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Carsten Rolle
One Year ERASMUS
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It has always been a major task of economists to set
incentives so that resources are allocated in the most
efficient way. Nevertheless, the Transportation Sector in
general was characterised for a long time by government
intervention. Radical changes in transport policies -
especially in the UK and later also in other European
countries came along at the beginning of the 1980s and were
largely supported on a theoretical basis by the new concept of
contestable markets[13].
Accordingly the policy of deregulation and privatisation of,
for example, express coaches, buses and aviation, has resulted
in significant product innovation and rising efficiency.
As road space is a valuable and scarce resource[14]
we would argue that it ought to be rationed by a price
mechanism. Road users should pay for using the road network to
make correct allocative decisions between transport and other
activities.
In the past, the technical possibilities of road pricing
were very limited[15]
but with the advent of electronic road pricing, cars no longer
have to stop to be charged.
Both aspects, the more liberal political climate of
deregulation and privatisation in the last years and the new
technology, are essential prerequisites for the actual
discussion of road pricing. On a more practical political
basis we could also identify the interest of the state to
create a new source of revenues although road pricing does not
necessarily imply a higher burden for car users.
After a brief description of electronic road pricing this
paper will outline the costs of using a road and give a
definition of the price to be charged. Then the effects of
road pricing shall be identified and critically evaluated
before the basic results will be summarised.
The new technology of electronic tolls no longer requires
motorists to halt at tollbooths. Therefore, it prevents
additional congestion. Drivers would be given an electronic
number plate which signals to the recording computer the
presence of a vehicle. This would be the most direct way to
charge the amount specific to the road and the time of the
day. The devise could charge users via bank account or monthly
bill. Because there have been many objections against the
individuals location by electronic detectors[16]
the use of smart cards appears to be more preferable. The
electronic licence plate would be loaded with the smart card
and would debit payments. Only if the card were exhausted
would the central computer monitor and bill for road use[17].
The complete installation of such an electronic system
would take some time. In the meantime area licences could be
sold for very congested zones, such as city centres. (This
solution is used in Singapore for the rush hour traffic with
considerable success. The impact of its introduction was an
immediate reduction of 24,700 cars during the peak time and a
rise of traffic speed by 22%.)[18]
Before actually defining the price of a good it is essential
to characterise the good in terms of the Public Goods Theory
to deduce the optimal rule of providing it. Road use is rival
in consumption[19]
and also excludable with adequate costs of the pricing
technique. For that reason road infrastructure is no longer a
pure public good but a private good with some degree of
externalities. This implies that private provision of roads
may be favourable.
The ideal road price would only allow cost justified trips to
be undertaken. Economic theory therefore postulates marginal
social costs (MSC) to be equal to marginal social benefits (MSB)[20].
But what are the marginal social costs that allow a vehicle to
make a particular trip? Besides the private costs of road use
(like fuel, drivers time etc.) that are directly paid by the
driver, four main costs can be identified[21]:
a) road damage costs
b) accident externalities
c) congestion costs
d) environmental costs.
Road damaging is basically caused by heavy vehicles as the
damage to the road pavement increases to the fourth power of
the axle load. Therefore road damage costs should be
proportional to the damaging power (measured in terms of
Equivalent Standard Axles). Thus almost all costs should be
paid by heavy trucks.[22]
Accident externalities arise when extra vehicles on the road
increase the probability that the other road users will be
involved in an accident. Accident probability depends to a
large extend on distance, driving time and particularly the
other traffic. This is why accident costs will be treated like
congestion costs.[23]
Congestion costs arise due to the fact that additional
vehicles reduce the speed of the other vehicles and hence
increase their journey time. Economic analysis shows that the
traffic flow will be optimal at Q* if the costs of additional
traffic (MSC) and the demand are equated. However, the
individual user entering the road will typically consider only
the costs he personally bears (MPC), i.e. marginal private
cost and will thus operate at Q Therefore he takes the
marginal private cost curve into consideration rather then the
optimal marginal social cost curve (MSC) for the new
trip-maker and the existing road users. The difference between
the MPC and MSC curves reflects the dead-weight loss of
excessive traffic congestion.
In a market system without transaction costs the other road
users would be willing to pay the additional car the amount of
their opportunity costs of time and additional fuel for not
entering the road. As transaction costs have been obviously
immense (if a perfect bargaining process would have been
possible at all) so far, only an electronic pricing system can
overcome the huge existing transaction costs between the road
users.
The road use of vehicles has various spillover effects on the
environment[24]
like:
local: emission of CO, NC, NO2
global: emission of CO2, CFC
water pollution
noise and vibrations
land use effects (destruction of wildlife habitats and the
landscape)
As shown in the previous analysis the marginal social costs of
road use exceed the marginal private costs. The optimal road
price, p* must therefore reflect the differences between MSC
and MPC and will generate a welfare gain. Because of the
traffic reduction (Q - Q*) consumer surplus will fall but as
long as the social gain is greater than this loss the total
welfare effect will be positive.
A basic problem still remains, however, : road users have
to get the information about the changing road prices
immediately to optimise their individual transport decisions.
(This could only be guaranteed if the motorist would have
access to the prices via a board computer.)
* In the second section, it was shown that road pricing is a
good instrum -ent to use to internalise most of the external
effects numerated above.Especial-ly in the case of congestion
costs, it appears to be the optimal method of internalisation
because a price mechanism would replace the present queuing
mechanism which is allocatively inefficient.
* Furthermore, it reveals the true economic costs of the
road use (including replacement costs) so that intermodal
competition[25]
would become fairer. Because road prices would be primarily
connected with congestion costs, some distributional and
locational effects could arise. Costs of driving in non-urban
areas would probably fall whereas urban driving costs would
increase so that in the medium run, the quality of the public
urban transport system would improve.[26]
* In the case of pricing highways on the continent, road
pricing is a good instrument to overcome the free rider
problem of foreign carriers using "home country"
highways. This is especially interesting against the
background that current ways of financing highways are very
different. For that reason actual competition between
international carriers is not neutral.
* As shown in the previous section, road damage costs of
cars are almost zero whereas heavy trucks cause most of the
damage. Therefore, a vehicle specific tax depending on the
damaging power would be a simple and effective wayof charging
efficiently. Road pricing systems could improve this
instrument a little by taking the quality of roads that were
actually used into account.
* The costs of implementing an electric toll system are very
high. The German government estimates that the implementation
of the system will cost 2bn pounds for its Autobahn network
plus individual costs for every vehicle of 40 pounds each, not
including additional costs of controlling the system. On the
other hand, controlling the toll system would enable a
privatisation of the roadnetwork which could lead to
additional revenue for the state.
* In terms of negative environmental externalities, road
pricing is (with the exception of noise) probably not the
optimal instument for internalisation. Taxes on fuel or
emission fees, for instance, charge vehicle emissions in a
moredirect way and they are very simple to design.
Furthermore it must be mentioned that the effect of road
pricing depends to a large extent on the authority[27]
that receives the revenues and its way of using the money.
Economists would argue that the profits made should be
reinvested into the transportation system to generate an
efficient outcome rather than cross-subsidising other traffic
modes or other state activities.
To put it in a nutshell, this paper advocates that road
pricing is the best instrument to internalise the costs of
congestion and road damage. Although the initial costs of
installation are high, these costs would probably quickly be
exceeded by the efficiency gains of corrected prices.
Nevertheless, road pricing cannot perfectly internalise
external environmental costs. That is why instuments like
"fuel taxation" or "emission fees" will
still be necessary to design an optimal price mechanism in the
transportation sector that sets the correct incentives.
Baumol/Panzer/Willig, (1982) Contestable Markets and
The Theory of Industry Structure
Boris,S., (1988) "Electronic Road Pricing: An
Idea Whose Time May Never Come", Transportation
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Braeutigam, R (???) Optimal Policies for Natural
Monoplies
Buchanen, J. (1965) " An economic theory of
clubs" in Economica 32
Button, K (1990) "Environmental externalities
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Glaister, Starkie and Thompson (1990) "The
Assessment: Economic Policy for Transport", in the Oxford
Review of Economic Policy, Vol. 6, No. 2
Keating, G (1993) "For whose the road
use", in Economic Affairs, June
Newbery, D (1988b) "Road Damage Externalities
and Road User Changes" in Econometrica ol. 56(2)
Newbery, D (1990) "Pricing and Congestion:
Economic Principles relevant to Pricing Roads", in the Oxford
Review of Economic Policy Vol. 6, No.2
Sandler, T and Tschirnart, J. (1980) "The
Economic Theory of Clubs: An Evaluative Survey", in the Journal
of Economic Literature, Vol. 18
Schmalensee/Willig,(1989) Handbook of Industrial
Organisation, Vol. 2
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