Ben Muse

Congestion pricing for roads, airport slots, railroad infrastructure, and waterway locks

The NERA Economic Consulting firm offers several reports dealing with congestion pricing for various transportation modes: 

• Worldwide: Transport Economics - Part 1 Road and airport slot pricing (Emily Bulman, John Dodgson and Stuart Holder)
• Worldwide: Transport Economics - Part 2 Airport slot and rail infrastructure (Emily Bulman, John Dodgson and Stuart Holder)
• Using Charges to Tackle Road Congestion (Emily Bulman, Simon Maunder, and former NERA Director John Dodgson)
• Congestion at Locks on Inland Waterways: An Experimental Testbed of a Policy of Tradable Priority Permits for Lock Access (Dr. Joseph Cook with Dr. Charles Plott)
• Study to Assess the Effects of Different Slot Allocation Schemes (Ian Jones, et al.)
• An Examination of Rail Infrastructure Charges (Ian Jones, Stuart Holder, and former NERA Director John Dodgson with Sion Jones)
• NERA Topics #10: The Economics of Airport Slots (Ian Jones with Ivan Viehoff)

UK Congestion Pricing

John Palmer, at The Eclectic Econoclast, provides an update on London's program of using prices to address congestion externalities: "Congestion and Price Elasticity of Demand" .

Here are links to earlier posts: "The London Congestion Charge is Working".

The London Congestion Charge is Working

In February 2003, London began to charge drivers five pounds (about $8) to enter a 21 square mile core area in its downtown. The fee was meant to reduce traffic congestion.

Richard Bourn and Stephen Joseph report (in Australian Policy Online) on the congestion charging program introduced in central London last year. They say its working: "London's Successful Drive Against Congestion" :

"EIGHTEEN months after its introduction, London�s congestion charge has largely ceased to be controversial. The transport and environmental benefits are beyond doubt and the predicted social drawbacks have not materialised. A few concerns remain about the effects of the charge on some businesses in central London but these have been inflamed by the business interests that always opposed it. Meanwhile the success of the charge has been such that it has carried Ken Livingstone back for a second term as London�s mayor, after forcing the Labour party to readmit him and admit that its concerns about the charge were ill-founded.

The aim of the congestion charge was honest and explicit: to reduce traffic congestion by reducing traffic volume by 10 to 15 per cent. To achieve this, drivers are required to pay �5 per day if they enter central London between 7am and 6.30pm, Monday to Friday. In the event the reduction in traffic has been greater than anticipated. Overall traffic entering the zone is down 18 per cent during charging hours, with a reduction in car traffic of 30 per cent and a similar reduction in congestion. There has been little displacement of traffic into areas round the zone or additional congestion on the ring road. Motorists themselves have benefited; for those who still drive in the zone, journeys are quicker and more reliable..."

Read the rest; it's a nice column.

I've been following the story here intermittently. Previous posts include: January 2003: "
Using a fee to control externalities"; February 2003: "London's Congestion Pricing Scheme"; February 2003: "Follow-up on London congestion pricing"; August 2003: "Bad news from London (about traffic)"; September 2003: "Congestion pricing in London";

These last two are not really about London, but about proposals for a national road pricing scheme in great Britain: July, 2004 "Britain's road-pricing proposal "; August 2004 "The cost of one more driver".

The cost of one more driver

Eric Helland, at Marginal Revolution, links to and discusses a paper by Aaron Edlin and Pinar Karaca-Mandic on road congestion externalities: "Toll Roads and Externalities"

Among other things, Edlin and Karaca-Mandic find that "In California, a very high-traffic state, we estimate that a typical additional driver increases the total insurance premiums that others pay by roughly $2231 �$549 each year."

In July, the British Ministry for Transport released a report on the feasibility of road pricing to address driving externalities. The report web page is here: "Road Pricing Feasibility Study".

"12. There is significant experience, both internationally and in the UK, of road charging schemes. They fall into three main types: charges for crossing a cordon; for driving in an area (e.g. the London Congestion Charge) and charging for the use of a linear section of infrastructure such as a bridge or motorway. They use technologies such as toll booths, self-declaration, microwave tags and automatic number plate recognition. These are well proven, but limited in scale. As demand management tools they are effective at dealing with city centres (the London charge has cut congestion in the charged area by an average of 30 per cent), but cannot deal with large complex urban areas without a large number of boundaries with infrastructure at each one. And they can be blunt. They do not distinguish between short and long journeys, or several journeys in a zone.

13. The key to a fully national road pricing scheme is a technology which can charge by time, distance and place to target the costs, including environmental costs. Most costs are caused by congestion. Targeting congestion might require a complex 'box' on board the vehicle which could work out exactly where, when and over what distance the vehicle was being used, possibly using a positioning system, although the technology requirement will depend on the precise requirements of the scheme, and on technological developments over time. On the advice of experts, the study estimates that the equipment necessary to deliver a full position-based charging scheme will not be available in a mass market, low-cost form, until at least 2014."

Global positioning systems could provide the opportunity to monitor activity and provide the necessary pricing flexibility:

"4.15 Technologies that can charge by time, place and distance are at the forefront of technological development. While the individual components are available, getting them to work together to the required standard is the challenge. This would entail the development of a complex 'box' on board the vehicle that uses several different technologies (including position-fixing and communications facilities for transferring data to and from the charging authority). No such unit is currently manufactured for the mass market or has the necessary capability to be applicable for all vehicles. There are emerging possibilities of using the technology of the mobile phone cellular radio network that can give the location of a mobile phone, similarly to give the location of a vehicle. But the most likely candidate for a reliable and accurate positioning technology is that offered by positioning satellites."

Britain's road-pricing proposal The Economist

The Economist reports that the British government has released its new transportation policy report: "Stop-Go"

"SHORT-TERM cowardice and long-term courage: that's Britain's transport policy in a nutshell, following a bunch of big announcements. This week the government gave its strongest commitment to road-pricing. By 2014, technology permitting, drivers will pay per mile driven, ranging from pennies on lightly used country roads to �1.30 a mile at peak-time on the most congested urban ones.

That scheme, requiring a meter in every vehicle, would cost an annual �3 billion to run, but would bring in revenues of up to �9 billion. The surplus could go to public transport, or be used to cut motoring taxes.

Either way, the scheme's welcome, if a long way off: rationing road-space by congestion is inefficient, dirty and expensive. In the nearer term, local authorities will be encouraged to adopt their own congestion charges, as pioneered successfully by Ken Livingstone, the mayor of London..."

As I think the proposal must be to put a combination GPS/radio unit in each car; these units would communicate the car's location to a satellite.

Pricing driving

The Guardian reports on an upcoming, government funded, report in the U.K. that will recommend a new system to price road access.  It sounds like cars would be required to carry a combination GPS/radio unit capable of transmitting the cars' locations to satellites.  The system could track road usage and bill drivers appropriately.  The report is due out later this month.  The goal is to address road congestion problems.  Here's the story: "Crisis plan for tolls on all roads ".

It sounds like, with this technology, it would  be relatively easy to adjust charges to reflect varying levels of congestion in time and space (downtown at 3:30 PM on Sunday morning may be relatively uncongested and the charge per mile could be low; the inbound expressway at 7 AM on Monday morning may be relatively congested and the charge per mile could be high).

The technology sounds like that used to monitor vessel location and movement in the waters off Alaska.  Certain classes of vessels are required to carry Global positioning system (GPS)/radio units so that their movements can be monitored.  This system was introduced to monitor vessel activity with respect to areas closed to protect the endangered Stellers sea lion.

I learned about the Guardian article from Skip Sauer's Sports Economist blog: "Toll Roads"

Is light rail worth it?

Molly Castelazo and Thomas Garrett of the Federal Reserve Bank of St. Louis think not: "Light Rail: Boon or Boondoggle?" (Boondoggle, they say).

"...The economic value that society places on light-rail transit is reflected, in part, by people�s willingness to pay for it. This is true for most products and services in the economy. To make a profit and stay in business, private companies must offer a product or service whose production costs are below what consumers are willing to pay for it. The public provision of light-rail services, in contrast, costs more than consumers are willing to pay. For example, fare revenue covers only 28.2 percent of operating costs in St. Louis, 19.4 percent of costs in Baltimore and 21.4 percent of costs in Buffalo.2 Nationwide, annual light-rail operating costs ($778.3 million) far exceed fare revenue ($226.1 million); the balance ($552.2 million) is paid for with tax dollars. Note that these numbers refer only to operating expenses. With such large annual losses, no light-rail system could possibly recoup its construction costs, which can amount to several hundred million dollars. No privately owned system would ever be operated (or even be built) with such a dismal balance sheet.

One justification for the subsidies paid to build and operate light-rail systems is that light rail will reduce pollution and congestion from automobile traffic. However, building light rail is only a short-run solution to the problems of traffic congestion and pollution. To permanently alleviate the problems of traffic congestion and pollution, policy-makers must address the root cause of both: the inefficient pricing of roadway usage. Traffic congestion and pollution exist because the costs of driving an automobile are artificially low..."

There are also cheaper ways to provide transportation for poor people.  For example, for what's being spent on the St. Louis MetroLink:

"...the annual light-rail subsidies could instead be used to buy an environmentally friendly hybrid Toyota Prius every five years for each poor rider and even to pay annual maintenance costs of $6,000. Increases in pollution would be minimal with the hybrid vehicle, and 7,700 new vehicles on the roadway would result in only a 0.5 percent increase in traffic congestion. And there would still be funds left over�about $49 million per year. These funds could be given to all other MetroLink riders (amounting to roughly $1,045 per person per year) and be used for cab fare, bus fare, etc."

Or maybe just provide traditional bus service - it would still be cheaper than light rail.

Given the draw backs, why do we still keep building light rail systems?  Large, concentrated benefits to a few special interests, while the total costs, which may be large, fall lightly on individuals in the overall tax paying population.

I learned about this from Peter Gordon: "Airy Plans".

Pricing parking

Douglas Kolozsvari and Donald Shoup point to the potential benefits from pricing curbside parking so as to effectively ration access.  They point to reforms in the Old Pasadena neighborhood of Pasadena, California, that combined: (1) an increase in curbside parking meter charges, (2) earmarking of the meter revenues for investment in the neighborhood in which they are raised, (3) under the supervision of a neighborhood committee. 

In the absence of the reform, underpriced curbside parking spaces are a common property good.  Creation of a neighborhood committee of residual claimants able to influence the curbside parking price, and the use of the revenues, simulates privatization of the resource.  Kolozsvari and Shoup attribute the rehabilitation of the Old Pasadena neighborhood to this approach: "Turning Small Change into Big Changes"  What's the neighborhood's optimal charge for curbside parking?:

"...The right price for curb parking is the lowest price that keeps a few spaces available to allow convenient access. If no curb spaces are available, reducing their price cannot attract more customers, just as reducing the price of anything else in short supply cannot increase its sales. A below-market price for curb parking simply leads to cruising and congestion. The goal of pricing is to produce a few vacant spaces so that drivers can find places to park near their destinations. Having a few parking spaces vacant is like having inventory in a store, and everyone understands that customers avoid stores that never have what they want in stock. The city should reduce the price of curb parking if there are too many vacancies (the inventory is excessive), and increase it if there are too few (the shelves are bare).

Underpricing curb parking cannot increase the number of cars parked at the curb because it cannot increase the number of spaces available. What underpricing can do, however, and what it does do, is create a parking shortage that keeps potential customers away. If it takes only five minutes to drive somewhere else, why spend fifteen cruising for parking? Short-term parkers are less sensitive to the price of parking than to the time it takes to find a vacant space. Therefore, charging enough to create a few curb vacancies can attract customers who would rather pay for parking than not be able to find it. And spending the meter revenue for public improvements can attract even more customers..."

I learned about this from Peter Gordon: "Free parking".

Toll roads

Tomorrow's Washington Post has a story by Lyndsey Layton on proposals by Maryland officials to construct express toll lanes to relive congestion on important highways.

"...Express toll lanes are special lanes added to highways that allow motorists to pay their way out of traffic jams. Motorists in an express toll lane pay a fee that is automatically deducted through an electronic reader as their car or truck moves along at highway speeds, similar to the way E-ZPass works.

The price would change with the degree of congestion, so that a premium is charged when the rest of the roadway is especially crowded but the toll drops as the highway empties. On State Road 91 in Southern California, one of the earliest examples of this relatively new trend, express lane tolls range from $1 to $6.25, depending on the traffic in the adjoining free lanes..."

The article notes changing attitudes toward toll roads:

"...Public opinion about toll lanes is shifting. The idea of "congestion pricing," or charging motorists for using limited road space, has been around since the 1960s. But public policymakers long thought it was political suicide to begin charging motorists for something they were used to getting for free, and the idea carries the unappealing label of "Lexus lanes."

In the mid-1990s, toll lanes in California and Texas opened, and subsequent studies showed they were used by motorists of all income levels, usually when people needed to get somewhere in a hurry. They gained support among motorists who didn't use the lanes regularly but saw them as a way of diverting vehicles from the regular lanes..."

Let's auction off airplane takeoff and landing slots!

I agree with Lynne Kiesling - let's use market prices to ration access to scarce airport facilities and reduce congestion and inconvenience.  And:

"*Make little planes and big planes participate in the same auction. One of the most egregious uses of the nice, long runways at O'Hare during peak periods is seeing streams of Cessnas in between 737s. If the CEO's private plane's journey is that valuable at that time, make the company pay for the time slot."

Lawrence Solum wants to apply a similar principle to the allocation of email storage space on the University of San Diego computer system.

Congestion pricing on roads

Alex Tabarrok of the blog Marginal Revolution is recommending a new report on road congestion pricing, "combating Gridlock: How Pricing Road Use Can Ease Congestion," by Deloitte Research.  Here's a link directly to the report: "Combating Gridlock".

Congestion pricing in London

In June the Victoria Transport Policy Institute published a short report by Todd Litman on the London traffic congestion pricing program. You can find the report here: "London Congestion Pricing. Implications for Other Cities". In mid-February the city of London began to charge a congestion fee of five pounds to cars entering core downtown areas during the day on weekdays. A variety of discounts and special arrangements were provided for certain classes of travelers (the disabled for example). Fees could be paid at retail outlets, street kiosks, over the internet, or cell phone text messaging. Fees could be paid in advance or within a few hours of entry into the congestion fee zone. Video cameras scattered throughout the zone monitored license plates. Plate numbers were compared to lists of numbers for which fees had been paid, and fines were assessed when fees had not been paid. Litman, publishing in June, probably reflects the impacts of the program through April or May (the first 3.5 months at a maximum - an internal statement suggests it was written after two months, in mid-April). He finds:

• traffic has dropped
• non-compliance is under control
• traffic dropped more than expected, so program revenues are less than expected
• shift to public transport
• greater use of motorcycles, bicycles, mopeds
• increased travel speed in central London
• program has been generally accepted by the public
• bulk retailing selling to customers in private cars may shift location out of central London
• traffic diversion through areas around the periphery of the congestion zone has had a minimal impact
• program costs are likely to take 80% of revenues over the first five years

This is a brief survey report. Two attractive features: (a) color photos give a good feel for various implementation details (payment kiosk, video cameras, signage); (b) a wealth of live internet links. London's transport authority, "Transport for London" maintains a number of web pages for the program. The main page for people who have to live with the program daily (what areas are covered, how to pay, how to get a discount, etc.), is here: Congestion Charging...". The overall Transport for London congestion charge page is here: "Congestion Charging Introduction". Transport for London is monitoring the impacts on the congestion pricing program, and maintains a web page, here: "Congestion Charging Monitoring".

Bad news from London (about traffic)

Iain Murray in Tech Central Station critiques London's new congestion charge system, here: "Down the Tube ".  I learned about this from Arnold Kling: "Demand Too Elastic?".

I posted earlier this year on the London scheme: (a) "Using a fee to control externalities"; (b) "London's Congestion Pricing Scheme"; (c) "Follow-up on London congestion pricing".

"The Man Without Qualities" on electrical shortages

Robert Musil at The Man Without Qualities posts on a column by Vernon Smith and Lynne Kiesling in today's Wall Street Journal.  Smith and Kiesling argued for the use of flexible prices to help address electrical system problems, here: "Musil posting".  Musil is posting on the same column I posted on earlier today: "What to do about electricity shortages"

Musil points out that Smith and Kiesling are arguing for prices as a way of controlling congestion on the electrical lines and that the proposal is similar to proposals to use pricing to control congestion on roads.  He points out the political obstacle.  He also links to other blogmentary on the Smith and Kiesling column.

I've posted a couple of times this year on the use of fees for dealing with traffic congestion: (a) "Using a fee to control externalities"; (b) "London's Congestion Pricing Scheme"; (c) "Follow-up on London congestion pricing"; (d) "Dealing with congested roads"

What to do about electricity shortages

Whenever I see an essay attributed to either Vernon Smith or Lynne Kiesling I take notice.   When I see something attributed to both of them I'm especially interested.  They've authored an essay in today's Wall Street Journal on electrical power reform which is well worth reading. 

The Journal isn't available online without a subscription, but here's a link to a couple of paragraphs from it on Kiesling's blog: "Smith and Kiesling in the Wall Street Journal"

Here are some extracts:

"When a transmission line is stressed to capacity, and its congestion cost spikes upward, the market is signaling the need for increased capacity in any of three components of the delivery system: increased investment in technologies for achieving price responsive demand at end use appliances; increased generation nearer to the consumer on the delivery end of the line; or increased investment in transmission capacity..."

Their focus is on the pricing component.  Our current retail electricity price regime is very rigid.  Prices are unable to change in resonse to short-term shifts in electricity supply and demand curves.  The result is a meat-ax approach to allocating available electricity supplies:

"When the inevitable occurs...and unresponsive demand exceeds supply, demand must be cut off.  Your utility sheds load by switching off entire substations - darkening entire regions - because the utility has no way to prioritize and price the more valuable uses of power...This is why people get stuck in elevators and high-value uses of power are shut off along with all the lowest priority uses of energy..."

With more flexible retail prices (that vary by hour or day, for example) people would be prompted to cut off less important uses of electricity during periods of otherwise high demand or low supplies.  Evidently the technologies exist that would allow this:

"...The simplest and cheapest is a signal controlled switch installed on an electrical appliance, such as an air conditioner, coupled with a contract that pays the customer for the right to cut off the appliance for specified limited periods during peak consumption times of the day..."

In addition, policy changes that separate electrical generation and transmission are needed.

And then there's this:

"...If you were to design an electrical system maximizing the vulnerability to attack [they are thinking of terrorist attack - Ben], it is hard to imagine a better design than what has evolved in response to regulation.  If a terrorist attack took out half the energy supply to Chicago, the only viable response would be to shut down half the substations.  Demand response [in response to flexible prices - Ben] would allow a prioritization of energy use, shutting down only the lowest priority of power consumption while supplying high valued uses..."

The war on terror is a misnomer.  Terror is a tactic.  We are at war with al Qaeda.  The operatives who drove the planes into the World Trade Center and the Pentagon were innovators.  They've pushed the terror-tactic envelope out.  The prospect of terror attacks is now a permanent part of our lives. 

Terror requires a military and a police response.  But a response is required at another level as well.  If we are going to protect ourselves, while protecting what is important about our way of life - including our liberties - we are going to have to innovate and change many of the ways we do things.  We are going to have to create a society whose institutions and physical infrastructure can, so far as possible, absorb terrorist attacks with minimal damage.  There is work here for city planners, architects, transportation planners, and so on.  There is also, apparently, work here for economists.  Smith and Kiesling are right on the money in pointing to the need for institutions that have the flexibility to survive with minimal damage when they are under attack.

Dealing with congested roads

The Reason Public Policy Institute blog, Out of Control (devoted to investigating opportunities for welfare-enhancing privatization of government functions), draws attention to an exciting private toll road in California, in "Are toll roads safer?".  The toll road organization - "91 Express Lanes" has a web site, here: "91 Express Lanes"

In 1995, the 91 Express Lanes opened as the first privately financed toll road in the U.S. in 50 years - in the median of "California's Riverside Freeway (State Route 91) between the Orange/Riverside County line and the Costa Mesa Freeway (State Route 55)."  See the "91 Express Lanes" website above for a photo - and a virtual drive along the road.   I gather from the website that the road was an initiative of the Orange County Transportation Authority (OCTA).  In the early 1990s, Route 91 was congested and public funds were not available for the construction to relive that congestion.  OCTA turned to private financing to develop the road - the exact mechanism is unclear from the site.

Construction to relive congestion is everyone's first idea.  What's more interesting here is the use of tolls to control congestion, and the optimization of the toll system to deal with varying congestion conditions through the day and week.

There are no toll booths:

"91 Express Lanes customers pay tolls from pre-paid accounts, using a FasTrak transponder � a pocket-sized radio transmission device mounted to the inside of their vehicle's windshield. This breakthrough electronic toll collection technology eliminates the need to stop and pay tolls at traditional tollbooths, thus ensuring the free flow of traffic on the 91 Express Lanes."

If you want to use the road you can open an account on the web with a major credit card.

Tolls vary by day, by hour, and by east or westbound lane.  You can see the toll schedules here: "91 Express Lanes Toll Schedules".  The demand for the road fluctuates throughout the day and week, and so do tolls.  As rush hour in the inbound lane begins, tolls gradually rise from $1.00 to a peak of $3.60 between 7 and 8 AM, and then gradually fall to $1.70 for the rest of the day.  All the tolls apparently automatically billed.

The web page claims these benefits:

"Since the 91 Express Lanes carried its first vehicle on December 27, 1995, this world-class transportation facility has logged more than 46 million vehicle trips, saving customers over 22 million hours of commuting time. These time savings have produced measurable benefits including some $330 million in added economic productivity and quality-of-life benefits for commuters, their families and businesses."