ECONOMIC FUNDAMENTALS OF ROAD PRICING: A DIAGRAMMATIC ANALYSIS, PART I—FUNDAMENTALS

Abstract

Parts I and II together presents a conceptual framework for road pricing based on a rigorous diagrammatic—but non-mathematical—framework derived from first (economic) principles. It throws light on congestion pricing systems and issues surrounding short-run and long-run marginal cost pricing, scale economies and diseconomies, indivisibilities, road durability, the peak-load problem in urban transport and the financial viability of the public provision of road services. The paper integrates the ideas of Mohring, Strotz, Vickrey, Walters, Keeler, Small, Winston and Newbery into a single analytical framework. Analysis of the traditional road pricing arguments demonstrates why congestion pricing as practiced in the past has understandably encountered obstacles to implementation. This is partly because both types of road users, the tolled and the tolled off (those who avoid a road in order to shun the toll), are shown to be worse off—with the exception of the government—under a constant value of time. Even if differences in time valuation are taken into account, it is still essentially the case that primarily those with very high time values are made better off. Unless congestion toll revenues are earmarked and travellers perceive that the money is channeled back in the form of reduced taxes, lower user charges or improved transport services, neither the priced nor the priced off would support road pricing. It is only in the case of hypercongestion can congestion pricing be shown to make everyone better off. In the absence of scale economies or diseconomies, the level of economic profits, i.e., toll revenue collections less the fixed and non-use related costs of a road, serves as a surrogate market mechanism indicating that a road ought to be expanded or downsized. The decision to let roads deteriorate over time in and of itself is an act of disinvestment. Further, it is shown graphically that if a road authority were to efficiently charge for congestion, it is possible to make money on the road. Profitable roads arise in urban areas in the long run because land rents are high and congestion tolls reflect the high opportunity costs. Yet, efficient pricing in the presence of both indivisibilities and diseconomies of scale in urban roads may curtail the extent of profitable undertakings, whereas pursuing marginal cost pricing under the restrictive conditions of both indivisibilities and scale economies in rural roads could result in profits in the short run. Economic efficiency would be enhanced if optimal pricing were pursued in the short run and optimal investment in capacity were pursued in the long run. The rule is therefore to implement short-run marginal cost pricing while varying road capacity over the long run. Extensions by Newbery, Small and Winston have enriched the basic Mohring model that this paper develops diagrammatically by incorporating the fact that heavy vehicles are responsible for extensive road damages. Charging for both the external and variable cost of road damages on a vehicle weight per axle basis can help cover the deficit that may arise from congestion tolling. Even if a road network is broadly characterized by increasing returns to scale in road construction's use and strengthening, the deficit could be closed by diseconomies of scope. The existence of scope diseconomies in highways means that a road network that accommodates both loading and traffic volume, as found universally, costs more than the sum of an autos-only and a (smaller) trucks-only road system. Hence, the surplus associated with diseconomies of scope offsets the potential loss associated with scale-specific economies. The viability of a dedicated road or transport fund is enhanced by the fact that the road pavement is charged in two dimensions: once when traffic flow creates congestion and another when traffic loadings cause road damages.

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