You Get What You Pay For

Posted on March 29, 2005
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There are a few issues on which economists almost unanimously agree, but because of public misconception or the haphazard detouring of the political process, that universal agreement never gets transferred to the public arena.

One of those issues is the use of congestion pricing for roads. Congestion pricing can take a number of forms, but it basically entails pricing roads more directly in line with demand. Right now, in any major city, including Phoenix, the problem of traffic congestion is not due solely to a lack of supply (adequate amount of road space) or unmanageable demand (too many people wanting to drive), but rather a mismatch between that demand and its cost. In fact, most places (again including Phoenix) have ample supply: think of traffic conditions during non-rush-hour times, especially late at night.

In theory, we pay for the roads we use through gasoline taxes. Roughly, it is argued, the amount of gas we each consume helps pay for the road we use. Never mind that our sales and income taxes also pay for the cost of roads, payments that are very much less connected to how much road we use. Even for gas taxes, the payment and the use are so far removed once we consider that these revenues are collected by the state, shifted upwards for federal finagling, sliced up for pork barrel projects, and then reapportioned back to the states for freeway construction. Moreover, the cost of using the roads is different for different times of day (based on total demand), and taxation of any kind simply cannot reflect that dynamic.

A better option would be to pay for the freeway via a toll paid at the time of use, and to let the toll vary based on the congestion present. In this way, consumers can adjust their consumption of a congested good, while the changing cost of the roads is paid for by those who use them.

We see congestion pricing all the time, for things like movies (think matinee prices versus twilight) and electricity (peak and off-peak charges). In fact we do it for pretty much everything for which there is a freely moving market prices for some goods vary according to different seasons of the year, different days of the week, and so on. Ultimately, variable pricing results in a more efficient (read: more people are happier) allocation of goods.

Fortunately, while congestion pricing carries with it little in the way of political horsepower, some places are still charging ahead. A story on NPR this morning discusses the experience in London, where prior to tolls for entering the central city, traffic was daily a perpetual crawl, and now traffic moves freely and area retail sales are actually up.

In Buses, Trains, and Automobiles: Finding the Right Transportation Mix for the Phoenix Metro Region, transportation expert John Semmens highlights the enormous projected benefits of implementing congestion pricing in the Phoenix area, comparing it to the negligible and possibly negative effects of public transit options. He also points out creative ways to set up the private construction and operation of freeways that keep down costs and still entrench incentives to maintain quality.

As it is with most things, and for that we can be grateful, the universal dynamics of supply and demand dictate that in transportation, we indeed get what we pay for.

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