Marginal Social Cost Pricing Research Articles

L’économie portuaire en quête d’une audience : les péripéties publiques de la tarification portuaire au coût marginal social, 1870–2000

Economics and its sub-disciplines often developed in close relationship with its audiences. This paper examines the public life of one particular case, the idea of marginal social cost pricing for ports, by highlighting two key episodes. The first episode was the emergence of port pricing in the 1970s, when the academic concept found a willing ear at international organisations such as the World Bank. The idea of marginal cost pricing for ports replaced the then prevailing principle in port policy of national public interest, with the principle of economic efficiency. The second episode was the eager adoption of the idea of marginal social cost pricing for ports by the European Commission in the 1990s. Along the way, from the 1970s to the late 1990s, the relation between economics and its audience appears to have undergone a dramatic shift. In the earlier episode, academic economists took the lead finding only a receptive audience with international organisations. In the 1990s, by contrast, one such international organization, the European Union, took the lead in advancing the idea of marginal social cost pricing, pushing economists into the role of either intellectual defender or critical observer. The insights from this particular history may be useful to obtain a better understanding of the role of applied economics in the micropolitics of the various waves of deregulation, liberalization, and privatization that swept the world since 1970.

Benefits and Costs of Autonomous Trucks and Cars

Autonomous vehicles are currently developed, and are expected to be introduced gradually. Society needs a basis for decisions regarding market interventions. This study identifies, quantifies and values the benefits and costs of autonomous trucks and cars considering generalized costs, external effects and social marginal cost pricing to consumers with Swedish data. The results show that the greatest benefits are saved driver costs for trucks and decreased travel time costs for car drivers. In the example calculations, capital costs may increase by 22 percent for cars and 36 percent for trucks for benefits to exceed costs in 2025. Subsidies are not needed since the producers and consumers get the major benefits and pay the costs.

Environmental rail charges in Europe: a review

ABSTRACTEuropean legislation implies the use of marginal social cost pricing in rail access charges levied on rail operators. Thus, they may include specific environmental charges to internalise the impacts of rail transport. However, when applying these principles in practice, several difficulties call for second-best settings adapted to the particularities of the rail market. In this context, few European railway administrations are already implementing rail access charges with an environmental dimension. This paper reviews the literature on the issue and assesses the current European experience in noise and air pollution rail charges. For this purpose, an analytical framework is built on the definition of four basic dimensions: charging approach, allocation of abatement efforts, degree of differentiation and intermodal approach. The qualitative examination of the existing systems suggests that the level of environmental surcharges can be generally increased given the low substitutability between rail and road and that the range of abatement possibilities should be enlarged by further differentiating charges. It is also found that the pricing scope should be adapted to achieve particular cost-efficient allocations of abatement efforts among rail operators and upstream agents. Finally, further research requirements for a quantitative assessment are defined.

The correlation of externalities in marginal cost pricing: lessons learned from a real-world case study

Negative externalities cause inefficiencies in the allocation of capacities and resources in a transport system. Marginal social cost pricing allows to correct for these inefficiencies in a simulation environment and to derive real-world policy recommendations. In this context, it has been shown for analytical models considering more than one externality, that the correlation between the externalities needs to be taken into account. Typically, in order to avoid overpricing, this is performed by introducing correction factors which capture the correlation effect. However, the correlation structure between, say, emission and congestion externalities changes for every congested facility over time of day. This makes it close to impossible to calculate the factors analytically for large-scale systems. Hence, this paper presents a simulation-based approach to calculate and internalize the correct dynamic price levels for both externalities simultaneously. For a real-world case study, it is shown that the iterative calculation of prices based on cost estimates from the literature allows to identify the amplitude of the correlation between the two externalities under consideration: for the urban travelers of the case study, emission toll levels—without pricing congestion—turn out to be 4.0% too high in peak hours and 2.8% too high in off-peak hours. In contrary, congestion toll levels—without pricing emissions—are overestimated by 3.0% in peak hours and by 7.2% in off-peak hours. With a joint pricing policy of both externalities, the paper shows that the approach is capable to determine the amplitude of the necessary correction factors for large-scale systems. It also provides the corrected average toll levels per vehicle kilometer for peak and off-peak hours for the case study under consideration: again, for urban travelers, the correct price level for emission and congestion externalities amounts approximately to 38 $${EUR}ct/\rm {km}$$ in peak hours and to 30 $${EUR}ct/\rm {km}$$ in off-peak hours. These toll levels can be used to derive real-world pricing schemes. Finally, the economic assessment indicators for the joint pricing policy provided in the paper allow to compare other policies to this benchmark state of the transport system.

Tolled multi-class traffic equilibria and toll sensitivities

We review properties of tolled equilibria in road networks, with users differing in their time values, and study corresponding sensitivities of equilibrium link flows w.r.t. tolls. Possible applications include modeling of individual travellers that have different trip purposes (e.g. work, business, leisure, etc.) and therefore perceive the relation between travel time and monetary cost in dissimilar ways. The typical objective is to reduce the total value of travel time (TVT) over all users. For first best congestion pricing, where all links in the network can be tolled, the solution can be internalized through marginal social cost (MSC) pricing. The MSC equilibrium typically has to be implemented through fixed tolls. The MSC as well as the fixed-toll equilibrium problems can be stated as optimization problems, which in general are convex in the fixed-toll case and non-convex in the MSC case. Thus, there may be several MSC equilibria. Second-best congestion pricing, where one only tolls a subset of the links, is much more complex, and equilibrium flows, times and TVT are not in general differentiable w.r.t. tolls in sub-routes used by several classes. For generic tolls, where the sets of shortest paths are stable, we show how to compute Jacobians (w.r.t positive tolls) of link flows and times as well as of the TVT. This can be used in descent schemes to find tolls that minimize the TVT at least locally. We further show that a condition of independent equilibrium cycles, together with a natural extension of the single class regularity condition of strict complementarity, leads to genericity, and hence existence of said Jacobians.

Optimal toll locations and toll levels in congestion pricing schemes: a case study of Stockholm

As congestion pricing has moved from theoretical ideas in the literature to real-world implementation, the need for decision support when designing pricing schemes has become evident. This paper deals with the problem of finding optimal toll levels and locations in a road traffic network and presents a case study of Stockholm. The optimisation problem of finding optimal toll levels, given a predetermined cordon, and the problem of finding both optimal toll locations and levels are presented, and previously developed heuristics are used for solving these problems. For the Stockholm case study, the possible welfare gains of optimising toll levels in the current cordon and optimising both toll locations and their corresponding toll levels are evaluated. It is shown that by tuning the toll levels in the current congestion pricing cordon used in Stockholm, the welfare gain can be increased significantly, and furthermore improved by allowing a toll on a major bypass highway. It is also shown that, by optimising both toll locations and levels, a congestion pricing scheme with welfare gain close to what can be achieved by marginal social cost pricing can be designed with tolls being located on only a quarter of the tollable links.

Transport pricing and Public-Private Partnerships in theory: Issues and Suggestions

This chapter offers a theoretical examination of the following questions: what are the issues that arise when Social Marginal Cost Pricing is to be incorporated in Public-Private Partnerships (PPPs); and how may these issues be dealt with? We first briefly discuss Public-Private Partnerships in transport: what are the defining characteristics and what are the main types that exist in the different modes of transport? Next we consider the economics of Public-Private Partnerships, in particular from the viewpoint of incentives. Subsequently we identify and examine the issues that arise when Social Marginal Cost Pricing is to be incorporated in PPPs as a regulation with regard to pricing in the transport sector. Lastly, we investigate the possibilities of resolving these issues.

Applying social marginal cost pricing in rail PPPs: Present state, drawbacks and ways forward

The application of social marginal cost pricing (SMCP) in PPP's in the railway sector faces several challenges. We examine in detail the practical applicability of SMCP in railway PPPs from the perspectives of cost accounting and effectiveness of SMCP towards the allocative efficiency goal, addressing the likely drawbacks in conciliating the welfare objectives of SMCP with the objectives of project financing (cost recovery) and value for money that justify the realization of PPP's. To this end, we combine theoretical analysis with the observation of empirical results of a case study. We split the analysis per type of private service provision, which can be for service operation or infrastructure management. For infrastructure management, we recommend splitting the operator remuneration and the track access charges. For service operation, we argue that the correct decision on source of funding of the service operator should depend on the characteristics of the contract.

Social marginal cost pricing and second best alternatives in partnerships for transport infrastructures

According to the economic theory, if all the first-best conditions are met, social optimality involves the prices to be set equal to social marginal costs. When it is not possible to set prices equal to social marginal costs, due to the presence of constraints within the transport sector or distortions elsewhere in the economy, the theory suggests corrections to the SMC principle (second-best alternatives). But the implementation of second best alternatives can give rise to serious problems when transferred from theory to practice. This chapter will discuss in particular the problems that might rise when investment cost are included (totally or partially) in the social marginal costs rules, and in particular when private operators are involved.

The cost of second best pricing and the value of risk premium

Private provision of public infrastructure (PPP) is meant to give incentives to increased efficiency in construction as well in operation and maintenance of the infrastructure e.g. within the transport sector. Efficiency is not only (private) economic efficiency, but also social efficiency e.g. social marginal cost pricing of use of the infrastructure. Is it possible to design contracts concerning payment mechanisms and financial instruments for transport infrastructure that will stimulate social efficiency and optimal allocation of risks between parties? The paper discusses whether different targets can be met and whether compromises may lead to acceptable second best solutions. PPP implies an opportunity to let the user-payment give desired incentives in the form of Social Marginal Cost Pricing (SMCP). A PPP project is a set of contracts and agreements between several parties, including the Government, the private contractor, subcontractors, banks and infrastructure users. These contracts should be designed to give the right incentives to the parties to achieve optimal risk allocation and utilising of resources. Long contract-periods are a common feature of PPPs. The paper examines the way that financial solutions should be designed to achieve the goals for the PPP-projects concerning economic and social efficiency. The expected size and variation of the income stream from the project will influence the loan conditions offered by banks concerning interest rates, guarantees and repayment and also the ability to attract investors. The balance between equity and loans again influences the conditions of the loans. An additional problem is asymmetric information between parties. The private contractor usually knows more about the task than the Government (hidden knowledge), and the Government cannot have full knowledge of the efforts of the contractor (hidden actions).

Violation or strengthening of the self-financing doctrine at international airports by SMCP funded PPP schemes?

International airports are among the few examples of transport infrastructures which can well achieve self-financing. The growing interest of private companies in airport construction and operation is the visible testimony to this fact. However, the financing structures of airports are complex, involving not only traffic, passenger and goods handling, but also non-aviation services, such as retail, car parking or intermodal facilities. The integration of social marginal cost pricing schemes into this organizational structure according to the strategic plans of the European Commission, however, is challenging. This paper investigates whether they comply with a second strategic policy objective at European and national level, which is to foster public–private partnerships (PPPs) in transport financing in terms of full cost coverage, risks and incentives. The cases analysed in this paper deal with two sites with very different characteristics: Munich Airport which has been publicly operated since 1991 and the Bulgarian airports Varna and Burgas, which have been managed since 2007 by one concessionaire and whose planning and future development is being accomplished with private capital. The results of both cases showed that self-financing is possible in case congestion costs are considered in the SMCP schemes, and given that air traffic growth rates return to the significant levels prior to the economic crisis. The chapter will discuss the legal implications of congestion pricing at European airports which are violating current EC legislation, as well as the impact of alternative pricing schemes on the environmental performance and technological innovation in aviation.

Optimal Road Capacity Building: Road Planning by Marginal Cost Pricing

The purpose of this study is to propose a new road planning and financing scheme based on short-term social marginal cost pricing that facilitates the establishment of optimal road standards in the long-term. We conducted a simulation analysis based on the proposed planning scheme and observed that the simulation calculated the optimal road capacity in the future, and thus proved that the new planning scheme is feasible.

Introduction to the feature issue on design and evaluation of road network pricing

Several pricing strategies are increasingly considered worldwide as possible options to mitigate the negative externalities of traffic congestion in urban networks, manage travel demand and improve urban living conditions. Despite the annotated beneficial impacts of congestion pricing schemes on network performance and social welfare, a range of problems still hinder many decision makers to apply these schemes in practice. Such problems typically relate to technical issues as well as the use of toll revenues to address equity concerns and increase public acceptability. At the same time, the plans for upgrading, expanding or constructing new road transport infrastructure to enhance regional accessibility and economic development are hampered by limitations on the allocation of available public funds. This situation has motivated the development of suitable privatization mechanisms to allow the construction and operation of road infrastructure from profit-maximizing private firms, usually subject to constraints imposed by governments/regulators. The involvement of many different actors with diverse, often conflicting, goals and constraints, and complexities associated with realistic network implementation raise the need for devising innovative design and evaluation approaches for alternative road pricing schemes. This feature issue of Netnomics brings together original research, methods, state-of-the-art surveys and applications of pricing strategies in test and real-world road networks. Tsekeris and Voβ [6] provides an in-depth extensive review of the state-ofthe-art and describes methodological advances in the design and evaluation of road pricing. It stresses the need for considering a number of paradigm shifts from the two polar cases of marginal social cost pricing of traffic congestion and revenue-maximizing (monopolistic or competitive) private road pricing in

Design and evaluation of road pricing: state-of-the-art and methodological advances

This article provides an in-depth review of the state-of-the-art and describes methodological advances in the design and evaluation of road network pricing schemes. A number of paradigm shifts from the two polar cases of the marginal social cost pricing of road traffic congestion and revenue-maximizing road toll pricing are analyzed, as induced by the need to address realistic design complexities and constraints. The crucial role of the joint consideration of pricing strategies with optimal capacity provision and several network management measures is manifested and an integrated evaluation framework is suggested to incorporate a wide range of road pricing impacts into the scheme design process.

Efficient Tuition Fees and Examinations

We assume that students observe only a private, noisy signal of their ability and that universities can condition admission decisions on the results of noisy tests. If the university observes a private signal of each student's ability, which is soft information, then asymmetries of information are two-sided, and the optimal admission policy involves a mix of pricing and pre-entry selection, based on the university's private information. In contrast, if all test results are public knowledge, then there is no sorting on the basis of test scores: Tuition alone does the job of implementing an optimal degree of student self-selection. These results do not depend on the existence of peer effects. The optimal tuition follows a classic marginal social-cost pricing rule. (JEL: D82, H42, I22, J24)

Marginal Social Cost Pricing on a Transportation Network: A Comparison of Second-Best Policies

In this paper we evaluate and compare long-run economic effects of six road-pricing schemes aimed at internalizing social costs of transportation. In order to conduct this analysis, we employ a spatially disaggregated general equilibrium model of a regional economy that incorporates decisions of residents, firms, and developers, integrated with a spatially-disaggregated strategic transportation planning model that features mode, time period, and route choice. The model is calibrated to the greater Washington, DC metropolitan area. We compare two social cost functions: one restricted to congestion alone and another that accounts for other external effects of transportation. We find that when the ultimate policy goal is a reduction in the complete set of motor vehicle externalities, cordon-like policies and variable-toll policies lose some attractiveness compared to policies based primarily on mileage. We also find that full social cost pricing requires very high toll levels and therefore is bound to be controversial.

Internalizing emission externality on road networks

This paper addresses issues relevant to internalizing traffic emission externality on road networks with fixed travel demands. In addition to marginal social cost pricing (MSC) congestion pricing schemes are considered that yield a traffic flow distribution with minimum total travel time as first-best. We give a counterexample showing that MSC and other first-best congestion pricing schemes do not necessarily lead to less traffic emissions. Without using any subsidy, we indicate that there always exists a charging scheme that induces a traffic flow distribution with minimum emissions. We also provide a bound on the percent reduction in traffic emissions achievable by any charging scheme, and then offer methods for computing charges in a manner that allows decision makers to trade-off between two conflicting objectives, alleviating congestion versus reducing traffic emissions.

Phased implementation of transport pricing for Greater Oslo

We apply a modelling framework, RETRO, based on the land use and transport models for determination of implementation paths for marginal social cost pricing of passenger transport in Greater Oslo. Marginal social cost pricing strategies are assessed through welfare maximisation with respect to the transport instruments that are available. We have constructed implementation paths unconstrained and constrained with regard to acceptable levels of transport instruments, financial situation and equity. The implementation paths are evaluated relative to a base-case situation with continuation of today's pricing policy. The evaluation includes a discussion of the effects on land use and transport indicators.

Transport accounts—methodological concepts and empirical results

Although economic theory suggests social marginal cost pricing as the optimal pricing principle for transport infrastructure charging, information on the total (or average) social costs of transport and on the revenues from taxes and charges are important for pricing policy, for example for monitoring purposes and for the design of second-best prices. This paper provides empirical evidence on the total social costs and revenues for road, rail and air transport, covering all EU countries and Switzerland. It discusses methodologies to estimate the social costs of transport for all modes, focussing on practical experience with applying advanced methodological approaches both in the light of data quality and availability, and regarding the feasibility of conducting this type of research on a routine basis for transport policy.

Toll-Design Problem with Stochastic Route Choice

Congestion pricing has been regarded as an effective method of reducing network-wide travel cost. Previous work on the toll-design problem focused on the deterministic case, that is, it is assumed that travelers have perfect information on the cost of traveling on every route of the network and they always choose the one with the least cost. Limited literature is available on the stochastic case and most of it is focused on marginal social cost pricing with the underlying assumption that all links can be tolled. In this study, a toll-design problem based on stochastic route-choice behavior for multiple user groups is presented under a more realistic context—only a subset of links can be tolled. The methodology is tested with real-world network data. The performance of various algorithms is also discussed.