Dec 14, 2016

Yes, we need to introduce congestion pricing. Here’s how to do it.

The key is to not let the perfect become the enemy of the good.

Jason Murphy — Journalist and economist

Jason Murphy

Journalist and economist

We have to do something about traffic. Expert consensus is we need transport pricing -- especially using price signals to ration access to congested roads. This idea comes up time and again -- most recently in an Infrastructure Victoria 30-year plan. It is exactly as popular with the wonks as it is unpopular in the real world. A tiny number of cities have done it (notably London), but no sane Australian politician will implement it any time soon. The schism highlights the fact there are a lot of nuances in the effects of price signals and market mechanisms. When a market mechanism works well, it does all of this:
  1. Creates a broadly accepted process for deciding who gets what;
  2. Rations scarce things by creating incentives to consume some other cheaper, more abundant thing instead;
  3. Generates a flow of money that pays for making the thing, so it will be made again;
  4. Generates a flow of reward to the seller, to motivate others to sell similar things; and
  5. Creates incentive to make a thing more efficiently.
There is one other thing a market mechanism is supposed to do:
  1. Reveal who wants something the most in order to give it to them.
Market mechanisms don't do this well when people have unequal sums of money. Things go to a person who can afford them, rather than a person who wants it more in any sort of raw sense. Nobody denies pricing roads will achieve the first five things. The problem is point six. Poorer people tend to live further out. Road pricing will hit hardest the people that can't afford it, and that, most everyone who isn't an economist agrees, is unfair. [Is it time to get serious about road pricing?] Solving this problem is becoming urgent. The cores of Australian cities are becoming more expensive more quickly than the outer suburbs, because access from the outer suburbs is getting worse. This is rapidly becoming into a dilemma. Bad traffic is what makes the inner cities relatively desirable. But the most elegant solution to traffic is not implementable because all the rich people live in the inner ring. The bigger our cities grow the worse the dilemma becomes.

I can't believe it's not pricing!

A recent article in The New York Times describes a food donation network that used a kind of pricing mechanism to solve an allocation problem. It created a big range of efficiencies via a points system -- local food banks used points to bid for various items from each other. A similar points system could overcome the fairness problem in pricing roads. People could be allocated points based on, for example, how far from the CBD they live, or their lack of access to public transport. Unwanted points could be sold off. This system would totally eliminate congestion if few enough points were given out. It would also create incentives to use other kinds of transport. And it would do so fairly. What it doesn't do is reward the owners or operators of roads, or provide a funding stream for roads. Public provision and funding would still be necessary. But perhaps waiting for the perfect market mechanism that can deliver all the potential upsides is unrealistic. Can road pricing advocates choose not to let the perfect be the enemy of the good?

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8 thoughts on “Yes, we need to introduce congestion pricing. Here’s how to do it.

  1. phonakins

    Sounds like an emissions trading scheme?

  2. Decorum

    Economists – good ones, anyway – do not think it fair that poor people should be hardest hit by congestion pricing. Rather, they acknowledge that any validity of their views on fairness follows from their citizenship, not from their profession, so they have no more (or less) merit than those of the next person. So good economists do not typically share their own views on fairness when they write as economists. (And yes, the implications of the contrapositive hold: the Gittinses and Dennises of the world who do happily bang on about fairness when writing as self-declared professionals are not, IMO, good economists.)

  3. Raaraa

    I can never understand the discussion around distance-based road pricing. Why penalise outer-suburban and rural people for driving long distances? They don’t have much in the way of alternatives such as PT.

    London and Singapore’s road pricing scheme hits congestion where traffic is heaviest, right in the city (provided alternatives are provided in the form of PT and/or freight rail, otherwise it is just an exercise in revenue raising).

    1. Jason Murphy

      It’s interesting that charging for roads is seen as a penalty, when charging for electricity, water and bread is seen as normal.
      We view roads differently, for two reason. One, they’ve always been free, and two, the alternatives to using them are often poor or non-existent.
      I used to think changing this mindset was the answer. My piece above concludes that working within it is necessary…

  4. drsmithy

    Things go to a person who can afford them, rather than a person who wants it more in any sort of raw sense.

    “Want” ? Are you sure you don’t mean “need” ?

    Poorer people tend to live further out.

    It’s not just that. Poorer people also tend to have more need for vehicles and much less flexibility to change their routines due to multiple part-time jobs, shift-work, single parent families, etc.

    If only there were some other way to impact congestion. Like, say, reducing the number of people in a given area ?

    1. Jason Murphy

      Tell me more about your depopulation scheme! sounds …frightening.

      1. drsmithy

        Incentivising people to live somewhere other than one of the big capital cities is frightening ?

        I assure you that even in towns of only ten thousand people, they still have electricity, running water and internet.

        1. Jason Murphy

          I used to work in the regional development section of the victorian government and I can tell ya. Getting people to move away from their families and away from a diversity of jobs is like pushing viscous matter up a gradient.
          But it is nt just a tough policy problem, it is an idea that could have extremely pernicious unexpected side effects. Turns out growing your big cities can be very good for the people in them in non-traffic-related ways.
          A lot of research suggests that the bigger a city is, the higher its average productivity. (the term that captures this whole field of thought is agglomeration economics.) This suggests making very effective big cities is a shortcut to raising Australian wealth and well-being.

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