Road Pricing is Inefficient but Fair - Essay Example

 Road Pricing is Inefficient but Fair Introduction Traffic congestion is a major problem in a large metropolitan such as London and is becoming increasingly common on many of its inter-urban highways. Vehicle congestion arises when the volume of traffic exceeds the free-flow capacity and in such cases, each additional vehicle causes delays to other vehicles and suffers in turn from a slower and thus more costly journey. This negative externality would generally require a corrective tax or charge in order to reduce congestion and hence, provides the standard argument for road pricing. Models of increasing sophistication, which describe congestion have already been developed over the years since the seminal work of [6] and the theoretical case for road pricing is now being widely accepted by economists. A charge equal to the marginal congestion cost would make drivers think and face the true cost of their journey, thus maximising social surplus and internalising the congestion externality. If the problem is so clear, and the solution so obvious, why has it not been implemented widely in all the inter-urban districts and the various inner-city London zones that still suffer from congestion today? 2. Road Pricing Inefficiencies Marginal cost pricing in the London road sector poses public and political acceptability issues, linked sometimes to concerns about driver equity. The effort to build a way out of the congestion problem has not proved successful largely because once constructed there has been limited effort to ensure the new capacity is appropriately used. Efforts to attract drivers out of their vehicles have been equally ineffectual partly because of land-use patterns in the London areas alone are seldom conducive to the economic provision of transit and, in any case, many people do not see buses or the local rail tube services as offering comparable services to the passenger vehicles at the current prices being charged for road use. Introducing marginal cost pricing in the London transport sector does not guarantee an efficient outcome when there are externalities or distortions in other (related) sectors in the economy, which are not priced according to marginal cost. Marginal cost pricing has proved difficult to implement in the UK. Such form of pricing would require highly differentiated pricing systems in time and space, which would be expensive to provide and confusing to drivers [7]. From these factors, it is clear that first-best pricing is not very relevant from a practical perspective. A second-best charge can be defined as the optimal road charge when the true optimum (first best charge) is unavailable due to constraints on policy choice. The theory of second best says that a policy that would be optimal without such constraints may not be second-best optimal if other policies are constrained. Unfortunately, this also poses problems. In order to compute a second-best road charge, a fair amount of information is still required, including marginal congestion costs and the exact tax constraints [5]. The problem of traffic congestion in London still remains and a solution is required. There is an externality that creates an imperfection in an already imperfect market. A similar problem arises with environmental pollution. We will look at the London Congestion Charging Scheme and its proposed extension as its test-example. We find that the welfare gains from a congestion charge depend crucially on the location of where the charge applies and charge level and our results are only valid for the set of boundaries that have been proposed by Transport for London (TfL). If the model we use covered a different area, traffic flows and times savings would be different. The political economy of such decisions is not always guided by any efficiency principles, but rather by political forces and lobbies. The final result will be the combination of different pressure and political groups and this may or may not lead to increases in welfare. In the case of London, we find that the original congestion charging zone and congestion charge yielded gains. We cannot make definite conclusions on the increase of the charge from £5 to £8 would solve the congestion problem. We also model and assess the proposed extension and find that the benefit cost ratio would be higher than unity, and therefore the project would be justified on economic grounds. This can be translated to other towns and cities in the UK that may be considering the introduction of road pricing in the future, and in general to other sectors of the economy where there are market imperfections. Whilst simple and easy to administer solutions may yield important gains in efficiency, they may also yield losses, if they are influenced by political interests, even when they had potential to yield gains had the details of the policy not been so affected by pressure groups. Despite the lobbying and pressure groups that influenced the design of the London Scheme, it has increased welfare. This does not necessarily constitute a general conclusion; the influence of political factors may reduce or eliminate welfare benefits of a project. 3. Impact from Current London Pricing Schemes Three years after the introduction and running of the short-term congestion charging scheme by the Transport for London (TfL) in central London since 2003, some 18 percent fewer vehicles now enter the centre of London, and congestion has dropped 30 percent. Bus delays within central London owing to traffic congestion are down 60 percent [5], and bus ridership in and around central London has risen nearly 38 percent. Long derided as a mode of transport only for people without cars, buses have become a more reliable and cost-effective alternative for all. Many new riders come from the upper end of the income spectrum. Air quality has improved, with emissions of key pollutants like nitrogen oxides (NOx) and particulate matter (PM10) dropping 12 percent. Roads have also become safer, with fewer accidents occurring within the zone (the number of traffic accidents has also fallen throughout London). Meanwhile, the system has raised over $300 million to invest in London’s transport system [5]. However, these figures do not justify many of London’s roadways that are still choked with congestion today and are projected to worsen as a result of projected population growth from the influx of overseas migrants and high internal uncontrolled domestic birth rates. There is also debate about the disadvantages of the road pricing scheme. TfL conceded that 70,000 fewer people entered the charging zone each day compared with spring 2002, but claimed that only 4,000 were deterred by the charge [2]. The income from congestion charging has been lower than initially expected. Before the launch, London officials expected to raise £130m a year. At the launch this was revised to £100m, but it has since dropped to £68m. Many West End stores, notably the department chain John Lewis, blame the charge for a drop in their trade of between 7% and 9% [4]. Many other popular and major stores are also seriously affected. Many central London stores could be losing trade to out-of-town shopping centres, adding that areas such as Oxford Street should do more to help themselves. There has also been controversy about the mechanisms for collecting the road use charge. Charging mechanisms such as Capita, the private firm responsible, was fined £1m for poor performance. Since there are fewer cars coming into London, a lot of businesses are expected to close down unless things get better. 4. Challenges of the Road User Pricing Schemes Enforcement has been one of the biggest challenges so far for the road user pricing scheme. There have been problems with stolen license plates, drivers incorrectly entering registration details, and criminals replicating the license plates of other motorists. Several measures have been taken to address these problems, ranging from asking drivers to confirm certain details when they set up their accounts to using vans to track persistent evaders. Though it is still in its early days, several lessons have already emerged from the London experience. Strong political commitment by the London authorities ensured that the charge went ahead despite several attempts by opponents to delay and undermine it. Reinvesting all revenues in transport improvements increased public acceptance and consulting the public on key aspects of the scheme helped avoid mass opposition. The current taxation tariff for road use does not provide a set of prices which properly represent the social costs of road use including congestion and environmental costs. Tariff restructuring, to rebalance excise duty and fuel duty with a new element reflecting the variability of congestion and environmental costs by time and location, would be desirable in terms of economic efficiency. Charging can make all road users better off, because the trips that matter will take less time and be more reliable. Economic modelling work can show the impacts on users of different classes and on revenue of alternative schemes. Efficiency needs to be considered alongside operational, equity and wider planning factors in determining the overall social advantage of road user charging [1]. 5. Addressing Fairness in Equity Issues One of the major criticisms of road user pricing is that it’s unfair to certain groups of people, ranging from low-income drivers who can’t afford the toll charges to people living within the pricing zones who would be forced to bear a disproportionate share of the charges simply because of where they live. Fortunately, there is a host of proven ways to address such concerns. One of the best ways to avoid adverse impacts on low- and medium-income individuals, for example, is to use some of the revenues from the pricing charges to improve public transport, as London have done. People who are unable to afford the road user charge tend to be much less likely to drive to work and more likely to use public transport than those with higher incomes, and thus should benefit greatly from public transport improvements. Another option is to provide discounts for certain categories of drivers. Some cities have exempted the disabled from pricing charges. Discounts could also be given to other categories of drivers, such as people under certain income levels or those living within the road pricing zone. In London, residents within the zonal area receive a 90 percent discount [3]. 6. Conclusion New technologies and changing public perceptions are transforming the debate about how to tackle the problem of ever-escalating traffic congestion in London. Although the City of London have already seen some success by implementing road user charging schemes to cut down on traffic during peak periods, it is now possible to apply further other factors such as market principles to road congestion to better match the increasing demand for road use to the finite supply of roads through programmes that are convenient to use, increasingly transparent, and proven to ease the thorny problem of gridlock in London. REFERENCES [1] Dft (2004), The Economic Case for Road Pricing, Annex A in Feasibility Study. [2] Greater London Authority Act 1999 and Transport for London (TfL). [3] Glaister, S. and Graham, D. (2004), Pricing our Roads: Vision and Reality, IEA. [4] Grayling, T. et al (2004), In the Fast Lane: Fair and Effective Road User Charging in Britain. [5] Santos, G. and Fraser, G. (2006), Road pricing: lessons from London, Economic Policy, pp. 263-310. [6] Vickrey, W. (1955), Pricing in Transportation and Public Utilities: Some Implications of Marginal Cost Pricing for Public Utilities, American Economic Review, Supplement 1955-56, Papers and Proceedings, pp. 605-620. [7] Nash, C. and Sansom, T. (2001), Pricing European Transport Systems, Journal of Transport Economics and Policy, 35(3), pp. 363-380. Read More