to face with “why are you demolishing my home?” in a situation where they can’t just use their arrogation of the right to use violence to get rid of the problem.

    More generally, it’s very hard to persuade people to take a chance on an unknown solution even when they’re suffering a lot from its absence. I work with motorists, and persuading them to even try public transport is extremely difficult. Even the ones who contraflow commute (our office is in middle Sydney, so you go out from the CBD to get to it), for whom the trains would be nearly empty but still arrive every 10-15 minutes because they don’t store them in the CBD all day. Bah!

  16. Well, the only way to increase PT user share is to improve quality (or reduce the quality of the roads). Increase coverage, increase speed, increase frequency. Then people will use the train.

  17. In Sydney we’re having something like that done – they’re privatising my train line and the new trains will run 50% more often. Sadly each will carry half as many people, so capacity will be 2/3 of what it is now. But at least those able to get on the train won’t have waited as long to see a train… Yay?

  18. 1. Road wear is a very steeply rising function of axle weight. To a first approximation, it’s all caused by trucks and other heavy vehicles. Road pricing schemes should reflect this. The current system encourages wasteful just-in-time logistics and home delivery of single small packages.
    2. Contrary to a common cargo cult, electrification of the vehicle fleet plus autonomous vehicles do not solve all problems. Congestion and air pollution from tire dust continue as before. The gains are of course worth having: no engine emissions, less noise, fewer accidents, less road space blocked by parking.
    3. Taking to the air just makes matters worse, supposing the fantasy of individual flying cars ever became feasible.

  19. There are two ways to reduce congestion; road pricing, and reducing the amount of road space dedicated to motor vehicles. With the latter the free’ed up road space can be re-allocated to transport modes that have higher capacity than private motor vehicles; ie, bikes, trams and buses.

  20. Much of the opposition to tolls and congestion charges stems from concerns about equity. That is, road travel is a much higher proportion of income for low-income workers. I haven’t seen numbers on this, but it seems plausible given the concentration of low income workers in the outer regions of our cities.

  21. @Bruce Bradbury

    That’s definitely an issue Bruce but it becomes ambiguous when you recognise that poorer road users also want occasionally to make high-value journeys. They will avoid the tolled road most of the time but when an urgent journey is required (wife’s waters break) they are happy to get an uncongested journey by paying a high fee.

    More generally poorer travellers can be compensated by using the funds from the fees to improve public transport and urban amenities.

  22. Spelling: Given that you’re telling the story, I don’t think “…the road would be untold.” (last words, 7th paragraph of extract). Should be “untolled”, as at the end of 6th paragraph.

    And lest someone thinks you dislike LPG, perhaps “gas tax” (5th paragraph) should be “fuel or gas tax”, but this depends on your prospective audience.

  23. @rog

    Rog, To the extent that tolls reduce congestion city-wide and reduce the case for living close to the city it is unclear to me they wil increase inner city property prices. They may reduce them since travel from the ‘burbs becomes less onerous. Or are you looking only at the amenity values of inner city living – less pollution, less traffic passing by your door?

  24. Part of the answer, of course, is fixing the zoning code to permit poor people to live in the city. That way everyone could enjoy the benefits.

  25. 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.

  26. @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:

    Click to access Brinkman.pdf

  27. 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.

  28. @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.

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

  30. 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: 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.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s