Edited by André de Palma, Robin Lindsey, Emile Quinet and Roger Vickerman
Georgina Santos and Erik Verhoef CONGESTION PRICING: AN INTRODUCTION Road pricing has long been viewed as a potentially efficient instrument for dealing with traffic congestion. In 1920, Arthur Pigou used the example of a congested road to explain the economics of external effects, and in particular how a corrective tax can be used to restore efficiency when some goods are not optimally priced at marginal cost. For a congested road, that particular ‘good’ is other users’ travel time (losses), the value of which is not taken into account by individual users when trading off the benefits and costs of making a trip. In this chapter, we will briefly review some of the economic theory of road congestion pricing, as well as some of its practical applications. Indeed, growing traffic congestion around the globe and rapid advances in automated vehicle identification has turned road pricing from a largely academic curiosity to a realistic instrument for modern urban transport policy. Figure 23.1 gives the standard exposition of Pigou’s theory as it appears in practically all modern transport economics textbooks (Pigou himself did not provide a graphical exposition of the problem). It considers a single congested road, with identical users. The horizontal axis represents traffic volume, V, while the vertical axis covers the price dimension. The downward-sloping line d depicts the inverse demand function, the upward sloping curve c is average user cost and mc is marginal social cost. Average cost rises when a higher traffic flow implies a lower speed. Marginal cost...
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