[Get Answer] congestion pricing


The cost of congestion was regarded by the late Professor William Vickrey to be high. Very roughly, the real economic cost of the transport infrastructure in the US was about three times the total gasoline and vehicular taxes generated by automobile use of city streets (Vickrey, 1963). Yet motorists were always under the misimpression that they pay their way: highway taxes and license revenues were sufficient to cover the highway expenditures made by the US federal and state governments.

Even if it were true that gasoline taxes or license fees were increased to meet higher road expenditures, so that motorists were to pay all their way, Professor Vickrey argued back in 1959 – with premonition in hindsight – that the results of not charging motorists for their rush-hour usage can be ‘disastrously expensive’ (Vickrey, 1963, p. 468). Why is it so important to charge users for their use of an item at the margin rather than on average? Professor Vickrey gives us a pedagogical illustration:

Each member in a group of conferees meeting for dinner inevitably ends up paying for an expensive steak dinner – instead of most members economizing on the goulash – if, in order to reduce the bookkeeping, the bill is divided evenly amongst the participants. The reason for the excessive consumption is that each person could not lower the group bill significantly by exercising self-restraint unless (s)he is charged according to the true resource costs. Thus everyone in society in fact ends up paying for a costly road system since motorists are not charged at the margin for road use.

Over three decades have passed by since Professor Vickrey enunciated his assessment and recommendations on the urban transportation problem to both the American and British governments. Nevertheless, congestion is ubiquitous as ever in major urban areas and incessant during peak periods and often between the hours. The traditional methods of curtailing congestion remain few, and their usefulness limited. On the supply side, the expansion and improvement of roads is restricted by increasingly tight fiscal, physical and environmental constraints. On the demand side, however, the problem can be addressed by pricing or regulation.

Rising real incomes result in increased aspirations for the ownership of private automobiles (Hau, 1992). Barring major restraint measures, an increasing number of motor vehicles means that travel demand swells. As municipalities find it increasingly difficult to finance new road construction and improvements, the rate of growth of travel demand outstrips the growth of road capacity.

1. implementing short-run marginal cost pricing to generate maximum net benefits for society: efficiency pricing;

2.  Undertaking investment in infrastructure whenever the additional benefits exceed the true resource costs (long-run efficiency) of doing so: economic viability;

3.  Investing in transport services when revenues exceed costs: financial viability;

4.  Maintaining ‘fairness’ among beneficiaries, for example, via benefit taxation – equity- where possible; and

5. Using pricing and cost recovery policies to improve the efficiency of managing the public sector – cost-effectiveness and managerial efficiency -if possible (Verhoef, Nijkamp & Rietveld, 1995).

Pros and Cons of Congestion Pricing

Congestion pricing strategies can be used to encourage people to prioritize their travel and use mass transit and other alternatives to the automobile; and adopt zoning ordinances and other measures to encourage people to locate closer to their places of employment.

The clear advantages of Congestion Pricing according to a Swedish Study are:

(1) Congestion pricing encourages drivers to use other modes of transportation.

(2) It increases rush-hour freeway capacity.

(3) It can raise revenues that can be reinvested in the transportation system. Simply put: There is no quicker, more cost-effective way to ameliorate gridlock.


On the other hand, others dismiss balanced transportation system and smart growth strategies as unwanted and inappropriate “social engineering.” In their view, the nation’s traffic congestion “problem” does not suggest policy failure. On the contrary, traffic congestion results from policy success. Air traffic congestion, for example, would not be an issue if the government’s air traffic control system and other safety measures had not convinced Americans that it was relatively safe to fly. Automobile traffic congestion also results from governmental policies that have created a transportation system that fosters economic growth. This growth, in turn, has enabled Americans to purchase record numbers of cars and trucks. Highways also provide millions of Americans an opportunity to improve their quality of life by locating in the suburbs. In their view, the suburbanization of American society is a sign of progress that should be hailed, not lamented. Instead of enacting policies that go against what most people want, their solution to traffic congestion is to continue increasing government funding for transportation infrastructure; continue emphasizing highway construction and repair over mass transit and intercity passenger rail service; avoid congestion pricing strategies and zoning ordinances that impinge on property rights; and require government bureaucracies to follow the best practices of leading government and private organizations when allocating resources.

The Clear Disadvantages of Congestion Pricing are

If a congestion pricing system was implemented in a city or a street where some of the premises were not a good basis for such a step and the congestion situation does not improve at all, it is against all moral rules to charge money from people. It can lead to a very bad image of this city which can have other bad affects on different parts than the transportation organization. If more and more people and especially a big part of the commercial sector move out of the city, the whole city will face a lot worse problems than the congestion problems in the beginning. One argument which is always used in combination with congestion pricing is the fact, that it hits the poor and not the rich. So people who have enough money do not care about paying atoll and will not change their travel habits and other people who cannot afford paying tolls but don’t have a chance on changing their travel habits suffer from this step. (www.foe.co.uk)

The American reaction to the gasoline price spikes in 2000 brought into sharp focus America’s relationship with the automobile. As noted earlier, automobile ownership is a powerful social symbol in the United States and an emotional outlet for millions of Americans. Obtaining a driver’s license is a major life-altering event, signifying for millions of American teenagers the transition from childhood to adulthood. Although the highway lobby has lost its dominance over transportation policy making in the United States, and those seeking a more balanced transportation system and smart growth strategies have won some legislative concessions, the bond between the American public and the automobile/ truck remains strong. Because that bond is so strong, American transportation policy may take on some of the characteristics seen in Europe, and it may incorporate some of the automobile diversion and congestion pricing strategies favored by those opposed to the free market approach to transportation policy making, but it will never embrace those policies completely. Americans love to drive and continue to demand that their political leaders put the automobile users needs above all others.


Greater London, with seven million people and nearly four million jobs, has been the site of a series of comprehensive studies of congestion pricing over the last 30 years. The resulting proposals have garnered considerable political support, but not enough as yet to be adopted.

During the 1970s, the Greater London Council became interested in restraining traffic through a form of ‘supplementary licensing’ in which a daily license would be required to drive within a defined area during peak hours. The favored options all involved a daily charge of around $2.00 (1973 prices) 20 to drive in Central London between 8:00 and 18:00 on weekdays; in some variations, an additional charge would apply in Inner London (a larger area surrounding Central London) during the morning peak only. Because Central London is only 3.4 miles in diameter and has extensive transit service, these charges were expected to reduce downtown traffic dramatically and to raise peak-hour speeds by as much as 40 percent (May, 1975).

In 1985, the Greater London Council was abolished and its planning functions devolved to the newly created London Planning Advisory Committee, composed of representatives of local boroughs and other authorities. This group in 1988 proposed a transportation strategy with considerably less road building than was planned by the national government.

The strategy relied heavily on traffic restraint, including pricing measures. This time the pricing proposal was for three concentric cordon rings, the innermost surrounding Central London and the outermost surrounding Inner London. In addition, screenlines would divide Central London into six cells. A charge of $0.89 (1988 prices) would be assessed for crossing a cordon or screenline; for Central London this would apply all day in both directions, whereas for the outer two cordons it would apply only during the peak period and in the peak direction.

Analysis suggested that the proposed charges would have reduced inbound traffic by 15 percent into Inner London and 25 percent into Central London (May et al., 1990). More recent analysis shows that the financial burden of the scheme would have been borne primarily by suburban car-owning households. Restricting the charges just to Central London would have lowered total benefits and shifted the adverse impacts more toward poorer households ( Fowkeset al., 1993 ); it would also have made the benefits more sensitive to the charging level, thus raising the danger of setting the price too high, as apparently happened in Singapore.

The most recent study of congestion pricing was a three-year program sponsored by the Department of Transport. Concluded in 1994, the study encompassed technology, public attitudes, changes in travel behavior, effects on reliability of travel times, effects on goods vehicles, cost-benefit appraisal, and many other issues. A sophisticated modeling scheme, named APRIL, was developed to distinguish seven time periods and allow for several types of mode, route, and time-of-day shifts (Sælendsminde, & Hammer, 1994). The methods and results were described in a published report and in a series of articles in Traffic Engineering and Control. All calculations were based on hypothetical implementation in 1991 and results stated at 1991 price levels. (Rothengatter, 1994)

The simplest pricing scheme investigated was a single cordon charge, involving 130 charge points. Three charge levels (ranging from approximately $3.50 to $14.00 for an inbound crossing) were considered. This scheme was predicted to achieve substantial traffic reductions (8 to 22 percent), with correspondingly large improvements in average speed (10 to 32 percent).

Annual revenues of $285 to $825 million would be partially offset by annual operating costs of the charging system (including in-vehicle units) of $97 million, as well as by modest changes in parking and public transport revenues. In addition there would be a onetime implementation cost of $150 million for the simplest charging system (read-write tags with central accounting).

After taking into account user time savings, lost consumer surplus, accident cost savings, and annualized implementation costs, the net benefits were estimated to be about $60 million (at the low charge) to $105 million (at the high charge). These did not account for any user benefits from increased bus frequency. A charge level about three-fourths of the highest one considered appeared to generate the highest net benefits (Rouwendal, 1996).

Successively more complex schemes provided significant additional net benefits only when charge levels were high. Adding a more outlying cordon around Inner London and charging outbound trips at half the level of inbound trips would more than double net benefits at the high charge level. A further increase, to $345 million annually, could be attained by adding a third cordon and four radial screenlines, with charges varying in several steps over time. Compared to a single inbound cordon, this scheme has a slightly smaller effect on traffic but a much larger effect on traffic in the larger Inner area. The charge levels that maximize net benefits would also be higher (Verhoef, 1994).

However, this scheme also would be considerably more complex than a single cordon, with nearly three times the implementation and operating costs. These studies generally verify the behavioral responses expected from theory. However, the technology was sufficiently expensive that charging costs used up an uncomfortable portion of revenues and benefits unless charges were set at levels that the public might consider very high. The technology investigated offered very high reliability, virtually no intrusion on traffic flow, and a high level of convenience and protection of privacy for drivers, however, characteristics considered essential for acceptance of a system affecting so many people.


At the conclusion of the study the Minister of Transport declared that no congestion pricing would be undertaken at least for the remainder of the decade. congestion pricing can substantially affect behavior and reduce traffic congestion. At the risk of over-generalizing, it appears that charges of $2 to $3 per day for entry to a restricted area during peak periods can reduce traffic by 20 percent or more. Charges can be targeted to divert traffic around certain areas or to shift it from one time period to another. In most cases it is feasible to offer customers a choice of collection options. Operating costs can be kept to reasonable levels, around 10-12 percent of revenues (Wiedlert, 1993).

Careful attention to the details of design and implementation is important. The level of fee, the potential for evasion or diversion, the security of information about people’s travel, and the degree of public understanding all greatly influences the project’s viabilit y.

Winning political approval for any congestion pricing project is difficult in a democracy, even with careful planning. The most fundamental reason is that many motorists stand to lose, especially if they do not perceive that they are benefitting from the uses of toll revenues. One obvious solution is to use toll receipts to finance widely desired transportation improvements, to lower other taxes paid by motorists, or to reduce other toll charges. When the tolled facility is new and is financed directly by the revenues, people are more likely to understand the relationship between their payments and tangible benefits.

Another reason is that people are suspicious of plans to change arrangements they are comfortable with. In this case, a strategy of incremental change may hold the answer.

The Norwegian toll rings began as means of financing transportation infrastructure, but have gradually incorporated traffic management as a subsidiary goal. The accumulated experience has enabled to design a conscious traffic management strategy in a city considerably larger than any in Norway, while still giving prominence to the objective of financing infrastructure.

It seems likely that similar spillovers from the projects in France and California could easily occur, giving pricing mechanisms the degree of credibility needed for other toll road operators to adapt them to their needs. These considerations increase the importance of demonstration projects (Newbery, 1990).

There is always the danger that an ill-advised project will focus attention on the potential drawbacks of congestion pricing without revealing its potential benefits, and thereby provide ammunition to opponents.

One advantage of the comprehensive studies is that they enable the essential elements of a successful program to be identified in advance, thereby reducing the likelihood of unexpected problems arising during the course of implementation.

Finally, an experimental approach offers the triple advantages of testing the equipment, demonstrating the system to the public, and collecting valuable data on how travelers respond to a variety of pricing schedules.

In sum, the international experience with congestion pricing is both cautionary and encouraging.

While suggesting important pitfalls and political limitations, it also demonstrates that pricing can be practical and effective at managing congestion, and that political problems, while difficult, may be soluble (Zamagni, 1995).


Fowkes, A. S., D. S. Milne, C. A. Nash and A. D. May(1993), “The distributional impact of various road charging schemes for London”, Institute for Transport Studies Working Paper 400, University of Leeds (June).

Hau, T. D. (1992), “Congestion charging mechanisms: an evaluation of current practice”, Preliminary Draft, Transport Division, Washington: The World Bank.



London Planning Advisory Committee (1988), Strategic Planning Advice for London, London.

May, A. D., P. W. Guest and K. Gardner (1990), “Can rail-based policies relieve urban traffic congestion?”, Traffic Engineering and Control, 31, 406-7.

Michaelis, Laurie (1993), ‘Global warming impacts of transport’, The Science of the Total Environment, 134, 117-24.

Newbery, D. M. (1990), ‘Economic principles relevant to pricing roads’, Oxford Review of Economic Policy, 6 ( 2), 22-39.

Rothengatter, W. (1994), External Effects of Transport, Project for the UIC, Paris, Interim report, Infras Zurich, IWW Karlsruhe.

Rouwendal, J. (1996), ‘An economic analysis of fuel use per kilometre by private cars’, Journal of Transport Economics and Policy, 30, 3-14.

Sælendsminde, K. and R. Hammer (1994), Verdsetting av miljφgoder ved bruk av samvalgsanalyse (Valuing environmental goods by using stated preference methods), Rapport 251/ 1994 Transportφkonomisk Institutt, Oslo.

SIKA (1995), översyn av samhällsekonomiska kalkylvärden för den nationella trafikplaneringen 1994-1998 (An overhaul of the socio-economic parameter values used in the national traffic planning 1994- 1998), SAMPLAN Nr: 1995:13.

Verhoef, E. (1994), ‘External effects and social costs of road transport’, Transportation Research, 28A, 273-87.

Verhoef, E., P. Nijkamp and P. Rietveld (1995), ‘Second-best regulation of road transport externalities’, Journal of Transport Economics and Policy, 29, 147-67.

Wiedlert, S. (1993), Värdering av miljöfaktorer (Valuation of environmental factors), Transek Consultancy Inc.

Zamagni, S. (ed.) (1995), The Economics of Altruism, Aldershot, UK and Brookfield, US: Edward Elgar.


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