Ken Lund - Flickr

The Many Benefits of Road Pricing

A market-oriented approach to road management would ease congestion, generate revenue, and encourage ridepooling

November 7, 2020

Road pricing, once rare, has increasingly become a mainstream policy. It can be categorized in various ways—charging for use of highways outside of cities is called “tolling”; charging for use of roads within cities is “cordon pricing”; and charging to prevent traffic congestion is “congestion pricing.” But the idea is always the same: charge a vehicle for its road use, factoring, in different contexts, things like location, vehicle weight, and miles driven. 

The policy responds to a real problem, which can be defined like this: U.S. cities, which were once built for pedestrians, have spent a century retrofitting themselves to prioritize automobiles. They’ve widened their roads, narrowed their sidewalks, torn out neighborhoods to build highways, and designated prime land for parking. U.S. cities have also been zoned to spread people and uses apart. 

This means that single-occupancy vehicles (SOV) are the primary transport mode in almost every U.S. city, and because SOVs consume lots of space, they become an unscalable model in places with large populations. America’s densest cities are its most congested, with ones like New York and Boston suffering from per capita congestion rates of over 100 hours annually. Car dominance also creates negative externalities: noise, air pollution and traffic deaths. This causes an estimated $87 billion in annual lost productivity and $37 billion in health and climate costs. There is also a major opportunity cost of dedicating so much valuable space to the low-intensity use of car movement and storage. 

This model is a textbook case of socialist failure. Governments have taken it upon themselves to plan, build and manage roads, often using aggressive eminent domain tactics to clear ROW. They have failed to manage demand on these roads, leading to a tragedy of the commons. Nor have governments accounted for the externalities that all this car usage dumps onto cities. These problems could be reduced through market-based road provision—namely the price mechanism—producing 3 benefits.  

Disperses demand

Road pricing’s main benefit is to manage demand, i.e. disperse it. Hotels raise prices during peak business activity, like holidays, because more people are bidding to access a relatively static supply of rooms. This helps the hotels maximize profit, and follows a certain logic—people who don’t really want or need to travel on that holiday will save money by booking on a different day, when hotel vacancy rates are higher. This “surge pricing” also gets applied to trips by plane, train and rideshare. 

Because road supply is fixed even compared to those services, demand management is especially important. The least sophisticated version is when agencies charge a simple fee structure for road use (take the New York-New Jersey Port Authority, which charges 2-axle vehicles $11.75 during off-peak hours and $13.75 during peak hours for use of bridges into Manhattan). A better road pricing version applies electronic cameras that can read traffic levels in real time, and set prices accordingly, via “dynamic pricing.” That way prices shift in any one moment, causing traffic to disperse across the day, as people who don’t really want or need to go out at the most expensive hours choose different times. 

Creates Revenue

Another positive is that road pricing creates revenue. One potential use of the money is to improve mass transit—for example Singapore and Stockholm, which respectively generate $81.5 million and $143.2 million in annual net profits from congestion charging, invest much of that money into rail, buses and bike lanes. This is a bold policy move, because the government is fundamentally shifting people’s incentives, thus their behavior.  

For that reason, I am skeptical of the idea, and would rather see a purely market-oriented transport financing approach: use revenue from roads to actually fund road costs, rather than redirecting the money elsewhere. This differs from standard U.S. road policy, where roads are subsidized in part by general funds, meaning they are public liabilities. Charging for usage creates a revenue stream that can help pay debt, fund maintenance, or expand capacity.

Road pricing also creates a market feedback loop that is very different from the political allocation of roads. In a politicized system, a road gets built or widened based on whether various interest groups want that, and can convince government officials to fund it. The process is full of lobbying and pork barrel politics, but lacking in the scientific rigor needed to actually gauge demand or the costs versus benefits of a given project. In a pricing system, providers learn how many people use a road, and more crucially, what people are willing to pay for that use. Revenue generation is thus more than just a lump of money to be spent; it is an information system to determine whether a road is adequate for current demand levels, or whether more capacity is needed.  

Encourages Ridepool and Transit

Road pricing can encourage shared rides in a way government policy does not. Normally when the government wants to group commuters in cars, they create HOV lanes. But studies show that these are not generally effective at reducing traffic or getting people to carpool—they just become underused lanes. 

A better tactic is, rather than delineating HOV lanes, to price all lanes equally, or establish express HOT lanes that are more expensive than the other lanes. If the prices are too high for certain individuals, they can split the costs by ridepooling together. 

In the last decade, we have seen how this can work in America. Services like Uber show that there is already a network effect of people who, for various reasons, want to share rides. Road pricing will encourage that trend, enabling clusters of people to outbid SOVs for road use. Large buses, which group yet more people, are an even better way to split the cost of high road fees. The result will be more mass transit ridership, lower per capita VMT, and fewer negative externalities than would result if everyone drove alone.  

While road pricing is a bipartisan concept, both sides want it for different reasons. For right-libertarians such as the Reason Foundation, it’s a way to foster markets and ease traffic flow. The goal is not to discourage cars, but make them move more efficiently. For left urbanists, road pricing is meant to reduce cars’ environmental and quality-of-life impacts, by reducing their presence altogether. There is a whole movement now to ban cars from cities, or at least make them less dominant. Increasing driving costs is one path to this.

While I am sympathetic to both arguments, I side less with those who view road pricing as a punitive tax, than with those who consider it a demand management tool. Cars play an important role in cities, helping with the transport of goods and services. “Banning” them is impractical.

But charging market prices for road use—and even adding the externality costs into that pricing—is a middle ground. It allows for the mobility that cars provide, while encouraging their use as a shared resource.