Marginal Social Cost Pricing Research Articles

Editorial

Given the current status of research and implementation, the various contributions show that research, and in particular the analysis of the impacts of reforms, must proceed in parallel with implementation, in order to create a virtuous cycle in which research and policy making mutually feed each other. Besides a “window of opportunity” is open for what concerns interurban and urban transport. Several experiences in different European cities confirm that an increasing number of cities are already well into the process of rationalising and increasing the sustainability of their transport systems, notably through the design and implementation of pricing policies. And also for inter-urban transport things are moving, e.g. the proposed revised Eurovignette Directive can be seen as a step in the right direction, although still containing many constraints which would prevent fair and efficient pricing of road freight vehicles. In general it can be said that Social Marginal Cost Pricing is still developing. Most practical experiences only use simple pricing schemes, which are far from optimal prices. In the long term fine-tuning of objectives and schemes will be necessary. Some general recommendations based on several Imprint seminars and the papers presented in this issue.

Marginal cost and other pricing principles for user charging in transport: a comment

This paper responds to issues raised in a paper by Werner Rothengatter entitled, How Good is First Best? Marginal Cost and Other Pricing Principles for User Charging in Transport, which appeared in this journal (vol. 10, no. 2, pp. 121-130). The Rothengatter paper argued that a simple textbook approach for relating prices to marginal social cost in determining user charges may not be optimal in practice. The current paper agrees that several factors mean that pure marginal social cost pricing is not a desirable or sensible aim. However, this does not mean that a totally different theoretical approach to pricing policy should be adopted or that full cost recovery as a principle is a good starting point. Instead, it is possible to measure marginal social cost and move towards it as the basis of transport pricing. Marginal social cost should be the starting point in the development of a pricing policy, with considerations such as budget constraints, equity, institutional issues, simplicity and price distortions elsewhere in the economy also taken into account.

Pricing transport networks with fixed residential location

For a congestible static traffic network which is used by different households, the conditions for optimal link tolls and destination charges are analysed for the case where not all links or destinations in the network can be tolled (partial network pricing). It is shown that differences in transport costs across households lead to unequal treatment of equal households at the social welfare optimum. Constraints on network pricing imply complex deviations from marginal social cost pricing because of network interactions. Parking charges rival second-best link tolls under some conditions. When no differentiated lump sum transfers are available, the optimal link tolls will deviate from marginal external congestion costs, even in the absence of network pricing constraints. Stylised examples are used to illustrate the interactions.

How good is first best? Marginal cost and other pricing principles for user charging in transport

The European Commission has suggested the use of the principle of social marginal cost pricing as a general first-best rule for pricing the transportation infrastructure in member countries, but allows for substantial exceptions from this principle through markups. This paper questions the use of a pricing principle that is obviously less relevant than the exceptions from it. A historical overview of this principle and its basic properties and major caveats are provided, with issues of efficiently providing, financing and managing the transportation infrastructure of primary concern. It is concluded that there is no need for a uniform system of transportation infrastructure prices for all transportation sectors and all regional units of the European Union. A workable and effective pricing system should instead reflect the political objectives, institutional arrangements and lever points of decision-making. A real world oriented pricing system will therefore consist of a number of different and non-uniform elements rather than a single abstract general economic orthodoxy. Some alternatives are suggested that are better suited for long term economic efficiency.

Solving the toll design problem with multiple user groups

Congestion pricing has been regarded as an efficient method to reduce network-wide travel cost. In this study, a methodology for toll design is developed to provide policy-makers with suggestions on both where to charge tolls and how much the tolls should be. As opposed to the traditional approach of marginal social cost pricing, this methodology is capable of dealing with the more realistic case, in which only a small number of links can be tolled. Furthermore, this methodology can accommodate multiple user groups. Specifically, we make several simplifying assumptions which enable us to convert a traditional bilevel formulation of the toll design problem into a single level, standard nonlinear optimization problem.

Flexibility of Freight Transport Sectors

In this paper, we explore how government policies in the field of transport may affect future freight rates, transit times, and delivery reliability. In particular, attention is paid to the ‘absorptive capacity’ of freight carriers, i.e. the extent to which they can reduce the effects of such policies by adapting their operations. Two policy scenarios are examined: one in which marginal social cost pricing becomes policy in the European Union, and one in which investment in infrastructure networks is insufficient to accommodate the future increase in traffic demand, inducing a strong increase in congestion. Six modes of transportation are included in the analysis, namely road haulage, rail transport, inland navigation, short sea shipping, airfreight, and deep sea container shipping. The study relied on experts’ opinions and estimations, which were collected by means of a Delphi survey. The expectation is that notably road transport will face difficulties in coping with the two scenarios. Its absorptive capacity proves to be the lowest, which deteriorates its competitive position vis-à-vis other modes. Yet, a weakened competitive position of road haulage is also expected autonomously.

Making urban road pricing acceptable and effective: searching for quality and equity in urban mobility

Urban Road Pricing has been proposed many times as a powerful instrument to fight congestion in urban traffic, but has systematically faced a hostile political envirionment, due to lack of confidence on its promised (traffic) results and fear of its political consequences. Lack of action in this front is contributing to stable or even growing congestion problems in most large cities. This paper tries to address the problem with a fresh look at the objectives of road pricing and at the reasons for that political hostility. For managing and developing the urban mobility system, efficiency and equity are normally taken as the basic economic objectives. Sustainability objectives may be integrated in the efficiency objective if we are able to represent adequately the costs of the resources consumed in the process. Political hostility is normally based on having to pay for what was freely available, and on the risk of exclusion for those with little revenue available for the extra cost of driving into the city. Pursuit of efficency leads to suggestion of marginal social cost pricing but this is hard to explain to the public and application of this principle is fraught with pitfalls since some components of that cost get smaller as traffic grows (noise related costs for example). Pricing is still a good option but the objective has to be something easier to understand and to serve as a target for mobility managers. That “new” objective is quality of the mobility system, with a meaning similar to that of “level of service” in traffic engineering, and prices should be managed to across space, time and transport modes in such a way that provision of service is made with good quality in all components. Pursuit of equity leads to some form of rationing, which has often been associated with high transaction costs and abuse by the administrators. But the use of electronic road pricing should allow easy ways to address the rationing process without such high costs. The basic proposition is that all local taxpayers receive as a direct restitution of their tax contribution a certain amount of “mobility rights”, which can be used both for private car driving in the tolled areas and for riding public transport. These principles are easily applicable with a variety of technical solutions for road pricing, from the simplest cordon pricing to the more sophisticated “pay-as-you-go” schemes. The paper addresses this question of implementation and argues for increasingly sophisticated schemes, as people get accustomed to the principles and finer targeting of demand segments may be needed.

Transport and environment: policy directions for europe

AbstractTransport externalities are among the most important environmental problems affecting quality of life in Europe. Forecasts suggest that past environmental improvements may now be rolled back by traffic growth, and current traffic trends are not sustainable. The theory of environmental policy proposes pricing external costs at their marginal social costs as one solution. Although full marginal social cost pricing is impracticable, advances in tolling technology and environmental valuation mean that it is now a viable option to approximate such charging. There are signs that the European Commission and other bodies are starting to favour pricing over regulatory instruments. However, often overlooked is the potential for non‐convexities in the transport sector or between transport and the rest of the economy. For example it may be that small increases in resources for public transport would not result in welfare gains, whereas large increases would. Non‐convexities would mean that market forces under marginal social cost pricing might lead away from the optimal transport system. This is one reason why pricing instruments cannot in themselves be a panacea for transport externalities or bring about a sustainable transport system. Copyright © 2001 John Wiley & Sons, Ltd and ERP Environment

Evolving Electric Utility Regulatory Policy

Abstract. Current electric utility pricing methods understate the marginal social casts of electricity. Electricity prices are set to cover the utility's average cost rather than the higher marginal social cost. This mispricing hides from consumers the true cost their consumption imposes on society and, thereby, encourages them to ignore efficient conservation opportunities. Additionally, the conservation market suffers from a number of imperfections such as barriers to the acquisition of information, high upfront capital costs and the lack of conservation equipment availability. The electricity and conservation multimarket equilibrium is not achieved. The result is that society overconsumes (excess demand) electricity, overinvests in electric generating plants and underinvests (excess supply) in conservation resources. The large, yet uncertain, level of foregone conservation investment offers new opportunities for regulators and electric utility managers to improve economic efficiency with regulatory and planning policies that appropriately encourage the cost effective use of conservation resources. In the absence of the most efficient policy, marginal social cost pricing, integrated resource planning (IRP) is being adopted as a potential second‐best regulatory policy and utility resource planning framework to improve energy efficiency. IRP uses mathematical optimization methods to search among many alternate resource portfolios of electricity creating and saving technologies. These methods identify the mix that best meets society's needs with the least social cost, where the social external costs and benefits of generating plant and conservation, respectively, are considered. Such a goal requires the choice of a resource portfolio that optimizes a complex objective function. As a result, the solution offers a resource action plan for electric utilities that may be Pareto‐improving.

Airport pricing: Congestion tolls, lumpy investment, and cost recovery

In this paper we investigate the relationship between congestion tolls and capacity expansion costs for congestion-prone transportation infrastructures with lumpy investment. With constant variable costs and social marginal cost pricing, this relationship determines the cost recovery status of an infrastructure authority. The theoretical model for optimal user charges and the timing of capacity expansion shows that the relative magnitudes of total congestion tolls and total capacity costs in an investment cycle depend on the time pattern of traffic growth, a point overlooked in the literature. A queuing model is used to conduct a numerical experiment to determine the cost recovery ratios under various time paths of traffic growth.

Transport pricing policies and efficient urban growth

Urban growth is assumed to depend on the balance between advantages of urban employment and the costs of public and private transport. With constant money prices or average cost pricing of buses (free competition), growth is towards a small congested city, with a period of urban decay when congestion and all travel costs are increasing although the city is shrinking. Marginal social cost pricing of both modes removes this dynamic inefficiency and leads to much larger cities with faster transport services. Short-run effects and profitability are found to be poor indicators of the long-run implications of policies.

Traffic assignment and social marginal cost pricing: A critique of some accepted ideas

Traffic assignment and social marginal cost pricing: A critique of some accepted ideas