ECONOMIC FUNDAMENTALS OF ROAD PRICING: A DIAGRAMMATIC ANALYSIS. POLICY RESEARCH WORKING PAPER

The author presents a conceptual framework for road pricing based on a rigorous diagrammatic - but nonmathematical - framework derived from first (economic) principles. His analysis of traditional arguments about road pricing shows why implementing congestion pricing as practiced in the past has encountered obstacles. Partly, it is because both types of road users - the tolled and the tolled off (those who avoid the road to shun a toll) - are shown to be worse off under a constant value of time, except for the government. And when differences in time valuation are taken into account, primarily those with very high time values are better off. Unless congestion toll revenues are earmarked and travelers perceive that the money is channeled back in reduced taxes, lower user charges, or improved transport services, neither the tolled nor the tolled off will support road pricing. Only where there is hypercongestion is everyone better off with congestion pricing. In the absence of scale economies or diseconomies, the level of economic profits - toll revenue collections less a road's fixed and non-use-related costs - serves as a surrogate market mechanism indicating that a road should be expanded or downsized. The decision to let roads deteriorate over time is itself an act of disinvestment. The author shows that if a road authority levies economically efficient charges for congestion, it is possible to make money on a road. Roads can be profitable in urban areas in the long run because land rents are high; congestion tolls reflect the associated high opportunity costs. On urban roads with indivisibilities and diseconomies of scale, efficient pricing may curtail the extent of profitable undertakings. On rural roads with indivisibilities and economies of scale, marginal cost pricing can produce short-run profits. Economic efficiency is enhanced by pursuing optimal pricing in the short run and optimal investment in capacity in the long run. The rule is to implement short-run marginal cost pricing while varying road capacity over the long run. Insights by Newbery, Small, and Winston - about the economic implications of the extensive damage that heavy vehicles cause to roads - enrich the basic Mohring model. Charging for both the external and variable cost of road damage, by assigning a fee based on vehicle weight per axle, can help cover deficits arising from road congestion. Even if a road network is broadly characterized by increasing returns to scale in building and strengthening roads, the deficit could be closed by diseconomies of scope. A road network that accommodates both cars and trucks costs more than the sum of an autos-only and a (smaller) trucks-only road system. So the surplus associated with diseconomies of scope offsets the potential loss associated with scale-specific economies. A dedicated road or transport fund is all the more viable because road users are charged not only for the damage caused by trucks and heavy vehicles but also for congestion.