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InTransition Magazine : Transportation Planning, Practice & Progress

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Try It, You'll Like It

Congestion Pricing Made Simple

By David H. Bernstein

It is difficult to understand why there is still such controversy about congestion pricing. After all, it's been around for ages. Telephone companies have used congestion pricing for decades. They call it "off peak discounts" or "Sundays Free." Electric companies, a number of mass transit systems, and recently a few toll authorities have used it with great success.

Congestion pricing is not a panacea, but it can influence the number of people who travel and the choice of travel mode, origin, destination, route and departure time.

An Example of Congestion Pricing

Imagine the following situation. There is only one movie theater in your town. On Friday and Saturday nights it has one show at 5 p.m. and another at 7 p.m., and charges $7 per ticket. The town is growing and, as a result, the lines at the three ticket windows for the 7 p.m. show are getting unbearable.

Congestion pricing to the rescue!

Your local movie theater uses congestion pricing.

The theater starts offering an early matinee discount. In other words, it charges $3 for the 5 p.m. show. Some people decide that, while they used to prefer the 7 p.m. show, they are happier saving $4 and going to the 5 p.m. show. The people that continue to go to the 7 p.m. show are also happy because the lines are shorter. Everyone's happy!

A few months later, a new housing development brings even more people into town and the lines for the 7 p.m. show start to grow again. Congestion pricing comes to the rescue once more, only in a different way.

Instead of charging $7 at all three windows, the theater starts charging $5 at window one, $7 at window two, and $9 at window three. Guess what happens?

The people who really hate to wait in line use the $9 window. They pay more but wait less. The people who don't care about lines use the $5 window. They wait more, but pay less (and still get to see the 7 p.m. show). Everybody else uses the $7 window. But, since some people have started using the $9 and $5 windows, they don't have to wait as long as they did before. Again, everybody's happy!

Allocating Resources

The U.S. has a market economy. That is, resources are distributed based on their monetary price, and prices are set in the market based on supply and demand. Things that are available in limited quantity (relative to demand) command a high price, while things that are plentiful (again, relative to demand) command a low price. In many cases, market economies allocate resources quite well.

Unfortunately, sometimes market economies do not work very well. In particular, they do not work well when all of the costs of a production process are not internalized. For example, consider a company that dumps large amounts of industrial waste in a river. If the company does not pay to dump waste in the river, it will tend to over-produce.

Congestion as an External Cost

Costs that are not internalized are called, not surprisingly, external costs. There are many kinds of external costs, and they can arise in suprising ways.

Imagine that you are waiting in line with 99 other people to receive a free pen. Suddenly, a man breaks in at the front of the line. What does that man pay for the pen? Nothing! (Well, maybe he gets beaten up, but let's ignore that possibility.) What does society pay? Assuming that it takes 1 minute for him to get his pen. That's a pretty substantial cost.

Internalizing the External Costs

Congestion pricing is necessary because it helps internalize this kind of external cost. Again, an example will help to illustrate this point.

Not long ago, I was at the head of the check-out line in a local supermarket. Ten people were behind me. There was only one cashier working and I had a full shopping cart. I turned to the ten people behind me and said that for $2 I would be willing to get out of line and let them all advance one spot.

At first they were all flabbergasted. Then they realized that it would only cost each of them 20 cents to get me out of line and reduce their wait. They each happily gave me the 20 cents. I was happy because I had my $2 and they were happy because they all had a shorter wait.

All of us would have been worse off if I had not come up with a way to internalize the externality.

On the Road Again

What does any of this have to do with transportation? Road capacity is usually "priced" only according to the time spent waiting. That is, the only "price" you normally pay to use a road is travel time. When more people use a road the travel time goes up.

Unfortunately, there are externalities. That is, the "price" that you pay (i.e., your travel time) does not include all of the costs that society incurs. As a result, road capacity is not allocated efficiently when time is the only "pricing" mechanism.

The idea behind congestion pricing is to use tolls to help internalize the external costs. In other words, the objective of congestion pricing is to use tolls to help allocate scarce road capacity more efficiently.

Congestion pricing allows some people to pay others to change their behavior. In the shopping example, the transaction was direct – they literally paid me to get out of line. In the movie theater example, the transaction was indirec t– the people who were willing to pay $9 for the fast window were, in essence, paying some people to wait in line at the $5 window. In transportation, the transaction also has to be indirect; the government helps out by charging different tolls on diferent facilities at different times of day.

In all cases the result is the same, external costs are internalized and resources are allocated more efficiently.

Making it Work

Of course, congestion pricing can only work if it is marketed properly. Off-peak discounts sound much better than peak-period premiums. (Just like a discount for cash purchases sounds better than a premium for credit card purchases.)

In addition, congestion pricing can work only if the government is sensitive to public opinion. In the supermarket example, imagine what would have happened if the store had announced that it was going to charge each of the 10 people behind me 20 cents to check out and pay me $2 to wait.

California State Route 91

It is pretty clear that congestion pricing can be made to work. Just take a look at SR91 in California.

California State Route 91 (SR91) is a privately built and operated 4-lane single highway section located on the median of an 8-lane public freeway in Orange County. SR91 toll charges are based upon the congestion on the adjacent freeway. The longer the delay on the freeway, the higher the SR91 toll.

After the first year of revenue service in 1995, 80,000 customers obtained transponders to access SR 91. A subsequent study done at Cal Poly suggests that the time saved by using SR 91 instead of the freeway was more valuable to motorists than the toll fee.

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