In economic parlance, traffic congestion, which is especially prevalent in urban areas, is a classic externality. A growing number of policy analysts concur that the best way to deal with it is to implement road pricing – a mechanism that involves charging a fee to drive a vehicle at times and places where there is insufficient road capacity to accommodate all demands (Small and Gomez-Ibanez 1998, p. 213). In this paper, the case for road pricing as a means of reducing traffic congestion is assessed. The paper first considers the economic argument in favour of road pricing.
It then uses evidence from a case study and two desk studies to illustrate that the theoretical benefits of road pricing have held up in the transition to practice. Following this, the paper broadens the discussion by answering arguments against road pricing. It concludes that if implemented in politically acceptable and operational efficient ways, road pricing can overcome the problem of urban congestion. Economic Theory of Road Pricing Beginning with Arthur Pigou in 1920, the theoretical foundations of employing road pricing to achieve allocative efficiency have been well discussed (Button & Verhoef 1998, p. iii; Phang & Toh 2004, p. 17).
Economists such as Pigou argue that during congestions, the marginal social cost of driving a vehicle exceeds the marginal private cost because marginal users of a crowded road consider only their private costs and ignore the fact that their vehicles slow down and inconvenience others. Hence, economists propose levying a toll on the use of congested roads to increase the individual cost of usage by an amount equal to the external diseconomies imposed by the marginal driver on others (Phang & Toh 2004, p. 7). Road Pricing Empirical Evidence In order to access how the theoretical advantages of road pricing hold up in the transition to practice, we need the aid of empirical evidence. As a land-scarce city-state, Singapore was the first to design and operationalise a manual charging and enforcement scheme for road pricing, known as Area License Scheme (ALS) in 1975 (Small and Gomez-Ibanez 1998, p. 213). The ALS defined a restricted zone (RZ) in the central business district (CBD).
All vehicles, except those in the exempt categories – public service and military vehicles, good vehicles, motorcycles, and buses – entering the RZ had to buy a licence in the form of a mountable decal during the morning peak period (Phang & Toh 2004, p. 17). In 1989, the charging hours were extended to include the evening peak (Small and Gomez-Ibanez 1998, p. 215) and the exemptions were eliminated for all except police and military vehicles, buses and emergency vehicles (Phang & Toh 2004, p. 18).
There was yet another change in 1994 with the charging hours extended to include the time between the morning and evening peaks (Small and Gomez-Ibanez 1998, p. 216). Although the ALS, during its life, did curb the amount of traffic entering the RZ, it had some drawbacks, the most critical being unlimited numbers of entry into the RZ for drivers who possessed the decal. This resulted in under-penalised contributions to traffic congestion, which in term meant a disequilibrium between marginal social benefits and marginal social costs.
Thus, between April and September 1998, the government replaced the manual ALS to Electronic Road Pricing (ERP) (Phang & Toh 2004, p. 21). The ERP relies on gantries with antennas to check smart cards on approaching vehicles. The ERP charge is debited from these cards without the vehicles having to slow down. A controller is able to detect possible violations, such as no card or insufficient balance on the card and a camera accordingly transits the image of the rear licence plate of the violating vehicle to a central computer. The penalty fee is an administrative surcharge of $10 plus the ERP charge. ERP charges are based on per-pass basis.
Charges vary by type of vehicle, time and location. Due to the adequacy of technology handing the ERP, the ERP was extended to various other locations covering expressways and outer ring road area (Phang & Toh 2004, pp. 21–22). A study conducted by the World Bank on Singapore ALS in 1978 illustrates the dramatic effect road pricing has on congestion. A charge of $3 to enter the RZ between 7. 30 am and 9. 30 am was able to reduce traffic by 44%. Solo car trips to the business district during the controlled time fell by 60%, with commuters transferring to car-sharing, bus, and travelling outside the restricted time.
The travelling speed of vehicles into and within the RZ increased by 20%. Conversely, speed on boundary routes and immediately after the controlled time fell, so the scheme was modified to mitigate these effects (May & Nash 1996, p. 252). These figures show that road pricing, if implemented carefully, does have the effect of curbing congestion. Furthermore, the transition from the ALS to the ERP has addressed the issue of allocative efficiency. Calculations done in the UK in 1997 have shown that total payments made by road users in the form of road taxes had more than fully covered total road costs.
Nonetheless, many journeys in high congestion conditions were probably under-priced, with the converse true for most journeys in uncongested conditions, illustrating that users of congested roads have not been paying the appropriate congestion costs (Roth 1998, p. 12). The ERP in Singapore has arguably solved this problem. Employing electronic technology, the ERP further fine-tunes the ALS system to ensure that appropriate charges can be levied at different times and locations on different types of vehicles.
This ability to flexibility adjust charges according to different variables shows that the ERP has allowed road pricing to move very close to Pareto optimality (Phang & Toh 2004, 24). Aside from the practical experience in Singapore, we can obtain further evidence of the effectiveness of road pricing from desk studies. Estimates from a 1975 study that was conducted for the proposed supplementary licensing scheme in London showed that a charge of $1 per day to use a car in central London could have reduced entering traffic by 45% and increased speed in the range of 40%.
Only 15% of the revenue would have been needed for enforcement and administration of the scheme. The study also showed that there was a clear optimal charging level. For charges below the optimal point, drivers who chose to divert to other modes would have been those whose marginal costs exceeded their benefits. At higher charge levels, drivers would still be diverted even though the benefits gained from their trips exceeded the marginal costs (May & Nash 1996, p. 253).
Results from a 1992 transportation strategy study of Edinburgh also show that cordon charging around the city centre – albeit, combined with other measures – could decrease traffic to the centre by 40% and increase speed by 30%. The study demonstrates that if the revenue from congestion pricing is not invested in the transportation system, the benefits of introducing congestion pricing is roughly halved, suggesting that road pricing achieves the best results when implemented as an integrated strategy (May & Nash 1996, pp. 253–54).
Counter Arguments to Criticisms of Road Pricing The evidence from these studies point to the positive impact road pricing has on alleviating congestion and ensuring optimal allocative efficiency in charging for road usage. Besides these economic efficiency considerations, other implications of road pricing – which relate to such schemes being politically acceptable – need to be taken into account too. Some critics of road pricing have advanced the argument that pricing will not get people out of their cars (Jones 1998, p. 266).
However, in a research by Phang and Chin (1990) on Singapore, the researchers found that the income elasticity of demand for the ownership of cars was 1. 0. In another research, it was determined that the price elasticity of demand for car usage was very high (Toh 1977). Although one must be mindful of the caveat that information from Singapore may not readily transfer to western cities where circumstances are very different (May & Nash 1996, p. 254), such findings signal that whereas an increase in the price of cars will not seriously decrease purchase, implementation of tolls will seriously discourage their usage (Phang & Toh 2004, 24).
In terms of technical concerns, several critics contend that the technology involved in electronic pricing will not work (Jones 1998, pp. 266–267). However, as noted earlier, the implementation of the ERP in Singapore shows that not only have these technical issues been resolved, the employment of technology has allowed for more sophisticated chargings that move the system towards Pareto optimality. A third area of concerns relates to the issue of equity. The aim of road pricing is to take some traffic off the road system.
The key question is whether those least able to pay for the charges are the types of traffic that are least essential. In this regard, congestion appears a socially preferable form of rationing road usage (using time), instead of rationing by money (Jones 1998, p. 269). Nonetheless, equity concerns are not insurmountable. For instance, there are multiple ways to implement road pricing within a package of other schemes to ameliorate the negative effects of road pricing on particular groups of travellers.
As an example, part of the revenue raised from road pricing can be used to improve modal alternatives and to provide acceptable travel conditions for those displaced from cars due to their inability to pay the road pricing charges. Governments can also meet social equity concerns by means such as reducing general motor taxation and reduce domestic and business rates within the charged areas to counter increased costs or loss of profit brought about by road pricing (Jones 1998, p. 276). Conclusion Clearly, the studies presented above show that the economic theory championing road pricing is able to hold up in practical implementation.
To the extent that road pricing is implemented carefully with new technology, it also has the potential to ensure that the social and environmental costs of using roads are appropriately borne, as the Singapore ERP case illustrates. Finally, criticism against road pricing, while worth noting, can be met with counter arguments that demonstrate that these concerns can be adequately addressed. Accordingly, to the extent that road pricing is devised in politically acceptable and economically efficient ways, it is an attractive option to overcome the problem of urban congestion.