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Chapter 5 | Determining the charges

Target speeds

When confronted by the challenge of determining the optimal congestion charges,

road authorities typically set target speeds, and charges are then calculated to achieve

those target speeds. Based on the historical average traffic speed, a target speed of 20

kilometres per hour was adopted for the model tests in Hong Kong. Charges under

the test target speed range from $HK8 to $HK31 depending on the period of the day

and the traffic demand growth scenarios (Hong Kong Transport Department 2001,

p. 5). All travel models have default values of travel time. However, the efficiency gains

from the charges will depend, in part, on the accuracy of these travel times. Based

on the assumption that average travel speeds of at least 45 miles per hour should be

maintained in the managed lanes, and optimising toll rates to achieve or exceed this

mobility standard, the model delivered recommended tolls (Georgia State Road and

Tollway Authority 2006, p. ES5).

5.5 Second-best charges

Under certain assumptions, ensuring road users face the marginal social cost of road

use will maximise community welfare. However, if these assumptions do not hold,

then research suggests that such an approach may not be optimal: applying firstbest

pricing principles could be detrimental to community welfare. Informationallydemanding,

second-best charges, may be preferable. 81

However, when the information needed to calculate second-best charging is not

available, it will be difficult to ensure that a pricing structure will improve community

welfare—as explained by Rouwendal, et al. (2002):

In many second-best circumstances, optimal prices are close to marginal costs, and

then the first-best rule provides a reasonable guide to policy implementation. However,

this is not always the case and there exist examples of second-best situations in which

first-best pricing would be harmful. An important finding of the work reported in

this deliverable is that the difference between the truly optimal second-best prices

and marginal costs often depends on the details of the situation under consideration

(Rouwendal, et al. p. i).

However, in reality, there appears to be less focus on determining the ‘right’ level of

charges and more on ‘what the market can bear’. 82 Hence, it is not surprising that the

distinction between charges and taxes is often blurred and that road authorities may

be driven to maximise toll revenue rather than to maximise community welfare (as

measured by improvements in allocative efficiency).

Both the structure and level of the charge that maximises revenue is likely to be

significantly different from that which maximises community welfare. de Palma,

Lindsey and Proost (2005) showed that time-varying step toll charges will generate

higher (as much as twice as high) welfare gains but less revenue, compared with flat

tolls.

81. Verhoef and Small (1999) showed that for second-best pricing it is important to know the distribution of values of

time, the level of external costs, the demand and cost elasticities and the distribution of values of time.

82. For instance, in preparation for congestion charging few authorities reveal concern over the possibility that they will

choose the wrong charges and, by doing so, worsen rather than improve the situation.

109

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