Congestion (new size)
Jason Bujaroski
Jason Bujaroski

Congestion Pricing: A Solution to Chronic Road Traffic

Every day, thousands, if not millions of people, wake up and frolic in automobiles to begin their morning commute to work while expressing discontent with their least favourite part of the day—peak hour traffic. Indeed, of the nine million commuters in Australia, 79 per cent travel to work using a private vehicle (Australian Census, 2016).

Concerns about road congestion are nothing new in Australia. Interestingly, in the later decades of the nineteenth century, newspapers were stonewalled with discontent about the horse-and-cart congestion around Sydney’s waterfront. Some decades later, in the early twentieth century, people complained about the automobile congestion on the thoroughfares of Melbourne’s central business district.

Still to this day congestion persists. Out of all the major cities in Australia, the share of the population who use private vehicles to drive to work or other purposes of travel are greatest in Sydney and Melbourne (Grattan Institute, 2017). To exemplify this, let’s break down what the travel patterns of residents living in Sydney and Melbourne look like on an average weekday.

To add greater credibility, I had also hoped to take a finer glimpse at the extent of congestion in these cities by gathering real-time data of vehicle speeds and travel delays over time. However, I have decided to leave this analysis for a future article using unique datasets that contain this level of information.

Instead, let’s focus on the premise of this article. That is, how economists define congestion and solutions to overcome it using the science that is economics.

The economics of congestion

One wonders, what exactly constitutes congestion? A motorist might assert that congestion occurs when their speeds drop too far, and their trip takes longer than what they had initially perceived. Conversely, an engineer may posit that road congestion occurs when more vehicles are attempting to use the road than it has the physical capacity to carry. Economists, however, define congestion in a rather novel way. An economist would say that road congestion occurs when the social cost of driving is unaccounted for.

What is the social cost?

The social cost is a function of the drivers private costs such as time and vehicle maintenance costs, and the costs each driver imposes on other drivers—and other road-users—through their role in overall congestion. The disparity between the private and social cost is the marginal external cost imposed on motorists.

Why is the social cost so important?

The social cost defines the ‘optimal’ volume of private travel—an amount where road users consider the social costs of their travelling decisions. Let me explain what social costs are through the use of an example.

Say, a high rise development was built in front of your house blocking its view of the teeming activity of the city, the water or mountain in the distance. Here, the developer did not consider the negative impacts that this would have on the value of your property. This scenario is an example of a negative externality (an indirect cost to individuals that manifested out of a transaction they were not affiliated with).

Interestingly, road use is much the same—it too generates negative externalities. Here, the cost to other road users is added congestion by that additional car on the road which materialises through higher traffic density, lower traffic flow rates, and greater time spent in a standstill.

The problem economists have with congestion is that the presence of externalities prevents any efficient road use from occurring. The unique role of an economist would be to measure the avoidable external costs of congestion in order to reduce its adverse implications.

How can this be done? As road space is a scarce resource, an economist would look at strategies on the supply side or the demand side.

A fashionable solution by policymakers is to address congestion by increasing the supply of road space. Inevitably, this solution is self-defeating as it serves as an impetus to encourage further individuals to drive. Nevertheless, the advancement of complementary public infrastructure such as bus services, railways and trams could form a notable supply-side initiative that would assist in the improvement of road traffic flow—much like the development of a fully-automated rapid transit system (Sydney Metro) recently opened by New South Wales premier, Gladys Berejiklian.

Most economists would agree—with much public discontent—that the only way to address road congestion is on the demand side. That is, implement strategies that reduce demand for private travel.

Fun Fact

To reduce traffic problems of Ancient Rome, Julius Caesar outlawed the use of private vehicles in city streets during the first ten hours of the day. According to historians, this demand management initiative adjusted the travel patterns of the Roman populace.

A promising modern-day demand management initiative is congestion pricing on urban roads (promising as it is anecdotally plausible in reducing traffic volumes, particularly in inner city regions). Congestion pricing on urban roads is employed in many cities and countries around the world such as Singapore, London, Stockholm, Milan, Czech Republic, Latvia and Malta.

The idea behind congestion pricing is that it allows motorists to internalise the cost that they impose on other travellers. In other words, the private costs incurred by each additional driver reflects the social costs. To ensure this occurs, a fee equal to the marginal external cost (the cost imposed by an additional motorist on the road at a given point in time) is levied on motorists. By doing so, traffic volumes are reduced to the optimal level of private travel. A pricing strategy like this not only regulates demand but makes it possible to manage congestion without increasing the supply of road space.

Interesting, right?

It is important to note that the size of the fee is dynamic, meaning that the rate will change depending on the congestion that exists and the demand for road use at a particular moment in time. However, the implementation of dynamic road pricing does not eradicate congestion altogether but ensures that the external costs are factored into people’s decisions.

There are two types of road pricing systems currently employed that aim to reduce traffic congestion:

(1) a cordon area around a city centre that charges motorists electronically once they pass a cordon line (the cordon fee applied during peak periods);

(2) an electronic road toll that levies a fee on motorists for the use of urban thoroughfares (this fee is higher under congested conditions than uncongested conditions which acts as an incentive to shift vehicle traffic to other routes and modes of transport.

Do these types of road pricing systems actually work?

In February 2003, Ken Livingstone (the Mayor of London at the time) imposed a 5 pound daily charge (increased to 8 pounds in July 2005) for driving or parking a vehicle on public roads within Central London (inclusive of West End) between the hours of 7 a.m. and 6 p.m. on workdays. Currently, motorists who use these public roads are charged a flat fee of 11.50 pounds. However, individuals who live within the zone are entitled to a 90 per cent discount on the charge and do not have to pay the fee if their car remains parked off-street.

The congestion scheme is also quite efficient; the total estimated annual costs of the congestion scheme is 163 million pounds, while the total annual benefits (flow of revenue and reduction in traffic volume) are 230 billion pounds (Leape, 2004). According to the Transport for London, the estimated effect of the implementation of a cordoned area on traffic flow was a reduction of 50,000 cars per day.

In spite of the evidence we have on congestion pricing, Australia does not currently have a congestion pricing system implemented that levies a fee on road users upon entry into urban areas in the form of a cordoned area or an electronic road toll. However, such a scheme is paramount in the improvement of traffic flow particular in inner city regions. The implementation of such a scheme has the potential to not only reduce road congestion but also improve the efficiency of public transport, increase the government’s tax base and indirectly combat the advent of climate change (reduces emissions generated by urban transport as people shift to other modes of transportation).

Do you think that congestion pricing in urban areas has promise?

4 thoughts on “Congestion Pricing: A Solution to Chronic Road Traffic”

  1. Great article. Good thoughts. I guess the popularity of having additional cost with travelling to large cities is not one that the community would embrace if the conversation is not held as to why. With detailed discussion there would be much more understanding about longterm impacts like improving accessibility to locals and not only local environment but also lessening impact & effect on climate change.
    As individual travellers we can all choose to make the impact we believe is the most important.
    Pay the added price for perceived convenience or travel differently.
    The community always likes to have a choice and certainly the new Sydney Metro has given that and all will benefit either from shorter travel times ( more personal or family time, cheaper travel ( less toll), the environment definitely will benefit. We all need to just understand infrastructure always has an outlay but long term benefits are so worth it. Let us all see the light at the end of the proverbial tunne

    1. Jason Bujaroski

      Thank you for the feedback, Snez.

      You are right, it would definitely be difficult for the community to embrace such a policy, particularly if it affects their own pockets. I guess in a way it incentivises people to find other means of transportation, thus improving traffic flow rates.

  2. What a great way to kick off proceedings with The Ambitious Economist! Keep these coming. I’m interested in learning more about how technology can enable more people to work remotely and flexibly – and how this approach can help ease the congestion issues that our cities face. Also… high-speed rail wouldn’t go astray! Ha ha.

    1. Jason Bujaroski

      Thank you for the feedback, Jozo.

      I am glad that you enjoyed the article.

      Some good thoughts on a future article. I look forward to hearing some of your thoughts and opinions in the future.

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