5

The argument in principle

for pricing the use of road

space rests on firm

intellectual foundations.

The necessary technology is

readily available. Public

acceptance of the idea,

with the concomitant need

for investment in new

roads, is subject to much

confusion, reinforced by

Nimbyism on one side and

Swampyism on the other.

Alan Day is Emeritus Professor of

Economics, London School of

Economics.

The case for road pricingAlan DayR

oad

p

rici

ng

The problems

In order to justify the establishment of a system of road pricing, three sets of problem have to beaddressed.The first is the basic economic argument;the second is the question of the practical engineeringmodalities; the third is concerned with politicalunderstanding and implementation.

The first of these sets of problem is in many waysthe simplest.The case for road pricing as a major and indeed fundamental element in a fair andrational system of transport co-ordination is built on elementary principles of micro-economics which themselves rest on firm intellectualfoundations. Since the overwhelming evidence of the failures of socialist bureaucratic economic co-ordination has been obvious to anyone with eyes to see, these principles have become more or less universally accepted in most of the world – albeit accompanied by significant reservations andresentment in some quarters.The second set ofproblems – that of devising electronic or similardevices to measure the use of roads by individualdrivers and to ensure that they pay what is due – has been solved and there can be little doubt thatreasonably foolproof and fraud-proof systems can bedevised to satisfy any plausible and reasonable set ofspecifications.

The third set of problems – the political acceptanceof a fair and efficient system – remains daunting.Politicians are increasingly coming to accept the ideaof some kind of road pricing, but their understandingof the true economic case remains very limited.Their proposals for practical implementation aremuch too strongly influenced by the prejudices,misinformation and plain wrong-headedness whichlie behind a large part of well-meaning publicdiscussion of transport policy.The answers whichmost readers of the intelligent broadsheet press would give to the question of solving the transportproblem would probably include the need to co-ordinate (without any definition of that word);to subsidise public transport; to discourage privatemotoring (mainly by other people, of course);to encourage rail transport.This unthinkingconventional wisdom accepts that it is wrong tobuild new roads, because they inevitably create newtraffic which clogs them up almost as soon as theyare built.All in all, intelligent public opinion ontransport policy finishes up with a muddled set ofeasy ‘answers,’ whose practical application by thepoliticians is reinforced by Nimbyism on the oneside and Swampyism on the other. Road pricing,

sensibly used, can contribute to much fairer andmore efficient solutions.

The economic argument

The basic economic argument for using the price mechanism wherever possible, in order to co-ordinate the decisions and actions of millions ofindividuals, is that it provides a flexible and subtleinformation system, on the basis of which the myriad decisions are made. Moreover, the rationalreactions of individuals to this information interact in order to produce a social optimum in which theefficient use of resources is maximised. Clearly, theproblem of transport co-ordination is an excellent –a paradigmatic – example of the more generalproblem of co-ordinating innumerable individualdecisions, about both the present and the future.The fundamental rule of classical micro-economics isthat it is rational to carry out an activity right up to(but not beyond) the point at which the marginalcost of taking the activity any further just equals themarginal benefit enjoyed from taking it further.A classical example is that a firm acting in this waywill necessarily maximise profits. More generally,welfare economics has long taught that the rule forsociety as a whole is to push to the point wheremarginal social cost equals marginal social benefit.Since long before environmentalism was even heard of, economists have argued that social costs (as opposed to purely private costs which enter intothe profit and loss accounts or an ordinary firm)include the adverse impact on others of pollutionand other externalities.These external costs are notborne by the polluter in normal commercial practice,unlike the way it pays for costs it imposes on the rest of society for which there is a market price, suchas ordinary inputs of labour and materials.Welfareeconomists have long concluded that external costs(and benefits) should be charged to (or credited to)the individual or firm responsible for their creation.For many decades, economists have argued that thepolluter should pay.

The real world

Of course, the real world is not as simple as the basiceconomic model. Monopoly distorts the picture andneeds to be dealt with. Some goods and services havetraditionally not been priced, and some, such as thepublic goods of the defence of the country and theprovision of services of law and order, cannot becharged up to the individual beneficiaries.The classiccase of a public good is the lighthouse, which shines

Copyright © 2000. All rights reserved.

6

forth for every mariner, whether or not hecontributes to the cost of providing the lighthouse.1

More fundamentally, the guidance of micro-economictheory is about efficiency and not necessarily aboutjustice – to which one important answer is that it iseasier to achieve justice for many if resources areplentiful because they are produced efficiently.Andperhaps more subtly – the rules of marginal analysis(which are essentially those of differential calculus)are rules for getting to the highest point possible onthe mountain upon which we have been placed byhistory, rather than some conceivable alternativemountain.They are rules for Karl Popper’s ‘piecemealsocial engineering’ rather than for considering allpossible Utopias. Perhaps there is a better, Utopian,mountain, across the other side of some misty anduncharted valley, reachable only by revolutionarychange – and one of the lessons of history is that the course of revolutionary change is unpredictable.Many environmentalists, like earlier socialists, areUtopians, with all the confidence implicit in theirbelief that they can forecast far into the future andtheir willingness to pay a large price now for benefitsin the relatively remote future.The approach of thepiecemeal improver remembers that almost all long-term forecasts prove badly wrong, and that the logicof compound interest indicates that it is worthpaying only a very small price today, even for thesake of a large and certain benefit in the distantfuture.

Roads and external costs

Economists have long tended to accept that roadsmust be seen as public goods (except for limited-access toll roads where twentieth-century motorwaysin several countries have revived the eighteenth-century tradition, as a means of financing new roadconstruction). In the late 1950s and early 1960s, aconsiderable number of economists came to realisethat electronics was developing to the point wheremuch more subtle charging methods than old-fashioned toll gates could be used, on any part of theroad network, and that the toll charged could varywith factors such as the distance travelled, the degreeof congestion, and other external costs imposed onthe rest of society such as noise, pollution andaccidents. Despite attempts at obfuscation bypoliticians, there is now no doubt about thefeasibility of a variety of suitable electronic devices,of which perhaps the most attractive is thereplacement of the licence disc by the purchase of atransponder whose units of electronic charge would

be progressively used up as the vehicle is driven oncongested roads.The economic argument is generallypresented in terms of congestion costs – eachadditional vehicle on a road above some level of freeflow will impose additional costs on every othervehicle on the road, by making their journeys slowerand so less efficient than they would otherwise be.But the argument extends naturally to other externalcosts – for example, accident costs, where it would belogical and probably practical for insurance premiumsfor vehicles to be paid at least in part out of the roadcharge. In general, this road charge on the individualuser should be related to the marginal costs imposedon the rest of society – highest in congestedconditions, lower in uncongested conditions but stillcalculated to cover pollution, noise, accident and roadrepair costs.

The fundamental economic argument considersthat congestion, pollution and other similarexternalities should be treated in exactly the sameway as other costs, such as the use of scarce resourcesof labour or capital.This implies several things. Oneis that the charges should be paid by all road users,including trucks and buses, at levels reflecting asaccurately as possible the relative costs imposed bydifferent kinds of vehicle.Thus trucks and buses,which use more road space per vehicle-mile, wouldpay more.Another implication is that it is right thatthe charges are passed on in selling prices, just likeany other cost.A firm whose productive activitiescause congestion to others is imposing greater costson the rest of society than another firm usingdifferent techniques.Another implication is that theseexternal costs should be balanced against other,equally real, costs. For example, public transport maycause less pollution than private but it uses morelabour, because private transport is a perfect exampleof DIY.The two costs – and many others – need toenter into the balance and the outcome dulyweighed.The process of weighing will commonlylead to answers which do not accord withcommonly-held prejudices. For example, ‘everyoneknows’ that public transport is more economical thanprivate. But is it, when labour costs enter the picture?Indeed, it is not even clear that the pollution costsare on average in favour of public transport. Pollutionis roughly proportional to fuel consumption.Anaverage bus carries a load of about 9 passengers anddoes 7–9 miles per gallon (mpg) in urban conditions– say 60–70 traveller-miles on a gallon of fuel.Asmall car will do up to 50 mpg in similar conditions– so with a driver alone as the only traveller in the

The case for roadpricing

Copyright © 2000. All rights reserved.

7

ECONOMIC AFFAIRSDecember 1998

© Institute of Economic Affairs 1998

Published by Blackwell Publishers,

108 Cowley Road, Oxford, OX4 1JF,

UK and 350 Main Street, Malden,

MA 02148, USA

car, it pollutes rather more than a bus to achieve agiven distance of travel, but with a driver and onepassenger it causes less pollution per traveller-mile.This simple example should indicate that untutoredcommon sense and a priori reasoning are nosubstitute for careful calculation.

Another lesson from all this line of argument is thatthe case for road pricing is not limited to congestedcity centres. Undoubtedly, the appropriate pricewould be higher there. Public transport is far andaway the most competitive with private on ‘linehauls’ where large numbers of people (or loads ofgoods for that matter) are being carried togetherfrom A to B, or in very congested areas where trainscan be run underground. It seems, however, that oursociety is developing away from these kinds oftransport demands to one of a complex pattern ofcriss-cross journeys – as a result of factors such asgreater job mobility, the now normal situation whereboth husbands and wives go out to work and thechoice of most people for suburban and exurbanliving. I have little doubt that if the traffic Origin andDestination surveys that were fashionable in the1960s were done again today, the apparent daily tidalflow towards and from the centre of cities andconurbations would break down into much morecomplex cross flows with the average movementbeing from farther out to nearer in to the centre –simply because most people live rather further outfrom the centre than their work places, but withrelatively few people travelling all the way fromperiphery to centre. Some of the social changesleading to the present pattern of journeys may,indeed, be socially undesirable, because the choicesmade by each individual may not fully reflect thecosts imposed on the rest of society because they donot pay for all the externalities.This is preciselywhere mechanisms for measuring and charging forexternalities, such as road pricing, need to be broughtinto operation. No planner can adequately measureand weigh the balance of advantages anddisadvantages and much of what goes for planningamounts to the blind application of guesswork and prejudice.

Guiding investment decisions

The last lesson of the application of basic micro-economics to road pricing is in many ways the mostfundamental and the one most often ignored. In theshort run, the function of the price mechanism is toallocate existing resources. But in the medium andlong term, its function is also to guide decisions

about adding to our productive resources(investment) or allowing existing resources to wearout (disinvestment). It is quite indefensible to argue,as many do, that road pricing should simply be usedto ration existing road space. Road pricing should beused, both as an allocative device and as a measure ofwhether or not to add to (or, indeed, subtract from)the existing road space: it can and should be used asan investment criterion.All this means – but this ‘all’is a great deal – is that if road users are prepared topay a price for the use of roads that is greater thanthe costs of providing additional road space(including all the costs, externalities, land costs, asensible measure of the costs of disturbing any areaswith special wildlife and all the other genuine costswhich can be identified) then the additional roadspace should be built, and as in any other economicactivity, the charge for the use of the new facilityshould be sufficient to finance its cost.

This point – pricing as an investment criterion – isthe one where we economists start to lose some ofour conventionally-minded supporters.Will not newroads lead to an indefinite demand and renewedcongestion? One answer is that this only happenswhen the pressure of frustrated demand has built upto enormous proportions. Certainly, road traffic canbe expected to grow with real incomes – but whyshould this growth be so wrong (as long as, one mustrepeat, external costs are all paid by road users) whengrowth in demand for and consumption of othergood things is accepted as a normal part of thegrowth of prosperity. Indeed, it is true that transport,both private and public, is a considerable user ofdepletable resources – but so are very many othereconomic activities.The basic lesson is that alleconomic activities – transport or non-transport,private or public – should follow so far as is possiblethe rule of marginal social cost equals marginal social benefit.

Here, then, is an outline of the economist’sapproach to the problems outlined at the start of thispaper.The third set of problems – that of the hugepolitical hurdles to the sensible application of widelyaccepted economic principles and perfectlypracticable technology – are for the most partbeyond the coverage of this introductory essay. Butthe broad nature of the political problems is not hardto see.The effects of bad transport policies take along time to show their full effect, and even longerto uproot. It is all too easy to postpone action and togo for glib, plausible-seeming solutions, and to usethe motorist as an easy source of taxation. It is not

Copyright © 2000. All rights reserved.

8

difficult to envisage a country with an adequate roadand public transport network (our neighbours in theLow Countries are the nearest example at hand)where we would all have a choice to pay for thekind of transport we wanted at a price reasonablyreflecting social costs. So far, no politician has begunto see that he or she might be able to offer us a

package of policies designed for choice, freedom andefficiency. Meantime, as economists, all we can do isto continue to set forth the case for a rationalapproach to transport policy.

1. Editor’s note: But see R. Coase (1974) ‘The Lighthouse in Economics’, Journal

of Law and Economics, 17(2).

The case for roadpricing

Copyright © 2000. All rights reserved.