Transport Economics: Analysis of Road Pricing, Congestion, and Policy

This report provides a comprehensive analysis of transport economics, with a specific focus on road pricing strategies, congestion management, and their policy implications. It begins by introducing the concept of road pricing, drawing upon Pigou's theory of externalities and marginal-cost pricing to understand the economic rationale behind it. The report then delves into the analysis of road pricing, discussing its objectives such as revenue generation and congestion reduction, as well as various forms like congestion pricing and road tolls. It explores the benefits of road pricing, including reduced congestion, improved time management, and environmental benefits, while also acknowledging limitations such as administrative costs and potential inequalities. The report uses a case study of a highway in a city and discusses the issues faced by Mr. Jones. The report also discusses the implications of building a new highway, which has been opposed by environmental groups. The report incorporates relevant academic references to support its arguments and provides a well-rounded understanding of transport economics.

Running head: TRANSPORT ECONOMICS
Transport Economics
Name of the student
Name of the university
Author Note

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Table of Contents
Introduction:...............................................................................................................................2
Concept of road pricing given by Pigou:...................................................................................2
Analysis on road pricing and its implications:...........................................................................3
Objectives related with road pricing:.........................................................................................4
Various forms of road pricing:...................................................................................................5
Benefits obtaining from Road Pricing:......................................................................................5
Limitations regarding Road Pricing:..........................................................................................6
Conclusion:................................................................................................................................6
References:.................................................................................................................................7

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Introduction:
Road pricing implies the practice to charge certain amount on road use in the form of
toll taxes, fees depending on distance, congestion charges and charges to restrict use of some
specific sources. The chief focus of these charges is to generate revenue, which in turn can
help the government to invest in road reconstruction or to control increasing transportation
demand for managing peak hour travel along with traffic congestion (Brent and Gross 2018).
Through charging road pricing, the government can also control negative externalities that
could affect a society, economy and environmental condition adversely. To understand the
concept of road pricing, this section intends to focus on the related theory, introduced by
Pigou, along with some relevant advantages and disadvantages that other academicians and
regulators have stated.
Concept of road pricing given by Pigou:
Initially, Pigou provided the concept of road pricing considering externalities and
charging for optimal congestion based on a congested road. The basic concept of this theory
is to apply a price related mechanism that already has been imposed in other parts of the
market economy (Caggiani, Camporeale and Ottomanelli 2017). During the time of higher
congestion, the amount of charging price needs to be high while the opposite situations can
also occur during less congested time for declining excessive uses of roads on some particular
areas. Hence, it is essential to choose and charge appropriate price level through a simple way
within a complicated socio-economic and technical situations. The entire concept follows the
theories of negative externalities and Pigouvian tax with the help of which the government
could determine the amount of road pricing (Runhaar 2017). Pigou and his followers adopted
the concept of marginal-cost pricing considering the demand and supply curves, based on a
standard situation for maintaining traffic on a congested road.

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Figure 1: Road Pricing
Source: ( created by author)
However, the road pricing strategy of Pigou took enough time to apply in city due to
some economical and social reasons. Hence, the following sections conduct a brief analysis
on the road pricing long with its applications.
Analysis on road pricing and its implications:
According to researchers, road pricing is the policy, imposed directly on the drivers,
who use road for reducing the road congestion, which in turn have generated significant
amount of revenue. Hence, according to the practitioners of transportation, the concept of
road pricing is considered as potential one that can further help citizens of city or country to
obtain comparatively better transportation service (Zhu, Jiang and Lo 2018). This strategy has
some positive implications on drivers and society though it is also observed that practical
implementation of this theory is very limited due to several constraints. The first constrain is
related with political issue while other problem deals with public opinion. Road pricing can

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be considered as a serious but sensitive issue and for this; a committed as well as strong
political base is required for undertaking such revolutionary policies. As the strategy
possesses huge possibility to experience either success or failure, risk aversion policy makers
may not intend to implement this specified strategy practically (Tikoudis, Verhoef and van
Ommeren 2018). Moreover, public opinion also plays a vital to role regarding imposition of
such strategy, as this can adversely affect living standard of many people, belonging to
different income group. According some people, this process falls under the process of
“double taxation” and consequently free riders would refuse this idea of road pricing. In this
context, researchers, public officials and policy makers could provide proper vision to public
for implementing and promoting the road pricing strategy.
Objectives related with road pricing:
The concept of road pricing follows two chief objectives related to revenue generation
and management of congestion. Some other objectives related to this policy are reduction of
carbon emission from transport, maximisation of social welfare and promote public transport
through reducing the uses of private vehicles. The policy also focuses on management of
land. In rural areas, the government could follow its revenue-generating objective for roads
that do not possess significant demand or do not enjoy other possible alternatives. This
objective is also followed for some congested roads in urban areas. The government invested
this revenue for completing any roadway project. Congestion management also plays a
significant role road pricing strategy, as it can reduce the number of vehicles during peak
hour for managing traffic and encouraging people to use public vehicles. This system further
can incentivize passengers and drivers to obtain comparatively better trip and this can
improve the entire transportation system significantly. Revenues, obtaining from this service,
are spent on various purposes so that congestion in road can be reduced effectively.

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Various forms of road pricing:
Congestion pricing: Through this process, the government reduces the volume of vehicles on
roads during peak-period. In this context, the government charges certain amount of money
from the road users (Serrano-Hernández et al. 2017.). Road is a public goods and users pay
for using it and for creating negative externalities, which increases social costs. Social cost
increases when marginal social cost exceeds marginal private cost. Social cost can be reduced
by charging congestion pricing.
Road tolls: With the help of this form, the government generates revenue for future funding
of road improvements that falls under the package of transportation funding (Basar and Cetin
2017). This is considered as fee of service that the government provides to its citizens. This
time of fees are implemented at a particular point, for instance, at a bridge or a tunnel. In this
situation, tollbooths use the system of Electronic Road Pricing (ERP).
Benefits obtaining from Road Pricing:
Road pricing or congestion pricing have various advantages, as this system can reduce
stress and delays of drivers and passengers through providing quality services in terms of
time management and allowing more passengers to travel during the peak time. This system
helps state and local governments to develop transportation system without levying or
increasing any tax (Ison 2017). Uninterrupted vehicle service can influence business
organisations to transact goods and other factors of inputs from one place to another within a
short period of time and at a faster rate, which in turn can help a business organisation to
experience robust growth. Moreover, due to higher congestion price or tolls, the number of
vehicles can be reduced even at the time of peak and this consequence further can reduce the
amount carbon emission within environment (Coria et al. 2015).

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Limitations regarding Road Pricing:
The road pricing strategy also has some limitations as it generates administration cots,
inequality and evasion. For collecting tolls and other charges on vehicles, the government
needs to pay some costs for its employees and for making centres to collect tolls at various
places (Bigazzi and Mohamed 2017). Moreover, this system generates inequality among
people, as it possesses regressive nature for which people with lower income plays
comparatively higher percentage of their income. This system also forces people to obtain
illegal way to avoid excess burden of money that the government imposes on passengers for
using some specific roads.
Conclusion:
Thus, the entire section has discussed about road pricing strategy by providing a
special emphasis on the pricing strategy given by Pigou. According his analysis, marginal
social cost can reduce further if the government imposes marginal social cost and by equating
marginal benefit with marginal cost, the government can obtain the amount of price that it
could charge on people for using certain roads. After analysing this concept, the paper has
analysed on various applications related to road pricing along with its main objectives that
entirely focuses on revenue generation and traffic management. Moreover, the report has also
discussed on various advantages and disadvantages as well.

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References:
Basar, G. and Cetin, M., 2017. Auction-based tolling systems in a connected and automated
vehicles environment: Public opinion and implications for toll revenue and capacity
utilization. Transportation Research Part C: Emerging Technologies, 81, pp.268-285.
Bigazzi, A.Y. and Mohamed, A., 2017. Motivation and implementation of traffic
management strategies to reduce motor vehicle emissions in Canadian cities. Canadian
Journal of Civil Engineering, 45(4), pp.241-247.
Brent, D.A. and Gross, A., 2018. Dynamic road pricing and the value of time and
reliability. Journal of Regional Science, 58(2), pp.330-349.
Caggiani, L., Camporeale, R. and Ottomanelli, M., 2017. Planning and design of equitable
free-floating bike-sharing systems implementing a road pricing strategy. Journal of Advanced
Transportation, 2017.
Coria, J., Bonilla, J., Grundström, M. and Pleijel, H., 2015. Air pollution dynamics and the
need for temporally differentiated road pricing. Transportation Research Part A: Policy and
Practice, 75, pp.178-195.
Ison, S., 2017. Road user charging: issues and policies. Routledge.
Runhaar, H., 2017. Efficient pricing in transport. European Journal of Transport and
Infrastructure Research, 1(1), pp.29-44.
Serrano-Hernández, A., Álvarez, P., Lerga, I., Reyes-Rubiano, L. and Faulin, J., 2017.
Pricing and Internalizing Noise Externalities in Road Freight Transportation. Transportation
Research Procedia, 27, pp.325-332.
Tikoudis, I., Verhoef, E.T. and van Ommeren, J.N., 2018. Second-best urban tolls in a
monocentric city with housing market regulations. Transportation Research Part B:
Methodological, 117, pp.342-359.

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Zhu, S., Jiang, G. and Lo, H.K., 2018. Capturing value of reliability through road pricing in
congested traffic under uncertainty. Transportation Research Part C: Emerging
Technologies, 94, pp.236-249.