The effects of road pricing - Feweb - Vrije Universiteit Amsterdam

Travellers have different values of time, desired speed, and so on. First-best pricing
often makes it necessary to distinguish between different vehicle types and users
(because of different marginal costs). It is important to know whether first-best
congestion pricing can still be implemented, given these dimensions of heterogeneity,
and if not, how second-best tolls are optimally determined. In this context a
distinction is often made between anonymous tolling schemes (independent of vehicle
type and driver) and non-anonymous (type-specific) tolls.
Many studies have been conducted on the implications of the problem of
heterogeneity and pricing. The topics range from heterogeneity in drivers’ values of
time and trip-timing preferences to the heterogeneity in travel speed. Another example
of a study that is of interest here is that of Verhoef and Small (2004), who consider a
differentiation of tolls across parallel traffic lanes by using a static model. They show
that an anonymous toll may still be optimal on each lane separately, and efficient
segregation of drivers is achieved without regulation. It should be noted that the extra
gains are rather small, so that a second-best single toll applied to the entire highway
does not impose much of a welfare loss. Optimal anonymous tolling may entail
segregation of vehicle or driver types onto separate routes.
Interactions with other sectors
Imperfections in other sectors of the economy have consequences for second-best
optimal pricing of transport services. Modelling the transport sector typically assumes
that the rest of the economy operates under first-best conditions. Although applied
with the aim of simplifying the modelling exercise, it is not very realistic. For
example, the existence of distortionary taxes on other markets (especially the labour
market) and income distribution (which might be suboptimal) can be motivated by
governmental objectives but have implications for pricing in transport. Intersectoral
issues matter because transport pricing interacts with other markets that may be
strongly distorted.
The existing literature on intersectoral issues shows their importance for optimal
pricing: they are almost always relevant (MC-ICAM, 2002). The most relevant
relation is with the labour market, which is heavily distorted: labour taxes exist
mainly because the government needs revenues and for equity reasons, but strongly
distort the labour-leisure choice. This implies that, whenever there is a reform in
transport prices, the effect on the labour market distortion should be taken into
account. Moreover, since distributional objectives can hardly be achieved by using
distortionary labour taxes alone, the distributional concern will almost always be
relevant in transport pricing.
In this context, the spending of revenues from pricing schemes is also important for
the overall success of the measure. These revenues might be used to subsidise public
transport, but also to reduce labour taxes, to increase government spending on other
services, and so on. The effects for other sectors should not be neglected when
looking at the effects of pricing. Parry and Bento (1999), for instance, show that the
general equilibrium effects of road pricing schemes are sensitive to the spending of
revenues, and may deviate considerably from partial equilibrium outcomes. This may
have important implications for gaining social acceptance for congestion pricing
schemes.
2.6 Conclusions
This chapter has aimed to give an overview of the economics of transport pricing and
provide a basic understanding of the fundamental issues in transport pricing. It
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