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Motorists will have to pay for the cost of congestion

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  • Gabriel Roth [mailto:roths@earthlink.net]
    From: Gabriel Roth [mailto:roths@earthlink.net] Sent: Sunday, 30 March 2008 05:41 To: thomas.power@dit.ie Dear Dr. Power - I read your article with interest
    Message 1 of 1 , Mar 30, 2008
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      Re: [KyotoWorldCities] Motorists will have to pay for the

      From: Gabriel Roth [mailto:roths@...]
      Sent: Sunday, 30 March 2008 05:41
      To: thomas.power@...


      Dear Dr. Power -


      I read your article with interest and agree with most of your conclusions. But I've taken the liberty to insert a few comments below in bold.


      Best wishes -


      Gabriel Roth


      P.S. While getting your address, my finger slipped and I sent you a blank message in error, for which I apologize.




      Motorists will have to pay for the cost of congestion


      The Irish Times, March 26, 2008 Wednesday - The solution to traffic gridlock is to charge motorists by pricing the cost of congestion in euro, writes Thomas Power.

      AN ECONOMICS professor at UCD used to tell us that one of the problems with economic theory is that people keep ignoring it. Applying economic theory as a resolution to the problem of road congestion is a case in point.


      How true!


      In 1776 Adam Smith published his classic, An inquiry into the nature and causes of the wealth of nations, which argued that individuals, left to follow their own self interests, will do what's best for them and indirectly what is best for society.

      The food we eat, the clothes we wear and the roofs over our heads don't simply appear because the food producers, tailors and builders are altruistic, kind, caring and thoughtful human beings. They appear because people are motivated to make profits.

      However, in pursuing their own self interest they unintentionally serve the public interest. It's as if they are guided by an "invisible hand" to promote (involuntarily) a public interest.


      I believe that Smith was deeply religious and that, if I am not mistaken, he wrote that the guidance was "by an invisible hand". Not "as if by an invisible hand".


      Adam Smith's idea of an invisible hand that connects private interests with public interests is at the heart of understanding political economy. Markets and market prices are more often than not the best way to organise economic activity and allocate scarce resources.


      How true!



      However, even Adam Smith would acknowledge that sometimes markets don't always promote the public interest and that governments need to intervene.


      Or, he might have pointed out that there is no market in road space since governments took upon themselves the responsibility to provide this resource, generally pricing it poorly. Smith could not have been aware of Frank Knight's 1924 observation that, if urban roads were privately owned, and if the owners could charge for use, they would levy charges that would result in optimal congestion


      One reason for market failure is what economists refer to as externalities - the effect that market activity has on the wellbeing of bystanders.


      I am not sure you need to bring in "externalities" to solve this problem - they are a tricky concept to deal with. What about the positive externalities associated with road use? Would not private ownership of roads "internalize" the congestion externalities and yet lead to the results you seek?


      A factory that doesn't have to pay the cost of polluting the air is likely to produce too much and therefore pollute too much. The social costs of pollution are not included with the private costs (wages, rent, materials etc) in the price of the product. In this case intervention is necessary to correct the market failure.

      Similarly, motorists will make a decision whether to take a particular journey based on the benefits of the journey and the costs (time spent travelling, petrol etc). What they don't consider is the additional costs they impose on others as a result of their decision to take that journey - the increased congestion.

      The available road space (the scarce resource) is currently allocated by one's willingness to sit in traffic jams. The costs incurred in sitting in traffic jams benefits no one - it is pure deadweight loss. The solution is to get the motorist to pay the social costs (marginal congestion cost). By pricing the cost of this traffic congestion in euro, this money could be collected and put to good use, perhaps on improving public transport.


      In market economies, prices serve not only to restrict demand but also to encourage supply. Why do you not mention this? Governments usually provide the land, and are therefore entitled to an appropriate share of congestion pricing revenues, but how can you justify giving all of it to what politicians might consider "good use"?



      An argument put forward against road pricing is that roads are a public good and therefore considered "free". However, roads cease to be a public good once they become congested and instead become a common resource. When a road becomes congested, one person's use of the road reduces the available space for other users.


      Because road use can be charged for, I believe that even uncongested roads do not meet the "public goods" criteria generally used in economic analysis.


      It is difficult to charge road users for the space that they use up.


      It is now as easy to charge for road use as for telephone use. Singapore has been doing it since 1975; Bergen since 1986; Southern California (State Route 91) since 1995.


      Receiving the benefits of something without paying for it (including the social costs) is an example in economics of the free-rider problem. The problem for policymakers is to decide how much should a common resource be used. Avoiding congestion would involve the co-operation of all motorists.


      That "ECONOMICS professor at UCD" might have said that "the problem for policy makers" is how to apply economic markets to road space.


      They could act together to reduce the number of cars on the road to a level that is efficient, ie to a level that would eliminate congestion. The problem is that each motorist does not have the incentive to co-operate because each individual motorist contributes only a very small proportion of the congestion problem. In economics this is the classic case of the "tragedy of the commons".

      To avoid this tragedy, policy makers could increase the price of complementary goods, eg petrol taxes. Petrol is considered a complementary good because cars cannot operate without petrol. By raising the price of petrol (via taxation) this reduces the demand for driving. But car ownership is, in economic jargon, a very inelastic good. Demand for driving is very insensitive to price. Therefore the fall in demand induced by petrol taxation is likely to be insignificant. In addition the problem is with peak demand. Congestion usually happens at peak times in mornings and evenings. But this type of variation in demand is not the problem. Petrol tax cannot be used to solve congestion problems - buying petrol during off-peak times can be used during peak periods.

      Urban planners and policymakers spend an inordinate amount of money, time and resources trying to find solutions to traffic congestion (top-down policies) often without reference to how market pricing can be used to eliminate congestion.


      As I mentioned earlier, what you describe is not "market pricing" but seems more like extortion by monopolists.


      Planners must surely realise that "supply-induced policies" (building more roads) has clearly failed to solve the twin problems of congestion and pollution. Building more roads simply leads to - drum roll - more cars. Knocking down all the buildings in Dublin and building roads would not eliminate traffic congestion.


      Not "clear" at all. Building "free" roads leads to your drum roll, but building priced ones would not. And there is probably no case for eliminating traffic congestion entirely, even in Dublin. Market pricing can be expected to result in what economists might call "optimal" congestion.



      Road pricing works in theory and in practice. Singapore, the first city in the world to introduce road pricing has no congestion problems and no traffic-induced pollution problems. London's experience has been a monumental success. There are fewer cars in the city, lower CO2 emissions and higher levels of business transactions.


      Is not having "fewer cars" a loss to those priced off, rather than a benefit? Do not the direct benefits arise from savings to those not priced off, and to those attracted to the less-congested roads?


      Fellow egalitarians who oppose road pricing on the basis that it is regressive and that the "right" to drive should be distributed equally and not just based on one's income should remember that road congestion is unfair to everybody not just to those who use the roads. However, since it is the case that higher income groups tend to drive more and use bigger cars than lower income groups, car owners could be given a driving permit that would give them an amount of driving time each year. For those who drive less or decide not to travel into congested areas they could sell their balance to those who are willing and able to buy them - a distribution of income from rich to poor.


      This last paragraph seems to merit more thought.



      Thomas Power is a lecturer in economics and finance in the faculty of the built environment at the Dublin Institute of Technology.


      Gabriel Roth is not wise enough to teach at a university, but he is the editor of  the 2006 Independent Institute publication "Street Smart: Competition, Entrepreneurship and the Future of Roads", and attaches information about it for your librarians.



      March 26, 2008

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