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Introduction
Since at least the time of the industrial revolution economists have tried to
account for the existence and ideally solve the problem of externalities. Much of this
focus has been on the negative externalities associated with pollution and how the free
market has or has not been able to adequately address the problem. Despite the general
agreement that a problem exists, there is no shortage of opinions regarding why the
problem exists in the first place and how to deal with it. This paper will discuss the
externalities associated with traffic congestion and analyze one potential solution,
Of the many economists who addressed the free market’s failure to compensate
for externalities, few have been more influential than Arthur Cecil Pigou and Ronald
Coase. While their approaches to the problem of externalities may seem different at first
glance, some have argued that many of Coase’s insights are borrowed from and built
1
upon Pigou’s work.1 These two economists’ views have been instrumental in shaping
deal these problems emerges. While both Pigou and Coase offer some guidance, an
benefit analysis seeks to solve the problem of externalities by asking “whether society as
a whole will become better off by undertaking [a] project rather than not undertaking it,
Policy makers can use welfare economics to identify cases of externalities and
explore different methods of addressing them. Solutions can range from relying on the
free market to correct itself to government intervention in the form of taxes and/or
subsidies. Although it may be argued that policy decisions are ultimately political in
nature, welfare economics does provide an important framework for solving the problem
inertia, it should be recognized that this inaction is still a form of policy. Leaving
problems unsolved however is only sensible if “it would cost more to remove them than
we would gain.”3
1
See Herbert Hovenkamp, The Coase Theorem and Arthur Cecil Pigou, University of Iowa Legal Studies
Research Paper 08-44, April 2009 (arguing that Coase built upon Pigou’s work more than Coase ever
acknowledged).
2
E.J. Mishan, Cost-Benefit Analysis, at xxix (4th ed. 1988).
3
RH Coase, ‘Social Cost and Public Policy’, in GA Edwards, ed Exploring the Frontiers of Administration,
Toronto (Canada), Bureau of Research, Faculty of Administrative Studies, York University, 1970 at 40.
2
The problem of congestion and the congestion pricing solution
traffic congestion, occurs when traffic demand exceeds roadway capacity.4 Traffic
economy in the form of lost jobs and wasted productive time.5 In addition, traffic
6
congestion adds to costs that are more difficult to measure, such as pollution, public
The idea to alleviate congestion in urban areas is not new, though the typical
railway, for example, gives commuters an alternative to driving, thus tending to reduce
underground railroad fails to directly account for the social costs imposed by the driving
commuters whose choice to drive contributes to the congestion. The driving commuters
would enjoy the benefits in disproportionately high amounts as compared to the rail
4
See http://www.fhwa.dot.gov/congestion/describing_problem.htm (defining congestion in terms of the
United States highway system).
5
See Partnership for New York City, Growth or Gridlock? The Economic Case for Traffic Relief and
Transit Improvement for a Greater New York (2006).
6
Id at 41.
7
Id at 5.
8
See E.J. Mishan, Cost-Benefit Analysis, 3-5 (4th ed., 1988) (discussing a cost-benefit analysis to the
implementation of an underground railway).
3
William Vickrey emerged as an early proponent of congestion pricing to ease
traffic congestion in urban areas so as to more accurately account for costs imposed on
the transit system by drivers.9 While congestion charges can take many forms, the basic
idea is to charge drivers a fee to enter congested urban areas. How much to charge and
the details of implementing such a plan as well as how to allocate the proceeds (if any)
present additional issues that must be resolved before any such plan should take effect.
While there are several examples around the world of successful congestion
pricing schemes, none has yet been implemented in a major US city. The mayor of New
York City, Michael Bloomberg, proposed such a plan in 2007,10 but the proposal failed to
achieve enough support in the New York State Assembly.11 Ultimately it was a political
economic theory.
Though Pigou did not use the word “externality” in his writings, it is clear that he
understood the concept in discussing the “divergences between marginal social net
product and marginal private net product.”12 For Pigou, a negative externality exists
9
See William Vickrey, Pricing in Urban and Suburban Transport, The American Economic Review,
(May, 1963) at 460 (discussing the impact of a congestion charge).
10
See Mayor Bloomberg Presents PLANYC: A Greener, Greater New York, http://www.nyc.gov/ (Search
“PR- 119-07”).
11
See http://cityroom.blogs.nytimes.com/2008/04/07/congestion-pricing-plan-is-dead-assembly-speaker-
says/?hp.
12
AC Pigou, Economics of Welfare, 172 (Transaction Publishers 2009)(1920).
4
when marginal private net product exceeds marginal social net product – that is,
crowded centre, which, by contracting the air space and the playing-room of the
neighborhood, tend to injure the health and efficiency of the families living there.”14 In
this example, the costs to the families, in the form of health and efficiency loss are not
borne by the builder and thus represent a classic example of a negative externality.
In discussing how to deal with these externalities, Pigou notes that simply
transaction which causes externalities will not work “because the [externality] arises out
However, Pigou notes that the State can remove these externalities by imposing
notes that the most obvious “encouragements and restraints…[are] those of bounties and
taxes.”17
Pigou cites the special taxes imposed on businesses producing and distributing alcoholic
drinks.18 In this case, the “extra costs in policemen and prisons which [alcohol] indirectly
13
Id at 185.
14
Id at 185-86.
15
Id at 192.
16
Id.
17
Id.
18
Id.
5
makes necessary”19 is paid for by the tax on alcoholic drinks. By using the proceeds to
combat the negative externalities produced by the taxed item, the tax works to eliminate
the negative externalities altogether. In pigovian terms, this tax would equate marginal
private net product with marginal social net product. Such a taxing scheme, often referred
to as a pigovian tax, presents the ideal situation where those who cause the negative
externalities in the first place are the ones who must pay to eliminate them.
The pigovian tax scheme also works in the case of positive externalities where,
produces a positive externality - “the indirect service of developing citizens suitable for
military training.”20 Regardless of whether that benefit holds true today, the idea for
Pigou is that since “the private net product of any unit of investment is unduly small,”21 a
Expanding on his agriculture example, Pigou notes that bounties can take the
farmers “lack the appreciation on the part of potential beneficiaries, it would be difficult
to collect a fee for undertaking that task.”23 Assuming the agricultural industry does
produce this positive externality, giving farmers a bounty in the form free information to
19
Id at 186.
20
Id at 193.
21
Id.
22
Id at 194.
23
Id.
6
In addition to any tax or bounty scheme, Pigou acknowledges “the Government
may find it necessary to exercise some means of authoritative control.”24 He gives the
example of city planning where “power must be held by some authority to limit the
quantity of building permitted to a given area, to restrict the height to which houses may
be carried, for the erection of barrack dwellings may cause great overcrowding.”25 He
goes on to argue for the necessity of a government authority to “tackle the collective
problems of beauty, of air and of light, as those other collective problems of gas and
Even though Pigou’s “name remains attached to the notion that negative
reducing the associated social costs,”27 he was weary of the government’s ability to
successfully regulate. Pigou was cognizant that the government is subject to “sectional
pressure and to personal corruption by private interest,” and that companies “may employ
corruption, not only in the getting of their franchise, but also in the execution of it.”28
based on short views – views bounded by the next election, not extending to the
permanent interests of the community.”29 It is clear that although Pigou advocates for tax
government that must implement them and therefore they either may not happen all, as
24
Id.
25
Id.
26
Id at 195.
27
A.H. Barnet and Bruce Yandle, The End of the Externality Revolution (20060 at13, available at
http://mises.org/journals/scholar/barnett.pdf.
28
Pigou at 332.
29
Id at 334.
7
was the fate for New York City’s congestion pricing plan, or it may not be implemented
When Pigou was writing about externalities in the early 20th century he did not
address the specific problem of urban traffic congestion, but he did address the concept of
congestion pricing in his first edition of The Economics of Welfare.30 As laid out by
Pigou:
Suppose there are two roads ABD and ACD both leading
from A to D. If left to itself, traffic would be so distributed
that the trouble involved in driving a ‘representative’ cart
along each of the two roads would be equal. But, in some
circumstances, it would be possible, by shifting a few carts
from route B to route C, greatly to lessen the trouble of
driving those [sic] still left on B, while only slightly
increasing the trouble of driving along C. In these
circumstances a rightly chosen measure of differential
taxation against road B would create an ‘artificial’ situation
superior to the ‘natural’ one.31
In this example, ABD represents a shorter route than ACD such that ‘natural’ situation is
for drivers to choose take the shorter route until, due to resulting congestion, the travel
time for both roads is equal. Pigou offers a solution to this problem in the form of a tax
on the shorter route which would cause some drivers to shift to the longer route so as “to
30
See Barnet at 7.
31
Robin Lindsey, Do Economists Reach a Conclusion, Econ Journal Watch, at 300 (quoting from the first
edition of Pigou’s The Economics of Welfare).
8
lessen the trouble of those still left [on the shorter route], while only slightly increasing
proposing a private as opposed to public solution.33 Knight claimed that “if the roads are
situation which would be established by the imaginary tax will be brought about through
the operation of ordinary economic motives.”34 The idea is that if the shorter road was
privately owned and the owner could impose tolls, the owner would “charge for its use a
toll representing its ‘superiority’ over the free road.”35 The owner will set this toll “up to
the point where congestion and diminishing returns set in,”36 and it is this point that
“maximize[s] the total product of both roads.”37 Thus Knight was able to propose a
solution that did not involve direct government intervention to solve the congestion
from later editions of his book and arguably conceded the point by doing so.38 Despite
this, Pigou continued to advocate for government imposed taxes (or bounties) as
If presented with the problem of urban traffic congestion, Pigou might very well
refer to his solution to the "two roads" problem. Since the roads in an urban environment
32
Id.
33
See F.H. Knight, Some Fallacies in the Interpretation of Social Cost, The Quarterly Journal of
Economics, Vo. 38, No. 4 (Aug, 1924).
34
Id at 587.
35
Id.
36
Id.
37
Id at 588.
38
See Barnett at 7.
9
are a public good and it would be hard to envision Knight’s idea of their private
product - private net product exceeding social net product. That is, the private benefit
accruing to the individual drivers exceeds the societal benefit when traffic demand
exceeds capacity. Drivers travelling into urban centers under these traffic conditions
impose costs on society beyond what they bear themselves. A pigovian solution to the
problem would entail a form of tax on the drivers, the proceeds of which would go
It must be noted that a congestion problem only occurs when traffic demand
exceeds capacity, and this only occurs during certain times of day and only on certain
days of the week. Since the problem is that of congestion rather than any one driver’s
choice to travel into an urban center, a proper pigovian tax should only target those
Pigou addressed this notion of variable pricing when writing about railroad
[services] are not necessarily similar in respect of cost when they are rendered at different
times or seasons of the year.”40 For example, consumers of electricity supplied during
peak hours are charged higher rates than during off-peak hours. In order to supply the
electricity required during peak hours, “a large quantity of equipment must be erected
39
See Pigou at 290-317.
40
Id at 294.
10
additional to what would be required if there were no hours or seasons of exceptional
demand.”41 Pigou refers to this pricing scheme as the “cost of service principle.”42
“would seem to warrant higher fares for travel at busy seasons and at busy hours of the
day than are charged at other times.”43 Further, even if rail ticket prices are not adjusted
form.”44 Specifically:
This same logic can be applied to a traffic congestion scenario. A driver who travels into
an urban center during congested times may pay the same absolute cost (i.e. fuel, wear
and tear, etc.) as the driver making the same trip during an un-congested time, except the
former pays more in the form of increased travel time and frustration.
not capture the costs imposed by drivers during congested times on others, particularly
other commuters. For example, drivers during congested times not only pay costs
themselves in the form of increased travel time and frustration, but also increase both of
11
pigovian terms, the marginal private net product of the drivers during congested times
A pigovian response to this divergence between marginal private net product and
marginal social net product would be to impose a tax on drivers who travel into urban
centers during congested times and use the proceeds to combat congestion. For example,
a toll could be imposed on drivers who travel into urban centers during periods of
congestion and the proceeds of the toll could be used to expand bus service. Assuming
preventing some drivers from traveling into urban centers during congested times while
offering an alternative to driving in the form of expanded bus services which reduces
congestion.
Coase was able to take a different approach to the problem of externalities from
that of Pigou by framing the problem in the first instance as a reciprocal one. Coase
notes that the traditional approach to dealing with externalities involves the scenario
where “A inflicts harm on B” and the question to be decided is “how should we restrain
A?”46 Instead, Coase argues that the “real question that has to be decided is, Should A be
allowed to harm B or should B be allowed to harm A? The problem is to avoid the more
serious harm.”47 By framing the question in this way Coase seeks to maximize social
46
RH Coase, The Firm, the Market and the Law, 96 (University of Chicago Press, 1990)(1988).
47
Id.
12
welfare through an efficient allocation of resources. In this regard, Coase’s objective is
externalities, Coase had faith in the free market to deal with these problems on its own so
long as an initial determination of rights has been made.48 Moreover, Coase argues “the
ultimate result (which maximizes the value of production) is independent of the legal
position if the pricing system is assumed to work without cost.”49 Essentially Coase
argues that as long as rights with respect to liability are clear (regardless of how they are
assigned) and there are no transaction costs involved in the market, the ultimate result of
maximization of the value of production will occur naturally through the free market
mechanism, eliminating the need for government intervention. While this prospect is
transaction costs.
undertaken when the increase in the value of production consequent upon the
rearrangement is greater than the costs which would be involved in bringing it about.”51
Furthermore, once transaction costs are taken into account, “the initial delimitation of
legal rights does have an effect on the efficiency with which the economic system
operates.”52 That is, after transaction costs are taken into consideration there is no
48
Id at 104 (arguing that without the establishment of initial delimitation of rights there can be no market
transactions to transfer and recombine them).
49
Id.
50
Id at 114.
51
Id at 115.
52
Id.
13
guarantee that the market will be able to bring about the “optimal arrangement of rights,
In certain situations where transaction costs are sufficiently high, Coase accepts
He then offers the example of the “smoke nuisance,” where “a large number of people is
involved and when therefore the costs of handling the problem though the market or the
firm may be high.”55 While it seems here Coase would be in favor of government
regulation, he is quick to point out that a “further alternative” exists; “to do nothing about
the problem at all.”56 The idea for Coase is that government regulation may bring about
the optimal solution, but it is far from certain. It may be the case where, despite the
It is at this point in “The Problem of Social Cost” that Coase is essentially calling
for a type of cost-benefit analysis. He argues “all solutions have costs, and there is no
reason to suppose that governmental regulation is called for simply because the problem
is not well handled by the market.”57 Instead of defaulting to government action, Coase
would have economists and policy makers undergo “a detailed investigation of the actual
results of handling the problem in different ways.”58 It is in this regard that Coase’s
53
Id.
54
Id at 118.
55
Id.
56
Id.
57
Id.
58
Id at 199.
59
See E.J. Mishan, Cost-Benefit Analysis, at xxix (4th ed. 1988).
14
A Coasean approach to Congestion Pricing
The ideal Coasean solution to the problem of traffic congestion would be market
based. This would entail a clear delineation of rights and a transaction costless market
through which all participants could bargain to reach an optimal solution. If the
congestion problem were neatly confined to two rural roads, like that of the “two roads”
problem, Coase would likely support Knight’s solution. Coase would explain that by
clearly defining property rights in the roads and assuming low costs in extracting and
enforcing tolls, the free market mechanism would achieve the optimal level of congestion
This example breaks down, however, when applied to urban traffic congestion. It
is hard to conceive of private ownership of city roads, but even this would fail to account
for other negative aspects of urban traffic congestion such as pollution. Furthermore,
even if property rights could be established so as to account for all the externalities,
transaction costs would be prohibitively high considering the large number of people
involved. Because of these issues, Coase might treat urban traffic congestion in a similar
manner to the problem of smoke nuisance.60 If so, urban traffic congestion may represent
would only support such intervention if it can be shown that the costs associated with
such intervention do not exceed the benefits. If the costs were to exceed the potential
benefits, Coase would likely advocate for the alternative of doing nothing at all.
60
Coase at 118.
61
Id.
15
Coase is generally critical of the pigovian tax scheme as a method of solving
externalities. In the context of smoke pollution, Coase argues that the “aim of such
regulations should not be to eliminate smoke pollution but rather to secure the optimum
amount of smoke pollution, this being the amount which will maximize the value of
production.”62 In the context of traffic congestion, Coase would argue that the aim of any
congestion charge should not be to rid urban areas of congestion completely but rather to
achieve the optimum level of congestion. It may be the case that some level of
congestion actually produces higher net benefits than a charge sufficiently high that it
It is clear that Coase would only support a pigovian congestion charge if the
empirical data supports the conclusion that the benefits exceed the costs. In Coase’s own
words; “it is all a question of weighing up the gains that would accrue from eliminating
these harmful effects against the gains that accrue from allowing them to continue.”63
Cost-benefit analysis
interaction with the private economy.”64 The idea behind the analysis is that only
62
Id at 153.
63
Id at 131.
64
Aaron Wildavsky, The Political Economy of Efficiency: Cost-Benefit Analysis, System Analysis, and
Program Budgeting, Public Administration Review (December 1966) at 293.
16
projects whose benefits exceed its costs should be undertaken. To make this
determination, “streams of costs and benefits are discounted so as to obtain the present
judgments must be made in conducting the analysis, many of which amount to educated
guesses.
that of an underground railway.66 Mishan frames the analysis as “estimating the initial
capital outlays which will be spread over five years against … the stream of future net
benefits (gross benefits less operating costs) spread over fifty years.”67 Curiously,
Mishan claims that “there is no difficulty in estimating” these initial costs for such a
project despite the fact that cost estimates for construction projects, particularly for public
transportation projects, are routinely understated, while the benefits are routinely
overestimated.68
accurately estimated, one still has to estimate the benefits, for both expected users of the
service and others. For example, “ for some portion of the expected users … the benefits
would be calculated as a cost saving as compared with their existing form of travel” and
may be “augmented by some estimate of the value of the greater comfort” which
65
Id.
66
See Mishan 3-5.
67
Id at 3.
68
See Bren Flyvbjerg, How (In)accurate Are Demand Forecasts in Public Works Projects?, Journal of the
American Planning Association (Vol.71, No.2 Spring 2005) (arguing that routinely inaccurate cost and
benefit estimates for major transportation projects lead to flawed decisions).
17
traveling by underground rail might provide.69 Also, there may be some people “that
might not travel at all if there were no provision for underground railway services.”70
For those who will not be users of the underground railway but will continue to
travel on roads, benefits may include “some saving of time,” as well as “an increase in
safety and an increase in comfort.”71 Mishan goes further to point out that even those
who never plan on using the new form of transportation may still benefit from “a partial
form of insurance” – the railway will be “an alternative that is always open to them
Mishan cautions, however, not to include among the benefits “any rise in land
values resulting from the new underground service,”73 for doing so would be double
counting. Mishan argues that the advantages leading to any increase in property value,
“been entered into the cost-benefit analysis of the railroad on an annual basis.”74 To add
the “capital gains,” in the form of property value increases, “would amount to a clear case
of double-counting.”75
the present value of the initial and operating costs should be less than the present value of
69
Mishan at 4.
70
Id.
71
Id.
72
Id.
73
Id.
74
Id at 78.
75
Id.
18
the benefits. In his comprehensive study of the London Congestion Charge,76 Jonathan
Leape outlined the costs and benefits of the scheme the London Congestion Charge
Costs for the congestion charge were divided up into five categories; the initial
set-up costs, the operation costs, the supervisory costs associated with managing the
scheme, traffic management costs, and charge-payer compliance costs.78 The benefits
included the “time savings to drivers and passengers of vehicles that continue to use the
road system after charging is introduced,” “improved journey time reliability,” as well as
“reduced accidents and lower carbon dioxide emissions.”79 The net proceeds of the
scheme were not included as a benefit, but “given the UK government requirement that
all charge revenues be spent on transport improvements, the charge payments are likely
to be generating significant additional benefits in reduced travel times and accidents and
in other savings.”80
Costs involved with the set-up and enforcement of a congestion pricing plan has
long been an attack against the implementation of such schemes. As Vickrey notes in his
1963 essay, “talk of direct and specific charges for roadway use conjures up visions of a
clutter of toll booths, an army of toll collectors, and traffic endlessly tangles up in
costly in terms of “manpower, space, and interference with the smooth flow of traffic,”82
76
See Jonathan Leape, The London Congestion Charge, Journal of Economic Perspectives, (Vol. 20, No.4,
Fall 2006).
77
See Id at 171.
78
Id.
79
Id.
80
Id.
81
Vickrey at 457.
82
Id.
19
but he had the foresight to envision technological solutions to these problems. His vision
of cars being scanned by roadside equipments and bills being sent out to drivers83 is not
so different from London’s enforcement scheme of “video cameras at every entry point…
number[s].”84
The main benefits of a congestion pricing scheme take the form of reducing
traffic congestion that would tend to decrease travel time, accidents and pollution while
increasing journey time reliability. These benefits are harder to estimate than the set-up
and enforcement costs largely because they depend on “assumptions made about the
value of time, the value of lower pollution and reduced accident rates.”85 Making
difficult assumptions like these is all part of conducting a cost-benefit analysis as noted
by Wildavsky; “if certain costs or benefits are deemed important but cannot be
computer modeling techniques allow for the easy adjustment of assumptions to create
reliable models – this was how the cost-benefit analysis was conducted prior to the
should be undertaken only if its value is at least as great as the costs which it imposes on
83
See Id at 458.
84
Leape at 163.
85
Laura Blow, Andrew Leicester & Zoë Smith, London’s Congestion Charge, Briefing Note 31 at 8, The
Institute For Fiscal Studies (2003).
86
Wildavsky at 296.
20
the community.”87 Since “the congestion problem arises because drivers are not faced
with the full costs of their actions, … an obvious solution is to make them pay these
external costs.”88 The charge works by making sure “that only those drivers with a
valuation of their journey (above private costs already incurred) greater than or equal to
the charge continue to travel.”89 This raises the question of what level to set the charge
While not a charge per se, license plate rationing programs seek to reduce traffic
congestion by only allowing certain vehicles to travel into congested urban areas on
certain days of the week. A typical plan “restricts a set of vehicles from entering a
specified area on certain days based on the last digit of the vehicle’s license plate.”90 The
theory behind such plans is that the restrictions will compel drivers to shift their mode of
transportation, change the time of day they travel, carpool, or simply not make the trip at
all. If successful, such plans would result in less congestion, thereby deriving similar
Such plans are usually accompanied by the imposition of fines for violators set at
high levels. While one could theoretically avoid the plan simply by paying the fine, the
price is usually set sufficiently high and may be coupled with vehicle impounding91 so
that drivers seeking to avoid the plan resort to other means. One common avoidance
87
David G. Tipping, Time Savings in Transport Studies, The Economic Journal at 852 (Vol. 78, No.
312)(Dec. 1968).
88
Blow et al at 3.
89
Id.
90
Cambridge Systematics, License Plate Rationing Evaluation, Technical Memorandum ES-1 (Dec. 2007).
91
See Id at 2-5 (noting that Mexico City’s plan penalty includes impounding the violating vehicles for a
period of 48 hours).
21
method for those who can afford it is to simply purchase a second vehicle. If the
particular plan only distinguishes between odd and even numbered license plates (like
that of Athens),92 this method of avoidance is particularly effective. If the second car
purchased is of lesser quality and therefore emits more pollution, then the plan may
actually end up causing more pollution while not reducing congestion. Furthermore,
since the acquisition of a second vehicle to avoid the restrictions may only be available
for the wealthy, such plans may disproportionately impact those with lower incomes.93
Though several of these programs are in effect in cities around the world, the
long-term effects are questionable and the programs require strict enforcement.94 License
plate rationing schemes cause drivers to expend resources avoiding the plan while
requiring funds from other sources for the plan’s implementation and thus may be
London
London’s congestion charge imposes a £8 daily fee95 to drive into central London.
The charge is a form of “‘area license’ in that the fee effectively buys for the purchaser
the right to drive into and out of the charging zone as many times as desired throughout
the day, with charges applicable between 7:00am and 6:30pm.96 The charge is the same
for all eligible vehicles, except that disable persons, emergency vehicles, and certain
alternative fuel vehicles are exempt.97 The charge is enforced through vehicle plate
92
See Id at 2-23.
93
See Id at 4-1.
94
See Id.
95
The charge is £8 if you pay on the day of travel or £10 if you pay the first charging day after travel.
96
Blow et al at 5.
97
See Id at 6.
22
recognition technology that captures each vehicle’s plate number, which is then stored in
a database and compared at the end of each day with those numbers for which the owners
have paid the charge.98 Those who fail to pay receive a fine of £120, which is reduced by
It can be argued that a flat blanket charge is not the optimal solution since it does
not “internalize the externalities imposed by road users slowing down everyone else.”100
The ideal charge would differentiate “by both the specific route taken and by the time of
sense.”101 However, this would require more sophisticated systems and likely increase
monitoring costs, though such a scheme is currently place in Singapore. In any event,
The congestion charge has successfully been able to influence “the decisions of
road users on various margins: whether to take a particular trip, which mode of transport
to use, and when to travel.”102 Since implementing the charge, average travel speeds
have increased almost 17 percent and congestion has “dropped an average of 30 percent
from the start in February 2003 to mid-2005, at the top end of expectations.”103 Another
result was an increase in journey time reliability; surveys showed that the “standard
98
Id.
99
See Penalties and enforcement, http://www.tfl.gov.uk/roadusers/congestioncharging/6714.aspx.
100
Blow et al at 7.
101
Id.
102
Leape at 165.
103
Id at 166.
23
deviation of travel times decreased 27 percent during the morning peak and 34 percent
Though there was no increase in rail trips,105 there was a large increase in bus ridership.
From autumn 2002 to autumn 2003 there was an increase in bus passengers of 38 percent,
half of which it is estimated is from an improved bus service and half to the congestion
charge.106 One explanation for the better than expected increases in bus ridership is due
Additionally, this ‘virtuous circle’ leads to more reliable bus service, as evidenced by the
30 percent drop experienced in excess waiting times for buses in the charging zone in the
In a certain sense the congestion charge had been too successful since revenues
from the charge have been far lower than estimates. The shortfall in revenues, at about
104
Id at 167.
105
Id at 168 (Leape cites other factors for this including the prolonged closure of the Central Line,
downturn in the local economy, the war in Iraq, and the drop off in tourism).
106
Id.
107
Id.
108
Id.
24
half the level originally predicted, was “due to the scheme’s greater-than-expected impact
on car traffic – a drop of 30 percent in potentially chargeable vehicles entering the zone
drop in revenue was also affected by a higher than expected number of discounted or
exempt vehicles, “reflecting, in part, the success of the scheme’s incentives for using
low-emission vehicles.”110 The shortfall in revenue was also attributed to higher than
reducing congestion and a popular success.”111 Though the benefits “appear to be largely
in line with expectations,” the resource costs of running the scheme “have been twice as
high as expected.”112 Despite this, the “net benefits of congestion pricing seem to be
positive, but less than commonly anticipated.”113 While it can be called a success,
London’s experiment shows the pitfalls associated with a cost-benefit analysis – the costs
are routinely under-estimated while the benefits are routinely over-estimated. However,
London’s experience provides a valuable guide for other major cities considering such a
Singapore
License Scheme) in 1975, which was converted to an electronic system (Electronic Road
109
Id at 169-170.
110
Id at 170.
111
Id at 173.
112
Id.
113
Id.
25
Pricing) in 1998.114 Singapore’s scheme differs from London’s in a few major respects;
each car is fitted with an in-vehicle unit which requires drives to use pre-paid cards, the
amount charged varies throughout the day, charges are paid each time a vehicle enters the
charging zone, and busses and taxis are not exempt from payments.115
Singapore’s system of fitting each car with an in-vehicle unit is in line with
Vickrey’s vision116 and allows the system to adjust the price based on prevailing traffic
conditions. Since a driver is charged each time they enter the charging zone, it forces a
driver to make the conscious decision whether to incur the payment for each trip, as
compared to London where a driver may make unlimited trips in a single day and only
make one payment. In this respect, it could be argued that Singapore’s system is more
“optimal” than London’s in that is seeks to more accurately “internalize the externalities
Singapore’s original Area Licensing Scheme (ALS) was more like that of London
in that it offered unlimited number of entries into the charging zone and only charged one
flat rate.118 While the ALS was effective in initially reducing by 44 percent, by 1988 the
drop was only 31 percent.119 Since the charge was either $3 or nothing, the system led to
“sharp and short peaks of entering traffic volume.”120 A variable pricing system could
114
Blow et al at 16.
115
Id.
116
See Vickrey at 459.
117
Blow et al at 7.
118
See Kian Keong Chin, Road Pricing Singapore’s Experience at 3 (2002), http://www.imprint-
eu.org/public/Papers/IMPRINT3_chin.pdf.
119
Id at 5.
120
Id at 6.
26
reduce these peaks in traffic, but such a pricing scheme was thought to be too difficult to
With the introduction Electronic Road Pricing Scheme (ERP), it was possible to
charge variable rates and easier to charge drivers each time they entered the charging
zone. As a result, the ERP reduced traffic volume by about 10-15 percent as compared to
the manual ALS.122 Much of this reduction is attributed to ERP charging for multiple
entries, forcing multiple trip-makers to reduce the number of trips and/or utilize public
transportation.123 The ERP system also allows for optimal road use; “when too few
vehicles are deemed to be using the roads…the road pricing charge can be reduced to
allow more vehicles to use the roads,” and conversely if “too many vehicles are on the
roads… the road pricing can be increased.”124 While the effect on drivers’ decision at the
margin to make a trip based on the variable price is unclear, in theory such pricing should
While it can be argued that Singapore’s ERP provides a more ‘optimal’ use of
roads than that of London’s Congestion Charge, it must be noted that the ERP
requirement of each car having its own device adds a considerable amount of cost to the
initial set-up costs of a congestion charge scheme. Though these costs may be justified in
the long term due to increased efficiency, this would require a separate cost-benefit
analysis.
121
Id.
122
Id at 8.
123
Id.
124
Id at 9.
27
New York City
After studying the successes of cities around the world, New York City recently
sought to implement its own congestion pricing scheme. The proposed plan would be
modeled after London and impose an $8 daily charge for cars and $21 for trucks who
enter Manhattan below 86th Street between 6 a.m. and 6 p.m., Monday through Friday.
Like the London program, all the revenue raised from the charge would be entirely
reducing congestion and political support from most of the city, the plan failed to win the
requisite support among city representatives from outer boroughs and among State
Representatives. Since the implementation of the plan required the support of New York
State, the lack of support among State Representatives prevented the plan from being
implemented.
Common among the complaints was the belief that congestion pricing tends to be
beliefs have strong political implications even if economic theory does not support them.
Indeed some economists, including David Tipping, would claim this is a “silly
argument,” since “only the rich can afford to do anything which happens to be expensive.
economists would argue that the congestion charge more accurately reflects the true cost
125
See Transportation Report (2006),
http://www.nyc.gov/html/planyc2030/downloads/pdf/report_transportation.pdf.
126
See Id (incorporating figures from various studies).
127
Tipping at 853.
28
of driving into congested areas and therefore if the charge makes a trip too expensive
then this is no different from any other good that is too expensive.
As New York City’s ill-fated plan makes clear, ultimately the imposition of a
congestion charge is not simply an economic decision. As Tipping notes, “it is a matter
for political decision, influenced by but not determined by the sums done by economists
and engineers.”128 Recognizing this, the London Congestion Charge program made a
“earmarking was seen as important in offsetting the potentially regressive effects of the
drivers. Thus … earmarking played a crucial role in securing political support for the
congestion charge.”130 Though the New York City plan called for such earmarking, it
was not enough to convince a majority of the State Representatives that the plan would
not be regressive.
Conclusion
congestion charge in order to reduce traffic congestion. While Pigou and Coase’s
theories diverged in many respects, both economists’ theories can be used to support the
Pigou’s concept of taxing those who cause negative externalities and using the
proceeds of the tax to combat the effects of the negative externalities is a rough
128
Id at 854.
129
Leape at 170.
130
Id.
29
approximation of what a congestion charge seeks to accomplish. If the charge is set up
so that the proceeds are used to provide enhanced bus service, like it is in London, the
The optimal solution envisioned by Coase, the assignment of rights and letting the
free market work itself out, is not feasible in the case of urban traffic congestion.
However, this would not stop Coase from blessing a congestion charge as a solution to
the problem. Ultimately Coase advocated for a change of approach in dealing with
problems of welfare economics; start with a “situation approximating that which actually
exists, to examine the effects of a proposed policy change, and to attempt to decide
whether the new situation would be, in total, better or worse than the original one.”131
In the end, a public project like that of a congestion charge should past muster
extensive cost-benefit analysis that demonstrated the likely benefit of the program.
Though it turned out that costs were underestimated and benefits overestimated, the
positive benefits predicted in the analysis did materialize and the program is considered a
success.
It may be argued that, economic theory and cost-benefit analysis aside, the
131
Coase at 154.
132
See Coase, Social Cost and Public Policy, at 41-42 (arguing that economic policy conclusions derived
from calculations which fail to consider how social institutions work in practice have little relevance for
economic policy in practice).
30
New York City’s experience is an example of a policy that ultimately failed not because
of unsound theory or a negative cost-benefit analysis, but rather due to politics. It must be
realized, however, that this failure to implement the congestion charge in New York City
was itself a form of policy – one of inaction. Coase would support a policy of inaction if
it indeed resulted in the least cost to society. But, if economic theory and cost-benefit
analyses show that action, a congestion charge in this case, would result in lower costs to
society than inaction, then even Coase would support it. In this regard, a congestion
imposed by urban traffic congestion that policy makers should take seriously.
31