Tolling the Freeway: Congestion Pricing and the Economics of Managing Traffic

Abstract

will manually Highway congestion increases the cost of travel in most urban areas of the United States. Policy makers have tried to reduce congestion by building more highways and mass transit. This approach is expensive and has generally failed to put a significant dent in congestion. Long commute times cost the United States an estimated $121 billion in 2012. This paper examines the economics of highway congestion pricing. Its goal is to make clear to policy makers how a variable congestion toll can reduce congestion and improve the operation of urban highway systems. Failure to charge a toll in order to use a highway can lead to congestion at certain times of the day. Additional drivers entering the freeway at some point slow traffic, which imposes an externality or cost on other highway users. The result is an inefficient use of the highway and too much infrastructure investment. The congestion externality can be corrected by a congestion toll that varies with the level of traffic. There are concerns that gasoline and congestion taxes are regressive. Many factors, such as the proximity of residential communities to jobs, can influence this outcome. Also, the use to which the tax revenues are put determines the degree a tax is regressive or progressive. The evidence is mixed with respect to congestion tolls. In order to better understand how congestion pricing might be implemented in the United States, cases where variable highway pricing systems have been used are analyzed. The evidence indicates congestion tolls reduce congestion and increase driving speeds. These cases provide examples of how congestion pricing might be implemented in the United States. To encourage and facilitate the adoption of congestion pricing in the United States, congestion tolls should be made legal on all interstate highways. They could stand alone or be part of a vehicle-miles-traveled tax. While both types of taxes provide revenues and influence traffic, the congestion toll has a bigger impact on improving highway efficiency as it directly addresses peak congestion. Advances in technology have lowered the transaction costs of collecting tolls, eliminating a barrier to adoption. Experience with congestion tolling improves the public perception and willingness to accept highway tolls. One tactic that has been successful is to follow a pricing experiment with a referendum on whether the system should be made permanent. The private sector’s role in building and managing roads can be increased to improve highways in the United States. The private sector offers a source of capital to expand the highway system. An advantage of private ownership is that it creates incentives for efficient management.