Red Faces, Red Cents, and Red Ken

I have a piece in today’s AFR on the economics and politics of congestion fees. Full text over the fold.

(There’s a slight irony in the timing of this piece. I normally cycle to work, but because of the rain in Canberra today, I drove, and got to spend my own 20 minutes in traffic.)

Pay a Fee or Pay the Toll
Andrew Leigh
Australian Financial Review, 14 June 2007

In nineteenth century Britain, the law required all steam cars to be preceded by an attendant carrying a red flag. In cities, cars were not permitted to drive faster than 6 km/h. In twenty-first century Australia, convention requires that every peak hour driver in Australia must have steam coming out their ears, and be preceded by an equally red-faced driver. In cities like Sydney, this ensures that peak hour speeds average 12 km/h.

Congestion costs are a classic example of what economists call a ‘negative externality’ (or what your grandmother might have called ‘just plain selfishness’). In deciding whether to drive or take the train, I consider only on my own costs: fares, fuel, tyres and time. But I ignore the impact that my decision to drive has on you and everyone else on the roads.

In his book Gridlock, Ben Elton described traffic jams as the experience of being “choked on carbon monoxide and strangled with a pair of fluffy dice”. But they have a price tag too. According to the Bureau of Transport and Regional Economics, the economic cost of congestion is about $9 billion per year, most of which comes from wasted work hours and increased air pollution. By 2020, the BTRE projected, this cost will have doubled.

A natural solution is to force drivers to ‘internalise’ the negative externality, by raising the price of driving into busy areas. Just as ‘sin taxes’ on alcohol, tobacco and gambling recognise the potential harm that can be done to the rest of us, so a congestion fee is society’s way of making drivers take account of other road users.

Recognising the potential of congestion fees, London and Singapore now charge drivers a fee to enter the city during peak times. In April, New York has announced a plan to charge drivers US$8 to enter the southern half of Manhattan. Following successful trials last year, Stockholm will implement a congestion charge in July.

What is notable about these examples is that they come from across the political spectrum. In London, the chief proponent for the congestion fee was mayor Ken Livingstone (known as “Red Ken”). In New York, Republican mayor Michael Bloomberg is backing the charge. Congestion fees are a commonsense reform, not an ideological one.

Moreover, contrary to the fears that congestion fees would hit low-income households hardest, modelling by the Institute for Fiscal Studies suggests that the effects are evenly spread. While the rich can more easily afford to pay London’s £8 congestion fee, affluent Londoners also drive more often. Once commuting frequency is taken into account, congestion fees end up being mildly progressive, meaning that the rich spent a greater share of their income on congestion fees than the poor.

In Australia, the use of public-private partnerships to build new motorways has led to a proliferation of toll-roads. Yet for the most part, those fees are not designed to reduce congestion. Busy old streets in the CBD are free. Quiet new toll-roads in the outer suburbs are pay-per-use. While a congestion fee should be higher in peak hour, Melbourne’s City Link and the Sydney Cross City Tunnel cost exactly the same whether you’re using them at 5pm or midnight.

With many cars now equipped with e-tags, Australia has the technology to get congestion charges right. An ideal system would charge commuters a fee to enter the city centre on weekdays. But simple changes could help immediately. For example, why not replace the $3 Sydney Harbour Bridge toll with a charge of $5 during weekdays, and $2 on nights and weekends?

Despite an outcry at the time it was implemented, British policymakers now generally recognise that the London congestion fee has been a success. Traffic volumes are down. Public transport usage is up. And average road speeds, which had fallen to jogging pace, are now increasing again.

With 6 out of 7 Australian commuters travelling by car, a city congestion fee might encourage a few more people to take the bus instead. It might also encourage people to think about sharing a car, rather than the present situation in which 90 percent of drivers travel solo to and from work. (Harvard political scientist Robert Putnam argues that individualistic car commuting is one of the factors that has led to the breakdown of social capital in America.)

As the Soviet Union eventually realised, queues help no-one. Time spent waiting in a traffic jam is neither devoted to productive activities, nor enjoyed with family and friends. With the typical worker spending the equivalent of seven days a year sitting in their car, coming up with clever ways to beat gridlock should be a high priority. A modest congestion fee might just be the solution that our lungs – and kids – have been looking for.

Dr Andrew Leigh is an economist in the Research School of Social Sciences at the Australian National University.

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18 Responses to Red Faces, Red Cents, and Red Ken

  1. Kevin Cox says:

    A statement and a question

    Congestion fees could be made even more effective if the fees paid were used to pay other people not to drive into the city. Let us forget initially about the problems of how to work out who should get paid but think instead of how to get the most value from the congestion payment.

    Let us assume that the money I am willing to pay to drive into the city is now used to pay my neighbour not drive.

    Now the question

    Are congestion payments included in the measures of economic activity?

    If they are then are the payments made to people who are paid not to congest also included in the measures of economic activity?

  2. Andrew Leigh says:

    Kevin, you could hypothecate the fee – but most cities already subsidise public transport, and I’m not sure what the optimal subsidy is. The answer to your other question is that – to a first approximation – fees and taxes don’t affect national income, since they’re merely a transfer from individual to government.

    Incidentally, Chris Winslow emailed me this morning, to tell me his preferred solution – taxing car registration.

  3. Sinclair Davidson says:

    I consider only on my own costs: fares, fuel, tyres and time.

    The ‘time’ you consider should internalise the externality. It is unexpected congestion that annoys, not expected congestion. The problem, to my mind, is that I’ve yet to see an economic definition of congestion as opposed to engineering definition. This is a problem with all exterality type arguments, they go vague with lots of arm waving ‘We all know what this problem is’ and move along quickly to the desired solution.

    The other problem I have is that public transport does not necessarily solve the time problem. It takes just as long, if not longer, for me to commute as it does to drive. Now I work slap bang in the middle of Melbourne CBD. Further when driving I can do so in the comfort of my air-conditioned (or heated) car, seated and listening to the radio or cds or whatever. On public transport, these days, I’m lucky to find a seat (which if I do is cramped and uncomfortable), the environment is temperature controlled at random, and radio reception is random. So what are the externalaties of public transport? And are they more or less than private transport?

  4. conrad says:

    This idea of capping the number of cars like Singapore (and HK) is crazy — the reason cities like Singapore can do this is that they are have been planned well and have exceptionally good (and safe) public transport, which was designed for extremely heavy use (quite unlike anywhere in Australia). Taxies are cheap and plentiful as well, and since the place is so tiny, getting them from anywhere to anywhere else isn’t a bother or a great expense. There’s no real comparison to places like Melbourne or Sydney, where getting from anwhere to anywhere else that isn’t the CBD is particularily slow, even if you happen to live in the inner city (Walking the 8ks it takes me to get to work is faster than taking the train, for instance).

    The other big difference about places like Singapore and HK is that almost everyone lives in huge high-rises — which means that it is possible to have a pool of cars to hire at the bottom of the building (and some places certainly do), which means you can get one easily for the weekend in if you want to go somewhere (not that there are many places to go).

  5. conrad says:

    SOrry when I said “and HK” I meant “and effectively HK” which provides so little parking and such high taxes on cars that 85% of the population does not have one.

  6. derrida derider says:

    I normally cycle to work, but because of the rain in Canberra today, I drove, and got to spend my own 20 minutes in traffic.

    Wimp! I rode my 22ks this morning. Mind you, it was a lot more comfortable in the rain than in yesterday’s frozen fog. Did you ride yesterday?

  7. Kevin Cox says:

    If a tax is collected then it is not counted. Presumably when the tax is spent (eg on salaries) then is it counted? If this is the case then if the tax is spent paying people not to drive then surely it should be counted. The question is when. Is it counted when they get the money or is only counted when they spend the money.

    Look at it another way. There is one spot available on the road to drive to work. I or my neighbour can go. One of us has to pay the other for the right to drive. Is this payment counted in economic activity? This is nothing to do with the cost of road just that one of us purchases the right to drive our car. If it was a payment of a toll to TransUrban then it would be included. If it is the payment of the toll but it goes to my neighbour then surely it should be included?

    Why this is of interest is that it makes a difference when presenting arguments about systems that pay people not to consume. If paying not to consume is a valid economic activity and is “counted” then it makes a big difference to the way you structure descriptions of your systems.

    Interesting article about Singapore – but who gets the money from the sale of the right to have a car in the city. Is it the people who choose not to purchase?

  8. Verdurous says:

    Andrew,

    I thought your article communicated the issue very well. Hope the idea takes hold.

  9. Andrew Leigh says:

    Did you ride yesterday?

    Yes, I came in about 7.30am. when it was still pretty thick. Had to stop thrice on the way to clean the fog droplets off my glasses, though.

  10. A Danish architect who had something to do with it, told me (a good ten years ago) that in Copenhagen they reduced the daytime parking places every year since 1971 (as I recall) by 3 percent.

    Apparently, this not only saved bureaucracy, made the city more liveable and stimulated public transport use, but it also saved building main roads.

  11. David says:

    Nice article Andrew. I don’t know if using externality arguments is the best way to communicate the congestion issue though: it’s not so obvious to people that one’s behaviour in driving imposes costs on other drivers or if, it does, why you should be sympathetic since they’re all imposing costs on you by driving too! (The air pollution suffered by motorists and non-motorists alike is easier to see as an externality).

    I tend to think of it more as peak time city road space being a scarce resource which we can choose to ration by price or (by default) by long queues. It then becomes a question of ‘Would you pay $5 a day to cut your travel time by a third?’ or whatever.

  12. Corin says:

    Andrew, having recently worked for Red Ken, it is appropriate to contextualise CC politics. In short, London has a great but arguably expensive Tube network that has been underfunded at times as it is old. Most people use the Tube to get to work as opposed to a car. It is a tipping point really, whereby the number of Tube goers just want a better service and don’t mind car drivers paying for it. In the climate of UK politics – where even the Tories are ‘pro-Green now’ – it also has wider support than perhaps it would in some other places. However, the extension into Chelsea and the rise from 5 pounds to 8 pounds may be another tipping point the other way??

    The CC is not as brave as it looks … the Chelsea extension might be??

  13. Joel Parsons says:

    New motorways create windfall gains for urban fringe land owners, and monopolist owners can capture those windfall gains through maximising toll revenues. Thus infrastructure can be provided for urban expansion without extending the tax burden on the existing urban area or creating windfall gains for land speculators.

    The monopolist owners in this case face a real market and can adjust to that market to maximise their revenue, if the road is underutilised, they can drop tolls, if congestion is driving away customers with willingness to pay in excess of existing tolls, they can increase tolls. I don’t believe it will be too long before real world toll road owners with access to electronic billing technology begin charging time sensitive tolls based on congestion.

    Government set congestion charges however are sticky, they can’t be altered at the drop of a hat in response to changes in the environment, and are also highly political. So while an optimum congestion charge might be valid, I am not sure that governments are capable of setting these charges at optimum levels.

  14. Christian says:

    Why don’t we use a cap and trade approach for tackling congestion in cities, with market forces determining the price of kilometres? I have previously raised such a possibility in this article: http://www.onlineopinion.com.au/view.asp?article=5580

    The applicability (and advantages) of a cap and trade approach in the context of cordon pricing (which is what London has) has also been discussed in a paper by some Belgian economists: http://library.witpress.com/pdfs/abstracts/UT05/UT05030AU.pdf

  15. Andrew Leigh says:

    Christian, I think this is a novel idea, but it reminds me of the various schemes for allowing households to trade their water rights. The transactions costs would be massive — probably enough to outweigh any other social welfare gains.

  16. Christian says:

    Yes, you’re right that the transaction costs could be a problem – But wouldn’t that then also be a major issue with emissions trading vs emissions taxes? I think that with technology improving such transaction costs could decrease subtantially – Using websites similar to eBay to trade in the kilometres and using GPS to track vehicle movements to ensure that vehicles do not exceed their kilometre allocation. In the end, if there is any city-wide (or even nation-wide) road pricing scheme implemented (as the UK is seriously considering doing: http://www.dft.gov.uk/pgr/roads/roadpricing/feasibilitystudy/), then it would inevitably have significant transaction costs whether it is based on government imposed prices or prices determined by market forces. I suppose it’s really a complex question of market design that requires more research! Those Belgian economists consider the issue of transaction costs in their paper, and a number of other papers they have published on the topic – I am just surprised more economists aren’t talking about it!

  17. Andrew, while I support the idea, one thing you might want to think about is where the actual congestion is in Australia’s major cities (in Melbourne, it’s not primarily in the CBD), and secondly how a scheme could be implemented without a massive invasion of privacy.

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