Congestion pricing

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Congestion pricing is a price structure that allows for increasing of prices during a certain period of time in order to charge users for the negative externalities generated by the peak demand in excess of available supply, for a particular public good. Congestion is considered a negative externality by economists. An externality occurs when a transaction causes costs or benefits to third party, often, although not necessarily, from the use of a public good. For example, manufacturing or transportation cause air pollution imposing costs on others when making use of public air. Congestion pricing is an efficiency pricing strategy that allows the users causing the externality to pay more for that public good, thus, maximizing the net benefit for society.

William Vickrey, winner of the 1996 Nobel Prize for his work on "moral hazard", is considered one of the fathers of congestion pricing, as he first proposed it for the New York City subway system in 1952.^[1] In the road transportation arena these theories were extended by Maurice Allais, a fellow Nobel prize winner "for his pioneering contributions to the theory of markets and efficient utilization of resources", Gabriel Roth who was instrumental in the first designs and upon whose World Bank recommendation the first system was put in place in Singapore, and Reuben J Smeed, the deputy director of the Transport and Road Research Laboratory whose report to the British government was very nearly implemented in British cities in the 1960s.

This mechanism has been used in several public utilities and public services for pricing higher fees during congested periods, as a means to better manage the demand for the service, and whether to avoid expensive new investments just to satisfy peak demand, or because is not economically or financially feasible to provide additional capacity to the service.

For some services, such as roads, "congestion is considered to arise from the mispricing of a good; namely, highway capacity at a specific place and time. The quantity supplied (measured in lane-miles) is less than the quantity demanded at what is essentially a price of zero. If a good or service is provided free of charge, people tend to demand more of it - and use it more wastefully - than they would if they had to pay a price that reflected its cost. Hence, congestion pricing is premised on a basic economic concept: charge a price in order to allocate a scarce resource to its most valuable use, as evidenced by users' willingness to pay for the resource".^[2]

Congestion pricing has been widely use by electric, telephone, internet and gas utilities. Also has been used for ports, waterways, airports and road pricing.

[edit] Urban traffic congestion pricing

For the road traffic congestion charge, see road pricing.

Urban traffic congestion pricing is a demand management strategy aimed to reduce auto travel into the congested city center in urban areas.^[3] The economic rationale for this pricing scheme is based on the externalities or social costs of auto travel in urban areas, such us air pollution, noise, traffic accidents, urban deterioration, and the extra costs and delays imposed by traffic congestion upon other fellow drivers, and mainly, to the more efficient public transportation vehicles. This policy allows a more efficient pricing of road use that maximizes the net benefits for society.

This first successful implementation of such scheme was Singapore's Area Licensing Scheme in 1975.^[4] Thanks to technological advances in electronic toll collection, electronic detection, and video surveillance technology, charging congestion prices is relatively less cumbersome than in the past. Singapore upgraded its system in 1998 (see Singapore's Electronic Road Pricing), and similar pricing schemes were implemented in London in 2003 (see London congestion charge); Stockholm in 2006 (see Stockholm congestion tax); and in Valletta, the capital city of Malta, since 2007.^[5][6] Although there has not been yet a comprehensive study, initial reports from the cities that implemented congestion pricing schemes show traffic volume reductions in between 10% to 30%,^[7] as well as reduced air pollution.^[8] Also, all cities report public controversy before and after implementation, making political feasibility a critical issue (see the city specific articles).

Hong Kong conducted a pilot test on an electronic congestion pricing system between 1983 to 1985 with positive results.^[9] However, public opposition against this policy stalled its permanent implementation. New York City is considering the implementation of a congestion pricing scheme,^[10][11][12] but on July 2007, the New York State legislature shelved the proposal to bring congestion pricing to Manhattan.^[13] Afterwards they passed a law creating the New York City Traffic Congestion Mitigation Commission to study several options for reducig traffic (see New York congestion pricing).

Other recent application of congestion pricing policies is the urban transportation context is allowing users of low or single-occupancy vehicles to use a High-occupancy vehicle lane (HOV) if they pay a toll. This scheme is known as High-occupancy toll (HOT) lanes, and it has been introduced mainly in the United States, Canada and the United Kingdom. There has been controversy over this concept, and HOT schemes have been called "Lexus" lanes, as critics see this new pricing scheme as a perk to the rich.^[14][15][16]

Some concerns have been expressed regarding the effects of traffic congestion pricing on economic activity and land use, ^[17] as the benefits are usually evaluated from the urban transportation perspective only. However, congestion pricing schemes have been used with the main objective of improving urban quality and to preserve historical heritage in the small cities of Valletta, Malta^[18] and Znojmo, Czech Republic.^[19]

[edit] Airport congestion pricing

Many airports around the world are facing extreme congestion, being runnway capacity the most scarce resource. Congestion pricing schemes have been proposed to mitigate this problem. ^[20][21] The Port Authority of New York and New Jersey applied this pricing scheme in 1968 for peak-hour use by small aircraft at Newark, Kennedy, and La Guardia airports. As a result of the higher charges, general aviation activity during peak periods decreased by 30 percent. In 1988 the Massachusetts Port Authority adopted imposed a higher landing fee for smaller aircraft at Boston’s Logan Airport, and much of the general aviation abandoned Logan for secondary airports. ^[22]

[edit] Internet congestion pricing

In this case, it is an alternative pricing structure for network access to the Internet. Under a congestion pricing scheme, users would pay a minimal subscription to cover their Internet Service Provider's fixed costs, and then would pay further usage costs determined by the congestion on the ISP's router.

The intention is to encourage users to behave in a "fair" way, in the sense that they will scale back their usage during times of greatest congestion so as to save money. If congestion becomes consistently too high, this provides the ISP with the necessary capital to purchase more networking hardware.

[edit] References

• Congestion Pricing - Paying Your Way in Communication Networks

es:Tarifas de congestión