Equity Effects of Road Pricing: A Review

Abstract

Are road pricing strategies regressive or progressive? This is a question that has been confronting researchers, practitioners, and policy‐makers who seek to implement new mechanisms to raise funds for transportation while simultaneously managing demand. The theoretical literature is mixed, as is the empirical literature. In part, this has to do with the various types of road pricing strategies that are being debated, different definitions of equity, and alternative assumptions about revenue recycling. Despite this seeming complexity, the literature is clear that equity issues are addressable. This paper provides a synthesis of the literature to date on both the theory of equity, as applied to road pricing, and the findings of empirical and simulation studies of the effects of particular implementations of road pricing, and suggested remedies for real or perceived inequities. To summarize, while there are certainly potential issues with equity associated with road pricing, those issues can be addressed with intelligent mechanism design that provides the right incentives to travellers and uses the raised revenues in a way to achieve desired equitable ends. These include cutting other taxes and investing in infrastructure and services.

Acknowledgements

This research was conducted for Cambridge Systematics as part of the Moving Cooler Project, sponsored by American Association of State Highway and Transportation Officials (AASHTO), American Public Transportation Association (APTA), Environmental Defense Fund (EDF), Federal Highway Administration (FHWA), Federal Transit Administration (FTA), Intelligent Transportation Society of America (ITSA), Natural Resources Defense Council (NRDC), Rockefeller Foundation (Rockefeller), Shell Oil (Shell‐USA), Surdna Foundation (Surdna) and the Urban Land Institute (ULI). The author thanks, in particular, Bill Cowart and Arlee Reno, and the comments of three anonymous reviewers. The author is solely responsible for the work.

Notes

1. Though gasoline consumption is a good proxy for carbon emissions, it ties less perfectly with other pollutants, and more importantly is not correlated with the health damages which depend on where the fuel is burned and the rate of intake of those pollutants.

2. Levinson (2000, 2001) examined the issue of using tolls as a form of tax exporting. By placing tolls at boundaries, jurisdictions can ensure that out‐of‐jurisdiction (e.g. out‐of‐state) residents pay for their use of the road, and perhaps more than their fair share, in contrast to a system of gas taxes where out‐of‐jurisdiction residents may never pay their costs (if they buy gas where they live rather than where they drive) and would instead free ride on the road system.

3. The development of first‐best pricing is generally credited to (Pigou, 1912), who argues that resources can be most efficiently allocated by setting the price equal to the social marginal cost. This argument depends on a number of assumptions, many of which either don’t hold or are difficult to ensure in practice, leading to the development of second‐best pricing strategies.

4. Pigou did not deal with dynamics of charging across a period of time, which awaited the development of Vickrey’s bottleneck model (Vickrey, 1965; Arnott et al., 1993). Xin and Levinson (2006) distinguishes between omniscient pricing (where the toll operator knows both schedule delay penalties and desired arrival times) and observable pricing (where the toll operator can observe only delay). It is the latter which is more realistic given information availability, but it may not fully account for individual preferences, and has a slightly lower welfare than omniscient pricing if arrivals are stochastic.

5. These annual reports can be downloaded from the TfL webpage at http://www.tfl.gov.uk/roadusers/congestioncharging/6722.aspx.

6. The origin of the term ‘Lexus lane’ is unclear, but a brief article on the subject can be found at Toll Road News: http://www.tollroadsnews.com/node/2143, attributing the term to Seattle‐based HOV advocate Heidi Stamm.

7. The 1997 Federal Highway Cost Allocation Study found that because heavy vehicles impose road damage disproportionate to their fuel taxes, they underpay compared to other classes of vehicles, and are thus cross‐subsidized (Forkenbrock, 2005).

8. One might speculate that policies like road pricing may result in attitudinal and behavioural changes embodied in decisions not to travel, or to travel less, thereby changing the shape of the demand curve for travel, and so less travel might not be a bad for those travellers; those speculated outcomes have yet to be observed.

9. Ramsey pricing charges users in proportion to willingness to pay, using price discrimination to differentiate customers by their elasticity of demand, constrained to recover some amount of money.

10. Bundling ensures that not only is there a net benefit (when all projects are considered together), the number of winners exceeds the number of losers by a significant amount.