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.

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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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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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