A Practical Rule for a Benefit Maximizing Toll

Abstract

The standard economist’s prescription for the benefit maximising toll for a congested urban road is to set the price equal to the marginal social cost implying a toll equal to the externality imposed by the marginal vehicle. This prescription has a theoretical solution, but its practical application requires knowledge of the values of time of all travellers and the shape of the supply and demand curves, making it of little practical value. An alternative approach (used in setting tolls in Singapore for example) is to adjust the toll to achieve the maximum sustainable traffic flow. This paper investigates the potential loss in efficiency in adopting flow maximisation as the objective. The paper demonstrates the circumstances under which flow maximising would approximate the theoretical optimum and suggests a tolling system that could be used to provide economically efficient congestion pricing.