Congestion pricing
Congestion pricing or congestion charges is a system of surcharging users of public goods that are subject to congestion through excess demand, such as through higher peak charges for use of bus services, electricity, metros, railways, telephones, and road pricing to reduce traffic congestion; airlines and shipping companies may be charged higher fees for slots at airports and through canals at busy times. This pricing strategy regulates demand, making it possible to manage congestion without increasing supply.
According to the economic theory behind congestion pricing, the objective of this policy is to use the price mechanism to cover the social cost of an activity where users otherwise do not pay for the negative externalities they create. By setting a price on an over-consumed product, congestion pricing encourages the redistribution of the demand in space or in time, leading to more efficient outcomes.
Singapore was the first country to introduce congestion pricing on its urban roads in 1975, and was refined in 1998. Since then, it has been implemented in cities including London, Durham, England, Stockholm, Gothenburg, Milan, and New York City. In the United States, it was also considered in Washington, D.C., San Francisco, and Boston prior to the COVID-19 pandemic. Outside of the United States, congestion pricing programs have been piloted or proposed in Bangkok, Cambridge, Edinburgh, Switzerland, and Hong Kong in the 1980s and since 2018.
Greater awareness of the harms of pollution and emissions of greenhouse gases in the context of climate change has recently created greater interest in congestion pricing. Implementation of congestion pricing has reduced traffic congestion in urban areas, reduced pollution, reduced asthma, and increased home values, but has also sparked criticism and political discontent.
There is a consensus among economists that congestion pricing in crowded transportation networks, and subsequent use of the proceeds to lower other taxes, makes citizens on average better off. Economists disagree over how to set tolls, how to cover common costs, what to do with any excess revenues, whether and how "losers" from tolling previously free roads should be compensated, and whether to privatize highways.
Description
Congestion pricing is a concept from market economics regarding the use of pricing mechanisms to charge the users of public goods for the negative externalities generated by the peak demand in excess of available supply. Its economic rationale is that, at a price of zero, demand exceeds supply, causing a shortage, and that the shortage should be corrected by charging the equilibrium price rather than shifting it down by increasing the supply. Usually this means increasing prices during certain periods of time or at the places where congestion occurs; or introducing a new usage tax or charge when peak demand exceeds available supply in the case of a tax-funded public good provided free at the point of usage.According to the economic theory behind congestion pricing, the objective of this policy is the use of the price mechanism to make users more aware of the costs that they impose upon one another when consuming during the peak demand, and that they should pay for the additional congestion they create, thus encouraging the redistribution of the demand in space or in time, or shifting it to the consumption of a substitute public good; for example, switching from private transport to public transport.
This pricing mechanism has been used in several public utilities and public services for setting higher prices during congested periods, as a means to better manage the demand for the service, and whether to avoid expensive new investments just to satisfy peak demand, or because it is not economically or financially feasible to provide additional capacity to the service. Congestion pricing has been widely used by telephone and electric utilities, metros, railways and autobus services, and has been proposed for charging internet access. It also has been extensively studied and advocated by mainstream transport economists for ports, waterways, airports and road pricing, though actual implementation is rather limited due to the controversial issues subject to debate regarding this policy, particularly for urban roads, such as undesirable distribution effects, the disposition of the revenues raised, and the social and political acceptability of the congestion charge.
Congestion pricing is one of a number of alternative demand side strategies offered by economists to address traffic congestion. Congestion is considered a negative externality by economists. An externality occurs when a transaction causes costs or benefits to a third party, often, although not necessarily, from the use of a public good: for example, if manufacturing or transportation cause air pollution imposing costs on others when making use of public air. Congestion pricing is an efficiency pricing strategy that requires the users to pay more for that public good, thus increasing the welfare gain or net benefit for society.
Nobel-laureate William Vickrey is considered by some to be the father of congestion pricing, as he first proposed adding a distance- or time-based fare system for the New York City Subway in 1952. In the road transportation arena these theories were extended by Maurice Allais, Gabriel Roth who was instrumental in the first designs and upon whose World Bank recommendation the first system was put in place in Singapore. Also, it was considered by the Smeed Report, published by the British Ministry of Transport in 1964, but its recommendations were rejected by successive British governments.
The transport economics rationale for implementing congestion pricing on roads, described as "one policy response to the problem of congestion", was summarized in testimony to the United States Congress Joint Economic Committee in 2003: "congestion is considered to arise from the mispricing of a good; namely, highway capacity at a specific place and time. The quantity supplied is less than the quantity demanded at what is essentially a price of zero. If a good or service is provided free of charge, people tend to demand more of it—and use it more wastefully—than they would if they had to pay a price that reflected its cost. Hence, congestion pricing is premised on a basic economic concept: charge a price in order to allocate a scarce resource to its most valuable use, as evidenced by users' willingness to pay for the resource".
As applied to traffic, there are technically two types of congestion pricing. Cordon or area pricing defines the boundaries of an affected area -- typically an area of dense travel demand such as a city center -- and charges for personal vehicles to cross its boundaries. Lane or facility pricing charges for access to a single facility, such as a segment of road or bridge. In practice, the term "congestion pricing" is often used to refer to cordon pricing but not facility pricing, as this is a newer idea.
Roads
Practical implementations of road congestion pricing are found almost exclusively in urban areas, because traffic congestion is common in and around city centers. Congestion pricing can be fixed, variable, or dynamic.As congestion pricing has been increasing worldwide, the schemes implemented have been classified into four different types: cordon area around a city center; area wide congestion pricing; city center toll ring; and corridor or single facility congestion pricing.
Cordon area and area wide
Cordon area congestion pricing is a fee or tax paid by users to enter a restricted area, usually within a city center, as part of a demand management strategy to relieve traffic congestion within that area. The economic rationale for this pricing scheme is based on the externalities or social costs of road transport, such as air pollution, noise, traffic accidents, environmental and urban deterioration, and the extra costs and delays imposed by traffic congestion upon other drivers when additional users enter a congested road.The first implementation of such a scheme was Singapore Area Licensing Scheme in 1975, together with a comprehensive package of road pricing measures, stringent car ownership rules and improvements in mass transit. Thanks to technological advances in electronic toll collection, electronic detection, and video surveillance technology, collecting congestion fees has become easier. Singapore upgraded its system in 1998, and similar pricing schemes were implemented in Rome in 2001, London in 2003 with extensions in 2007; Stockholm in 2006, as a seven-month trial, and then on a permanent basis. In January 2008 Milan began a one-year trial program called Ecopass, charging low emission standard vehicles and exempting cleaner and alternative fuel vehicles. The Ecopass program was extended until December 31, 2011, and on January 16, 2012, was replaced by Area C, a trial program that converted the scheme from a pollution-charge to a congestion charge. The Gothenburg congestion tax was implemented in January 2013 and it was modeled after the Stockholm scheme.
Singapore and Stockholm charge a congestion fee every time a user crosses the cordon area, while London charges a daily fee for any vehicle driving in a public road within the congestion charge zone, regardless of how many times the user crosses the cordon. Stockholm has put a cap on the maximum daily tax, while in Singapore the charge is based on a pay-as-you-use principle, and rates are set based on traffic conditions at the pricing points, and reviewed on a quarterly basis. Through this policy, the Land Transport Authority reports that the electronic road pricing "has been effective in maintaining an optimal speed range of 45 to 65 km/h for expressways and 20 to 30 km/h for arterial roads".
Singapore
In an effort to improve the pricing mechanism, and, to introduce real-time variable pricing,Singapore's LTA together with IBM, ran a pilot from December 2006 to April 2007, with a traffic estimation and prediction tool, which uses historical traffic data and real-time feeds with flow conditions from several sources, in order to predict the levels of congestion up to an hour in advance. By accurately estimating prevailing and emerging traffic conditions, this technology is expected to allow variable pricing, together with improved overall traffic management, including the provision of information in advance to alert drivers about conditions ahead, and the prices being charged at that moment.
In 2010 the Land Transport Authority began exploring the potential of Global Navigation Satellite System as a technological option for a second generation ERP. LTA objective is to evaluate if the latest technologies available in the market today are accurate and effective enough for use as a congestion charging tool, especially taking into consideration the dense urban environment in Singapore. Implementation of such system is not expected in the short term.