Towards marginal cost pricing: A comparison of alternative pricing systems

Abstract

European urban areas are marred by the problems of congestion and environmental degradation due to the prevailing levels of car use. Strong arguments have thus been put forward in support of a policy based on marginal cost pricing (European Commission 1996). Such policy measures – which would force private consumers to pay for a public service that was previously provided "for free" – are, however, notoriously unpopular with the general public and hence also with their elected representatives – the politicians. There is thus an obvious tension between economic theory, which suggests that marginal cost pricing is the welfare maximising solution to urban transport problems, and practical experience, which suggests that such pricing measures are unwanted by the affected population and hence hard to implement through democratic processes. The AFFORD Project for the European Commission has aimed to investigate this paradox and its possible solutions, through a combination of economic analysis, predictive modelling, attitudinal surveys, and an assessment of fiscal and financial measures within a number of case study cities in Europe. In this paper the methodology and results obtained for the Edinburgh case study are reported in detail. The study analyses alternative road pricing instruments and compares their performance against the theoretical first best situation. It discusses the effect of coverage, location, charging mechanism and interaction with other instruments. The paper shows that limited coverage in one mode may lead to a deviation from the user pays principle in other modes, that location is as important as charge levels and that assumptions about the use of revenues are critical in determining the effect on equity and acceptability. Finally the results show that a relatively simple smart card system can come close to providing the economic first best solution, but that this result should be viewed in the context of the model assumptions.