Carsten Rolle

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.

Economic description

Road Pricing - the technique

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]

Definition of the good

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.

Definition of the costs

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.

a) road damage 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]

b) accident externalities

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]

c) Congestion costs

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.

d) environmental costs

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)

Definition of the price

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.)

Evaluation and Effects

Advantages of Road Prices:

* 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.

Disadvantages of Road Pricing:

* 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.


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