Peter Martin has a good article on troubles in the Australian car industry. I'll comment on a few points.
Australians have traditionally had a liking for large medium cars. This was the market segment where our manufacturers had a comparative advantage. We then imported small cars and exported, with for a time growing success, larger cars. I assume the local preference for large gas-guzzlers has fallen with the current, seemingly permanent, escalation in petrol prices.
Peter is accurate in criticising the enormously expensive and stupid set of production subsidies that continue to be given to the Australian car assembly industry. He mentions some recent handouts but the worst part of the protectionist system is ACIS, the Automobile Competitiveness and Investment Scheme, which is an expensive way of keeping Mitsubishi afloat. ACIS subsidises output not exports and, because the subsidies are subject to binding caps, amounts to a set of lump-sum handouts to foreign multinationals. The fallacious arguments for retaining low levels of tariff protection might offer some short-term palliative for the industry at the expense of local consumers but, increasingly, are an irrelevancy as cheap labour costs and economies of scale in emerging NICs swamp any possibility for the local industry to survive with anything less than towering levels of tariff support.
By the way in assessing performance of some players declared profits are poor guides. For example, one must also take with a grain of salt the published profit figures of firms such as Toyota given evident proclivities to transfer price. These moves transfer taxation liabilities offshore and provides local offshoots of international firms to bleat and threaten for further handouts from naïve State and Commonwealth Governments.
A decade ago the Button Plan looked like it might provide the Australian car assembly industry with a future. By concentrating output among a smaller number of producers and by reducing numbers of models it has certainly improved industry efficiencies and, if nothing else, delayed the industry’s local collapse. But increasingly I agree with Peter that the Australian industry probably does not have much of a future despite the concentration of relatively low-cost design skills here. In my view the shift in car design and assembly in the future will lead away from all traditional production venues to a heavy concentration in China which, by 2020, will might well be the biggest car market on earth. This is one forecast I would happy to be proved wrong about but I am pessimistic.
I generally liked Peter’s arguments though I choked a bit when I saw his support for Kevin Rudd’s plan to hand out $500 million to build a ‘green car’ locally. Why should government be involved in picking winners in this way? Where are the possible market failures here?
It frightens me that Rudd can promote populist industry policies of this type. Generally, the Labor Party’s populist ‘industry policies’ frighten me - I expect there will be more of the same in the future in a variety of manufacturing settings. Indeed as the election draws near there is the possibility of a protectionist bidding wear with the Coalition.
Showing posts with label transport. Show all posts
Showing posts with label transport. Show all posts
Tuesday, March 20, 2007
Saturday, December 02, 2006
Tunnel under Melbourne
A tunnel is again being discussed linking CityLink with Melbourne’s Eastern Freeway. The project estimated to cost $10 billion would link the Eastern Freeway in the east of the city to the Tullamarine Freeway, CityLink and Melbourne’s west. An inquiry will be headed by Sir Rod Eddington who runs Victoria’s Major Events Association. The inquiry starts next year.
I’ll wait and see but I’ll be surprised if this project will ever proceed. The tunnel would have to be tolled and would also need a hefty input from taxpayers. As The Age article points out, the 2003 inquiry into the same project found that 90% of the traffic exiting the Eastern Freeway was bound for the city so the volume of cross town traffic is not currently large. Moreover, some of this traffic will be handled by current proposals such as improving the West Gate/CityLink/Monash corridor. Finally, the geology facing the tunnel is difficult because drilling must proceed through hard basalt.
But mostly I think Steve Bracks is the sort of conservative politician who might not like the risks of this sort of enterprise. Blasting at basalt under the ‘ornate terraces’ of Carlton is unlikely to be popular (Carlton's last liberal might go on the attack) and the Green-leaning strong Labor Seats of Melbourne, Richmond and Brunswick might not be happy with the plan.
My response is predictably to suggest road pricing as a means of cutting into congestion with an accompanying boost to public transport. Interestingly Sir Rod apparently agrees. But supply measures should not be ruled out without thinking carefully about future demand levels even with appropriate charges. I’ll watch this one for a while and follow the Eddington inquiry with interest.
I’ll wait and see but I’ll be surprised if this project will ever proceed. The tunnel would have to be tolled and would also need a hefty input from taxpayers. As The Age article points out, the 2003 inquiry into the same project found that 90% of the traffic exiting the Eastern Freeway was bound for the city so the volume of cross town traffic is not currently large. Moreover, some of this traffic will be handled by current proposals such as improving the West Gate/CityLink/Monash corridor. Finally, the geology facing the tunnel is difficult because drilling must proceed through hard basalt.
But mostly I think Steve Bracks is the sort of conservative politician who might not like the risks of this sort of enterprise. Blasting at basalt under the ‘ornate terraces’ of Carlton is unlikely to be popular (Carlton's last liberal might go on the attack) and the Green-leaning strong Labor Seats of Melbourne, Richmond and Brunswick might not be happy with the plan.
My response is predictably to suggest road pricing as a means of cutting into congestion with an accompanying boost to public transport. Interestingly Sir Rod apparently agrees. But supply measures should not be ruled out without thinking carefully about future demand levels even with appropriate charges. I’ll watch this one for a while and follow the Eddington inquiry with interest.
Tuesday, November 28, 2006
Heidelberg Road - An early instance of road pricing in Australia
In trying to dig out some facts on how Melbourne developed its road system I came across Max Lay’s, Melbourne Miles, The Story of Melbourne’s Roads, Australian Scholarly Publishing 2003.
This is not my idea of light reading though Dr Lay obviously loves this stuff. My main finds in this book were parochial. I live north-east of Melbourne city in the suburb of Ivanhoe not far from the Yarra River which runs into the city of Melbourne.
In 1841 Melbourne had a total population of only about 4,500. But even by this time the population had spread well out into Melbourne’s hinterland in the direction of my home. Adjacent areas of Bulleen, Templestowe and the river flats in Heidelberg were surveyed in 1837 by Robert Hoddle – the Surveyor General who was responsible for Melbourne’s initial road layouts. The Heidelberg land was sold in 1838 and sheep stations were installed on it by year’s end. It was an important early area of rural settlement though these days it is almost entirely urbanised.
The first local road body in Melbourne was the Heidelberg Road Trust (HRT) established in 1840 to develop a rough track into the first arterial road leading out of Melbourne. To fund this HRT levied rates on land within 5 km of the road and could apply to levy tolls from users. In fact Heidelberg Road was the first major road out of Melbourne and the first road in Melbourne to levy tolls – they commenced in 1847. Tolls were common in England in the 1830s and had been levied in Sydney since 1811. In Victoria as a whole, from 1853-1856, road costs were half covered by tolls.
By 1854 there are measures of average weekly road usage along Heidelberg Rd – 341 two-wheeled carts, 165 four-wheeled carts and 50 bullock carts! Tolls varied from ¼ pence for passage of a pig or a sheep up to 18 pence for 2 or 4-wheel carts. Exemptions were offered to those attending funerals or for those going to or from church! Toll evasion was a major problem – unscrupulous travellers diverted around toll gates by travelling along footpaths – a practise soon stopped by law.
Heidelberg Road was also the first road in Melbourne used by locals for pleasant Sunday drives in their ‘carriages and gigs’. Heidelberg itself became of interest in the 1880s because the Heidelberg school of art founded itself there – Ill try to get around to discussing this in a future post but the link gives a good brief picture. Heidelberg Road was eventually sealed with bitumen in 1938 and declared a main road in 1960.
This is not my idea of light reading though Dr Lay obviously loves this stuff. My main finds in this book were parochial. I live north-east of Melbourne city in the suburb of Ivanhoe not far from the Yarra River which runs into the city of Melbourne.
In 1841 Melbourne had a total population of only about 4,500. But even by this time the population had spread well out into Melbourne’s hinterland in the direction of my home. Adjacent areas of Bulleen, Templestowe and the river flats in Heidelberg were surveyed in 1837 by Robert Hoddle – the Surveyor General who was responsible for Melbourne’s initial road layouts. The Heidelberg land was sold in 1838 and sheep stations were installed on it by year’s end. It was an important early area of rural settlement though these days it is almost entirely urbanised.
The first local road body in Melbourne was the Heidelberg Road Trust (HRT) established in 1840 to develop a rough track into the first arterial road leading out of Melbourne. To fund this HRT levied rates on land within 5 km of the road and could apply to levy tolls from users. In fact Heidelberg Road was the first major road out of Melbourne and the first road in Melbourne to levy tolls – they commenced in 1847. Tolls were common in England in the 1830s and had been levied in Sydney since 1811. In Victoria as a whole, from 1853-1856, road costs were half covered by tolls.
By 1854 there are measures of average weekly road usage along Heidelberg Rd – 341 two-wheeled carts, 165 four-wheeled carts and 50 bullock carts! Tolls varied from ¼ pence for passage of a pig or a sheep up to 18 pence for 2 or 4-wheel carts. Exemptions were offered to those attending funerals or for those going to or from church! Toll evasion was a major problem – unscrupulous travellers diverted around toll gates by travelling along footpaths – a practise soon stopped by law.
Heidelberg Road was also the first road in Melbourne used by locals for pleasant Sunday drives in their ‘carriages and gigs’. Heidelberg itself became of interest in the 1880s because the Heidelberg school of art founded itself there – Ill try to get around to discussing this in a future post but the link gives a good brief picture. Heidelberg Road was eventually sealed with bitumen in 1938 and declared a main road in 1960.
Friday, November 24, 2006
Transport Victoria
It interests me that Melbourne’s urban transport problems have become an election issue in the current Victorian State elections. Like Sydney, Melbourne’s population is expected to grow strongly over the next 20 years and, while the city is expecting much higher levels of car travel, and hence much higher congestion, the public transport system has already come under pressure as motorists switch to train and bus to avoid high petrol costs.
Thus both public and private transportation systems are now under pressure.
The centrepiece of Liberal Party policies is the proposal to introduce free bus travel for students but there are other policies as well – most notably to extend the rail network. The Labor Party also have a comprehensive policy focussed on bus rather than train travel. They are right in emphasising the better economics of buses over rail and their proposal to institute cross town bus services is an astute one. Interestingly, however the Public Transport Users Association rank the Liberals marginally ahead on public transport issues.
One can hardly expect the parties to promote logically consistent policies such as pricing congestion – the political-economy costs are too high. But the long-term need in Melbourne is to divert people from cars to using public transport. Building extra roads won’t help much with this. The key is to induce people to drive their cars less and to use public transport more. It seems to me that neither political grouping has embraced this problem adequately although both parties go some of the way. But maybe such solutions come after, rather than before, elections.
Thus both public and private transportation systems are now under pressure.
The centrepiece of Liberal Party policies is the proposal to introduce free bus travel for students but there are other policies as well – most notably to extend the rail network. The Labor Party also have a comprehensive policy focussed on bus rather than train travel. They are right in emphasising the better economics of buses over rail and their proposal to institute cross town bus services is an astute one. Interestingly, however the Public Transport Users Association rank the Liberals marginally ahead on public transport issues.
One can hardly expect the parties to promote logically consistent policies such as pricing congestion – the political-economy costs are too high. But the long-term need in Melbourne is to divert people from cars to using public transport. Building extra roads won’t help much with this. The key is to induce people to drive their cars less and to use public transport more. It seems to me that neither political grouping has embraced this problem adequately although both parties go some of the way. But maybe such solutions come after, rather than before, elections.
Monday, November 13, 2006
Traffic accident externalities
In preparing classes on traffic congestion externalities in recent years I have touched on some other important externalities associated with driving. One very expensive externality is provision of free parking which is equivalent to a subsidy of 22 cents per mile for a US motorist taking the average journey to work. Another important cost is The Accident Externality from Driving, nicely analyzed by Aaron Edlin and Pinar Karaca-Mandic (EM), for US drivers, in the October 2006 Journal of Political Economy.
When two cars crash, although only one party may be negligent in causing the accident, the accident would not have occurred if either driver had not traveled. In this latter sense therefore both cause the accident. Motorists however pay (on average) only the average cost of the accident not the marginal cost so there is a substantial auto accident externality when one drives. Motorists pay too little for driving and hence drive too far.
EM estimate auto accident externalities using panel data on state average insurance premiums and loss costs. These external costs are substantial in traffic dense states – not immediately obvious since one might expect accident rates to be more serious under non-congested conditions where speeds are higher. Well, that seems not to be so – in low traffic density states the accident externality is low.
In California an increase in traffic density due to a single extra driver raises total statewide insurance costs by $1725-$3239 depending on the car model. A Pigovian tax to internalize this externality would raise $66 billion annually in California - more than all state taxes combined. A national corrective tax would raise $220 billion.
While building more roads to reduce congestion would reduce the externality this proves to be cost ineffective because of the vast expenditures involved - even with moderate congestion the external costs are quite high. While various Pigovian tax bases might deal with the problem the most sensible base would be to tax car insurance premiums – this is heterogeneous reflecting the accident and skill experience of drivers. EM estimate the required Californian tax would be 200-400% of the premium which the authors recognize will not work politically. Their suggestion instead is to leave overall driving costs the same but to increase the marginal cost of driving with insurance premiums rising with distance traveled as ‘per-mile’ premiums. People would then have an incentive to cut their insurance costs by reducing their driving which is the outcome sought. Per-mile premiums are fair since they impose lower charges on those (like women) who drive less.
The proposal is discussed over at Marginal Revolution. One difficulty is that the chance of having an accident dependents on when you travel as well as how far you travel. If I drive across Melbourne at 3-00 am I will encounter few cars and the probability of an accident is low. The best solution then is to seek congestion pricing of travel in a city and to add to tolls a charge that reflects the contemporaneous accident externality. This modifies a position I have long held in an inessential way.
The important point is to note that such a charge would be quite high. To put things differently we are all making far too many journeys by car because we are paying far too little to travel.
When two cars crash, although only one party may be negligent in causing the accident, the accident would not have occurred if either driver had not traveled. In this latter sense therefore both cause the accident. Motorists however pay (on average) only the average cost of the accident not the marginal cost so there is a substantial auto accident externality when one drives. Motorists pay too little for driving and hence drive too far.
EM estimate auto accident externalities using panel data on state average insurance premiums and loss costs. These external costs are substantial in traffic dense states – not immediately obvious since one might expect accident rates to be more serious under non-congested conditions where speeds are higher. Well, that seems not to be so – in low traffic density states the accident externality is low.
In California an increase in traffic density due to a single extra driver raises total statewide insurance costs by $1725-$3239 depending on the car model. A Pigovian tax to internalize this externality would raise $66 billion annually in California - more than all state taxes combined. A national corrective tax would raise $220 billion.
While building more roads to reduce congestion would reduce the externality this proves to be cost ineffective because of the vast expenditures involved - even with moderate congestion the external costs are quite high. While various Pigovian tax bases might deal with the problem the most sensible base would be to tax car insurance premiums – this is heterogeneous reflecting the accident and skill experience of drivers. EM estimate the required Californian tax would be 200-400% of the premium which the authors recognize will not work politically. Their suggestion instead is to leave overall driving costs the same but to increase the marginal cost of driving with insurance premiums rising with distance traveled as ‘per-mile’ premiums. People would then have an incentive to cut their insurance costs by reducing their driving which is the outcome sought. Per-mile premiums are fair since they impose lower charges on those (like women) who drive less.
The proposal is discussed over at Marginal Revolution. One difficulty is that the chance of having an accident dependents on when you travel as well as how far you travel. If I drive across Melbourne at 3-00 am I will encounter few cars and the probability of an accident is low. The best solution then is to seek congestion pricing of travel in a city and to add to tolls a charge that reflects the contemporaneous accident externality. This modifies a position I have long held in an inessential way.
The important point is to note that such a charge would be quite high. To put things differently we are all making far too many journeys by car because we are paying far too little to travel.
Friday, November 10, 2006
Cairns then home
This little critter (or more plausibly a distant relative) I encountered in a pocket of rainforest near Atherton in Queensland while travelling for the second time through some of the most interesting countryside in Australia. In a group of four we were mainly looking for birds in a group led by Ben Bluett of Cassowary Tours but we did see Eastern waterdragons and Spectacled flying fox - the latter being abundant around Cairns.The interesting thing about this countryside around Cairns is the way it shifts from coastal rainforest with mangroves to savanna country in a matter of a few kilometres. The close proximity of such a variety of habitat types creates a rich biodiversity.
We saw 107 bird species over about 10 hours birding - actually I saw 108 since I got a final Jabiru in the wetland next to Cairns airport as I drove in - I left the tour (and 33 degree C temperatures) directly for a flight back to Melbourne (and 8 degrees C). Hot is better don't believe lies to the contrary!
Among the interesting bird species I saw were Squatter pigeon, Mountain thornbill, Chowchilla, Victoria's rifebird, Spotted catbird, Tooth-billed bowerbird, Bower's shrike-thrush and what what certain the sighting of the day, a pair of Painted snipe at Hasties Swamp. All in all it was a great final day in Cairns. The APSAD Conference I had attended was very useful and I had also managed to enjoy the local environment.
I could very easily settle and live in the Cairns area and one-day I might. The locals are easy going. There is certainly enough of a town to provide the personmade creature comfits and the natural landscapes (and waterscapes) are astoundingly diverse.
It was back to work today and my heart was not entirely in it.
Monday, October 30, 2006
Urban traffic congestion & the boom
This is a draft of a paper on urban traffic congestion I will present at The Australian-Melbourne Institute 'Making the Boom Pay' Conference, November 2-3, 2006. Comments are very welcome.
Introduction
Demand-based economic policies, such as congestion tolls and market-based curb-side parking charges, should be tools for addressing congestion in Australia’s large cities. These policies are particularly important because Australia is a highly urbanised society possessing a handful of high population, low-density state capital cities, where most citizens live. Poor urban policies will detract from the quality of lives of most Australian citizens. Moreover, the transport sector in the cities is a significant part of the total Australian economy.
The resource-driven economic boom that Australia looks like enjoying for the foreseeable future should double Australian incomes over the next 20 years. Over this period, increasingly affluent city populations will grow by 4 million to 20 million and overall vehicle traffic flows will grow 40 per cent, with urban freight increasing by more than 70 per cent. The benefits of the present boom will be more keenly enjoyed in the major cities if citizens can travel using efficiently-utilised urban infrastructure. A failure to adopt sensible policies towards urban congestion will inevitably mean increasing congestion costs even as our prosperity increases and our cities grow.
Moreover, congestion costs will become increasingly hard to reverse using conventional road supply measures as land supply constraints increasingly come to bite. Without effective pricing, congestion costs will treble over the next 20 years and travel in major cities will become subject to general not just local congestion. Gains in living standards will be less than they could be without efficient and convenient travel in the cities.
The benefits of the current boom should spill into the provision of efficiently-designed roads and urban infrastructure. But for the most part these supply-driven infrastructure investments are not considered here. The reason is that supply issues have been overemphasised in the past relative to demand-oriented pricing policies. For the most part demand-based pricing measures are considered that will increase the efficiency with which we can use whatever stock of physical infrastructure we have.
To be specific, I discuss ways of ensuring that journeys taken within large cities are efficient. The ‘urban sprawl’ debate is also discussed. If there is no serious attempt to price congestion then sprawl will continue to grow exacerbating current congestion problems in our city peripheries. A popular approach to dealing with such sprawl is to set firm and binding city boundaries thereby increasing land values and encouraging more intensive development. Such policies are shown to be not nearly as effective as pricing in addressing urban congestion issues in our cities. We must bite the bullet and price journeys in cities so they reflect the full social costs of taking them.
Traffic Congestion
Traffic congestion is a miserable wasteful use of valuable time that reduces national productivity. While often considered to be an inevitable curse of modern life congestion is a well-understood resource misallocation concern that can be effectively addressed at low cost. Increased urban populations and affluence-driven increased vehicle ownership and use of the existing vehicle stocks, mean that traffic congestion will be an increasing problem. While free flow traffic speeds might be improving as urban transport surfaces and signalling technologies improve, this will be counterbalanced by much slower travel under widely-prevalent congested conditions. The deadweight losses that accurately measure the costs of congestion, I estimate were around $700 million in Melbourne in 2005.
In the past congestion issues have been addressed by supply-side measures that include building more roads and by upgrading the public transport system. Civil engineers have forecasted transport demands when socially-costly journeys by car are heavily underpriced or subject to no direct charges at all. The forecasts will not be inaccurate on this account but they will involve too many low-valued vehicle journeys and a demand for public transport that is distorted both by the underpriced road travel and low density urban sprawl that is a consequence of underpriced congestion.
The difficulty here is not private vehicle travel but underpriced travel. Indeed congestion per se is not the problem. We all voluntarily accept congestion as an acceptable cost of modern living that is counterbalanced by improved urban lifestyles and agglomeration economies. The problem is specifically inefficient congestion – congestion that we must put up with even though a change in policy could make us all better off. Inefficient congestion arises because congestion is underpriced.
That underpriced congestion generates economic inefficiencies has been recognised for 50 years by economists, following William Vickrey’s suggestions for pricing urban auto travel in downtown Washington. But the impact of these theories on public policy has been disappointingly low. For the most part it has taken the form of the single policy recommendation for ‘first best’ efficient pricing at social marginal cost where all private travel externalities (congestion, parking, noise, accident, pollution) are captured by levying charges on all roads and where all mass transit is marginal cost priced. Then urban transport planning is greatly simplified. Urban trips on the basis of these correct pricing signals are efficient – journeys are only undertaken when the private benefit from the journey exceeds all social costs. In this case even the dynamic issues of expanding road networks are simplified. Road expansion decisions can even be mechanically determined given forecast net returns by looking at payoffs from existing roads – as in a private business, if roads display constant returns to scale and are turning a profit they should be expanded.
But, as mentioned, this very comprehensive policy proposal has had little policy impact overall. Apart from Singapore, which has stronger central government than is practicable in Australia, this type of policy advocacy has seldom been employed. Indeed, authors such as Richard Arnott, claim that first-best congestion economics has generally failed to contribute usefully to policy debates. Why? This question has direct policy relevance since it points to the factors that we need to account for if we are to satisfactorily introduce road pricing.
In what follows I discuss issues that the simple efficient pricing prescription fails to address. These modify the way we need to think about pricing roads and accounting for them helps provide a package of demand management policies for large cities that can be successfully used to manage congestion.
Distribution issues
The efficiency gains from efficient pricing are real but often rather hidden whereas distributional impacts are painfully obvious. Without monetary compensations, those prevented from using roads because of pricing (the ‘tolled off’) are worse-off with pricing as are those who continue to use at toll-inclusive costs(‘the ‘tolled-on’). Compensations here are feasible using the income generated by pricing but this connection is difficult to sell politically since, while congestion tolls are a direct hit on the hip pocket, possible tax relief from compensations may be less keenly felt.
For pricing to be politically feasible governments must demonstrate that tolls are not a tax grab. Governments must show that all groups are advantaged with efficient pricing. Economists know that with appropriate compensations they can be but this needs to be spelt out to those affected. Tolling charges can be explicitly linked to tax savings elsewhere or to ear-marked infrastructure improvements, such as improved public transport, that benefit transport consumers.
The net benefit of a revenue-neutral switch to congestion pricing roads in the cities stems from the ‘double dividend’ green tax advantages of such charges. Congestion charges yield a revenue dividend but target a social ‘bad’ congestion rather than other taxes which target work effort or savings. Congestion charges can reduce reliance on socially dubious gambling taxes that depend on revenue streams that generate considerable community harm and which are widely despised in the community. Finally, congestion charges can displace reliance on stamp duty charges on housing which diminish labour market mobility and lower the efficiency of labour markets.
In thinking about introducing congestion taxes it is important to focus on promoting their distributional acceptability. This is a major policy design concern not a detail that can be swept under the carpet.
Other aspects of improving policy acceptability include providing alternative travel opportunities to those ‘tolled off’ roads because they are unwilling to pay tolls. This can mean providing options to travel under congested conditions as an alternative to travelling on low congestion tollways. It can also mean ensuring that public transportation reforms provide substitute public services although, again, these do need to be provided at efficient prices.
Finally, on distributional concerns, Donald Shoup has argued that market-determined curbside parking policies gain greater local political support if revenues are returned to local communities. This helps obviate their immediate cost impacts on local users and help ensure their local political acceptibility.
Second-best issues
Comprehensive pricing of all the roads in any Australian city is probably infeasible at present. Tolls are more likely to be applied only to major motorways or to CBD areas using cordon pricing schemes. These partial pricing policies will inevitably direct traffic flows from priced onto unpriced roads where the resulting congestion will reduce the gains from the piecemeal pricing reform. These ‘second-best’ constraints modify desired pricing and road expansion plans.
The economics of ‘second best’ suggest that, if there are constraints on efficient pricing of all resources, so that only piecemeal policy reform is feasible, that attempts to price the resources that can be priced at social marginal cost may not improve economic efficiency. To make this clear consider, for example, the situation where a major road can be priced but where transactions costs of monitoring traffic flows prevents pricing roads carrying lower traffic volumes that run nearby to it. Then pricing the major road at marginal cost may divert traffic onto these substitute roads – a phenomenon referred to as ‘rat-running’. This may even lead to a worse overall congestion problem than when the major road was unpriced. Similarly a cordon pricing scheme around a city’s CBD may create severe congestion problems on its boundary that undoes the advantages of pricing within the cordon.
Pricing Major Roads Alone. Piecemeal pricing of major roads alone will direct traffic towards unpriced roads where resulting congestion reduces the gains from pricing. Therefore charges on priced roads should be ‘adjusted lower than they would be with comprehensive pricing to reduce traffic spill-overs. Traffic diversions can be further reduced by ‘traffic calming’ – by reducing travel speeds along unpriced roads with street architecture, restrictions on turning and so on, so that travel along them is inconvenient for longer journeys. Thus tolls should be set low enough so that the relative expense of traffic diverting to travel down unpriced roads is too high to make it worthwhile compared to the cost of just paying the toll.
In a city like Melbourne there can be selective pricing of all major radial arterials and ring roads with traffic calming used to minimise ‘rat-running’ onto substitute roads. Details of such a proposal are set out in a recent paper by Harry Clarke and Andrew Hawkins.
Road tolls should be set at adjusted social marginal cost (adjusted downwards to optimise traffic flow spill-overs onto unpriced roads). Tolls should not be set at average costs in order to recover project costs. While cost-recovery provides distributive justice by charging in accord with ‘user pays’ principles, prices will be too high to ensure efficiency. Pricing at average cost has two disadvantages. First, it means prices will be too high which excessively discourages traffic, particularly when traffic can move onto untolled roads. Second, with average cost pricing tolls will not depend on current congestion, a prerequisite for smoothing peak traffic flows. The desire is to encourage motorists to switch from travelling during peak periods of high congestion to off-peak times where congestion is lower. This is ideally achieved by pricing travel less during less congested periods. Zero charges should be levied if traffic is operating under free flow conditions,
Thus while the role of the private sector in constructing and designing toll-roads is not seriously disputed by anyone, the requirement that tolls be set at short-run marginal cost means that private sector should not manage such operations. It may well be that efficiently-operated tollways operate at a loss. Where poorly-designed contracts have already been set, as they have on most of Australia’s toll roads, they should be ethically renegotiated to make certain that motorists are paying only adjusted short-run marginal cost for journeys.
Second-best constraints that limit pricing to a subset of a city’s roads do diminish the gains from efficient pricing but they do not provide a convincing case against pricing at all. They simply provide a case for adjusting downwards the tolls that should be levied. The extent to which tolls need to be adjusted downwards depends on the extent to which traffic diversions can be limited onto un-priced roads by using traffic calming and other measures.
The approach of pricing major roads alone can be viewed as an interim step before cities move towards comprehensive electronic pricing of all road use, based on GPS or other technologies. It introduces citizens to the notion of pricing and makes the final transition to more comprehensive pricing less abrupt.
Pricing Within a CBD Cordon. Cordon pricing means that charges are levied on travel within certain highly congested areas of a city. Periphery cordons levy tolls on motorists entering a city’s CBD and make sense for cities such as Melbourne and probably Sydney where sound parking policies are in place. Area cordons which levy charges that depend on the time spent in a CBD are less relevant in Australia than in other world cities, such as London, where congestion problems are more directly related to the duration of a car’s stay within the cordon.
Periphery cordons will create ‘boundary problems’ on the cordon periphery since motorists have incentives to park in this periphery and to either walk or take other means of public transport into the CBD. This problem becomes less important the broader is the scope of the periphery and the more effective are market-oriented curb-side and off-street parking policies there. Parking policies are discussed below. Given market-based parking policies, a broad enough cordon should encourage ‘park and ride’ policies that involve less car travel even from areas distant to the cordon. If a CBD worker who lives in a city’s periphery understands they will face hefty charges for entering the CBD or for parking on its boundaries, their incentives will be to drive their car to a convenient radial public transport link close to their departure point rather than to attempt to achieve most of a city-directed journey by car. It is precisely these types of incentives that cordon pricing seeks to foster.
A significant advantage of cordon pricing is that spill-over costs are smaller with it than with the selective pricing of major tollways because the substitution options involving private travel by a vehicle are less.
Although cities like Sydney and Brisbane possess multiple foci which induces greater complexity in designing cordon pricing approaches, the difficulties with these more complex city structures are not insurmountable. Cordon pricing schemes have been successfully introduced in Stockholm and London and Australia can learn from these experiences.
Parking
The congestion pricing models used by economists are often too aggregative even when ‘second-best’ constraints are admitted. On the supply-side planners do not typically focus on aggregative capacity per se but on a myriad of supply related decisions. On the demand side, parking until recently has been a neglected issue with congestion pricing studies downplaying its role by treating it simply as a fixed fee for taking a trip. Transport economists have emphasised that higher parking charges impact mainly on terminating traffic thereby encouraging greater ‘through traffic’ which can swamp congestion-reduction effects.
Recently Donald Shoup has focused attention on the role of off- and on-street parking and on the congestion caused by cars cruising for parking. Free or underpriced curbside parking provides analogous incentives to encouraging excess travel as unpriced roads and leads to an excessive allocation of space to off-street parking and to excessively disagglomerated CBDs. The correct pricing of parking is a major factor in managing urban traffic congestion. Shoup shows that, in the United States, 99 per cent of all automobile trips involve ‘free’ parking which is, in fact, anything but free – it has high social cost. The average US parking spot costs more than the average car occupying it. Underpriced curbside parking distorts transportation choices, debases urban designs, damages the economy and degrades the physical and aesthetic environment.
Free curb parking constitutes an urban commons so that society devotes too many resources to it. Parking occupies an excessive fraction of our urban landscapes and cities and reduces the social and economic agglomeration benefits derived from living in dense urban structures. As a consequence of free parking and free roads, motorists travel too much by car. For example, a free parking spot is equivalent to a 22 cent per mile subsidy to the average American making his journey to work.
Most significantly a significant fraction of American and Australian urban traffic congestion is associated with cruising for a parking spot. Thus subsidised parking encourages motorists to do things that harm other people and may even harm the motorists themselves. Shoup estimates than an average 30 per cent of traffic in a selection of 11 large cities is cruising for a parking spot with the average motorist taking about 8 minutes to find a spot. Moreover, motorists attach high disutility to this activity – in Sydney they will pay 3.5 times their wage rate to reduce search time.
Some parking opportunities are precluded entirely by the desire to optimise traffic flows. Where curbside parking is permitted, charges should be set so that markets for parking readily clear. The basic idea is that cruising for parking is socially wasteful so charges need to be set that anyone, anywhere can promptly find a parking spot. Traffic engineers normally recommend that about 15 per cent of parking spots should be kept vacant. Setting variable parking charges during the day so that this is vacancy rate is approximately achieved will avoid sociially wasteful cruising.
Sprawl
It is difficult for politicians to embrace the idea of comprehensive road pricing. The distributional and second-best constraints are difficult to reconcile with concerns in the electorate where despite the best efficiency and compensation arguments, citizens may resent paying for something they have previously enjoyed without explicit cost. Pricing major arterials and cordon pricing a city’s CBD can help relieve congestion if comprehensive pricing is impractical but even this limited pricing response is often ruled out political considerations as opposition to the Bracks Government’s move to price the Mitcham-Frankston Road makes clear.
If roads are unpriced then such things as travel to work and driving kids to school will be socially underpriced. This means that citizens, who make home and school siting decisions and indeed, work choice decisions, will pay inadequate attention to commuting costs. The result is excessively disagglomerated cities and excessive urban sprawl with insufficient respect paid to travel costs.
An alternative approach to promoting a more sensible city structure is to regulate directly the ‘sprawl’ consequences of unpriced congestion by setting definite city boundaries to foster urban consolidation. This will increase land rents and provide incentives to reduce ‘sprawl’ – here defined as car-dependent, low-density urban communities. Increased rents will foster agglomeration benefits from non-market exchanges and reduce the disutility of taking lengthy congested private car journeys in the suburbs by facilitating provision of effective public transport options.
It is thus claimed that pursuing compact cities reduces the average costs of providing infrastructure and particularly public transport. The economies of scale required to make this argument work can be thought of as a second-best constraint requiring a planning intervention since, in this situation there is a market failure induced by the implied monopoly power. This claim is contentious generally but particularly so with respect to urban travel by public transport. Rail requires huge numbers of users to achieve an efficient scale of operation – these are economies that are very unlikely to be realised in sprawled-out Australian cities. With respect to bus travel there are limited scale economies so that the argument is irrelevant here – except to make the general point that bus travel is likely to be much more cost efficient than rail in most such settings.
It should be emphasised that, in any event, the case for regulating city size requires a second-best constraint such as the inability to price roads or economies of scale in public transport. Without such a constraint setting limits on city boundaries will not improve efficiency. For example if land, travel and parking markets work effectively then individual agents will select the type of housing and residential choices that suit them best so there is no need for a public intervention.
But even if there are second-best constraints, there are problems with the policy of setting boundaries as a substitute for effective transport pricing.
One difficulty lies in the fact that there are various externalities operating. There are, for example, opposing centrifugal (moving from the centre) and centripetal (moving towards the centre) city externalities. The dominant centripetal forces are the agglomeration benefits that arise from the non-market exchange of information and informal contracting – interaction externalities - that occur in concentrated business areas such as a city’s CBD. The centrifugal externalities are transport costs which are increased by traffic congestion. When interaction externalities cannot be subsidised directly, so that there are insufficient incentives for agglomeration, a second-best policy is to reduce transport costs by reducing congestion charges to encourage interactions. The difficulty in accounting for agglomeration benefits is that little is known empirically about the size of interaction externalities.
As argued by a host of authors, such as Bruegmann and Moran, the case for curtailing sprawl is uneasy because the desire to encourage compact development need not reflect choices made by free agents. In part the desire to live in apartments in compact cities is a desire by planners not the desire of most citizens who prefer free-standing houses with gardens. There can be a selfish and elitist type of resentment towards the ‘nouveau rich’ who settle into luxurious so-called MacMansions.
If compact cities are provided even though people prefer stand-alone housing, the consequence will be the high land and therefore house prices that we have seen in Australia over recent decades. Since these high prices reflect a failure to deal directly with congestion by imposing charges, which provides efficiency in making travel decisions, they impose unnecessary social costs.
This same argument applies to alternative approaches to ‘compactify’ a city. Corridor development might permit an expanded use of rail or even tolled radial roads but the difficulty is that most journeys in a city’s periphery are cross-town. Journeys might involve travel to destinations to deposit people or goods cross-town and will often be by car. In this case corridor development along major train lines may still leave high levels of congestion in the periphery. The imperative again is to price the congestion.
Other Issues
Traffic planning issues are not only a matter of congestion pricing. Other means of addressing congestion should also be considered and congestion modelling should become more down-to-earth and specific.
Second-best constraints mean that specific urban freight delivery policies, staggered working hour policies, incentives for designing more congestion efficient cars (such as cars less prone to accidents), efficient road design, encouraging bicycling and the role of land use taxes and controls are all useful policy options in a second-best world.
Different forms of congestion also need to be considered - not only those related to traffic volume (or link congestion) but also congestion at intersections and freeway exits (nodal congestion), pedestrian-car interactions and gridlock stemming from the physical length of cars.
Conclusions
Most Australians live in cities where they are subject to increasing traffic congestion and diminishing opportunities to address congestion using supply-side measures. Comprehensive pricing of all roads in our cities if impractical for the moment so that pricing of major roads and CBD areas using cordon pricing schemes make sense. This means pricing at lower than social marginal cost in an environment where all roads are priced to optimise traffic spill-over effects. It also suggests a case for restricting traffic flows onto unpriced roads by using traffic-calming and other policies and for pricing parking on the boundary of city cordons. Distributional impacts should be addressed by promoting tax-neutral policies with beneficial double-dividend properties.
Parking policies are often assigned a minor role in overall congestion management. This paper argues that market-based curb-side pricing is crucial for achieving efficiency.
Attempting to deal with congestion indirectly by imposing constraints on sprawl has various secondary costs. Most notably it will raise land and housing prices. Piecemeal pricing policies will outperform urban planning attempts to drive more compact cities.
References
R. Arnott, T. Rave & R. Schöb, Alleviating Urban Traffic Congestion, The MIT Press, Cambridge 2005.
R. Bruegmann, Sprawl: A Compact History, University of Chicago Press, Chicago, 2005.
H. Clarke & A. Hawkins, Economic Framework for Melbourne Traffic Planning, Agenda, 13, 1, 2006, 63-80.
M. Fujita & J.-F. Thisse, Economics of Agglomeration: Cities, Industrial Location and Regional Growth, Cambridge University Press, Cambridge, 2002.
A. Moran, The Tragedy of Planning: Losing the Australian Dream, Institute of Public Affairs, Melbourne, 2006.
Donald Shoup, The High Cost of Free Parking, Chicago: Planners Press, 2005.
Introduction
Demand-based economic policies, such as congestion tolls and market-based curb-side parking charges, should be tools for addressing congestion in Australia’s large cities. These policies are particularly important because Australia is a highly urbanised society possessing a handful of high population, low-density state capital cities, where most citizens live. Poor urban policies will detract from the quality of lives of most Australian citizens. Moreover, the transport sector in the cities is a significant part of the total Australian economy.
The resource-driven economic boom that Australia looks like enjoying for the foreseeable future should double Australian incomes over the next 20 years. Over this period, increasingly affluent city populations will grow by 4 million to 20 million and overall vehicle traffic flows will grow 40 per cent, with urban freight increasing by more than 70 per cent. The benefits of the present boom will be more keenly enjoyed in the major cities if citizens can travel using efficiently-utilised urban infrastructure. A failure to adopt sensible policies towards urban congestion will inevitably mean increasing congestion costs even as our prosperity increases and our cities grow.
Moreover, congestion costs will become increasingly hard to reverse using conventional road supply measures as land supply constraints increasingly come to bite. Without effective pricing, congestion costs will treble over the next 20 years and travel in major cities will become subject to general not just local congestion. Gains in living standards will be less than they could be without efficient and convenient travel in the cities.
The benefits of the current boom should spill into the provision of efficiently-designed roads and urban infrastructure. But for the most part these supply-driven infrastructure investments are not considered here. The reason is that supply issues have been overemphasised in the past relative to demand-oriented pricing policies. For the most part demand-based pricing measures are considered that will increase the efficiency with which we can use whatever stock of physical infrastructure we have.
To be specific, I discuss ways of ensuring that journeys taken within large cities are efficient. The ‘urban sprawl’ debate is also discussed. If there is no serious attempt to price congestion then sprawl will continue to grow exacerbating current congestion problems in our city peripheries. A popular approach to dealing with such sprawl is to set firm and binding city boundaries thereby increasing land values and encouraging more intensive development. Such policies are shown to be not nearly as effective as pricing in addressing urban congestion issues in our cities. We must bite the bullet and price journeys in cities so they reflect the full social costs of taking them.
Traffic Congestion
Traffic congestion is a miserable wasteful use of valuable time that reduces national productivity. While often considered to be an inevitable curse of modern life congestion is a well-understood resource misallocation concern that can be effectively addressed at low cost. Increased urban populations and affluence-driven increased vehicle ownership and use of the existing vehicle stocks, mean that traffic congestion will be an increasing problem. While free flow traffic speeds might be improving as urban transport surfaces and signalling technologies improve, this will be counterbalanced by much slower travel under widely-prevalent congested conditions. The deadweight losses that accurately measure the costs of congestion, I estimate were around $700 million in Melbourne in 2005.
In the past congestion issues have been addressed by supply-side measures that include building more roads and by upgrading the public transport system. Civil engineers have forecasted transport demands when socially-costly journeys by car are heavily underpriced or subject to no direct charges at all. The forecasts will not be inaccurate on this account but they will involve too many low-valued vehicle journeys and a demand for public transport that is distorted both by the underpriced road travel and low density urban sprawl that is a consequence of underpriced congestion.
The difficulty here is not private vehicle travel but underpriced travel. Indeed congestion per se is not the problem. We all voluntarily accept congestion as an acceptable cost of modern living that is counterbalanced by improved urban lifestyles and agglomeration economies. The problem is specifically inefficient congestion – congestion that we must put up with even though a change in policy could make us all better off. Inefficient congestion arises because congestion is underpriced.
That underpriced congestion generates economic inefficiencies has been recognised for 50 years by economists, following William Vickrey’s suggestions for pricing urban auto travel in downtown Washington. But the impact of these theories on public policy has been disappointingly low. For the most part it has taken the form of the single policy recommendation for ‘first best’ efficient pricing at social marginal cost where all private travel externalities (congestion, parking, noise, accident, pollution) are captured by levying charges on all roads and where all mass transit is marginal cost priced. Then urban transport planning is greatly simplified. Urban trips on the basis of these correct pricing signals are efficient – journeys are only undertaken when the private benefit from the journey exceeds all social costs. In this case even the dynamic issues of expanding road networks are simplified. Road expansion decisions can even be mechanically determined given forecast net returns by looking at payoffs from existing roads – as in a private business, if roads display constant returns to scale and are turning a profit they should be expanded.
But, as mentioned, this very comprehensive policy proposal has had little policy impact overall. Apart from Singapore, which has stronger central government than is practicable in Australia, this type of policy advocacy has seldom been employed. Indeed, authors such as Richard Arnott, claim that first-best congestion economics has generally failed to contribute usefully to policy debates. Why? This question has direct policy relevance since it points to the factors that we need to account for if we are to satisfactorily introduce road pricing.
In what follows I discuss issues that the simple efficient pricing prescription fails to address. These modify the way we need to think about pricing roads and accounting for them helps provide a package of demand management policies for large cities that can be successfully used to manage congestion.
Distribution issues
The efficiency gains from efficient pricing are real but often rather hidden whereas distributional impacts are painfully obvious. Without monetary compensations, those prevented from using roads because of pricing (the ‘tolled off’) are worse-off with pricing as are those who continue to use at toll-inclusive costs(‘the ‘tolled-on’). Compensations here are feasible using the income generated by pricing but this connection is difficult to sell politically since, while congestion tolls are a direct hit on the hip pocket, possible tax relief from compensations may be less keenly felt.
For pricing to be politically feasible governments must demonstrate that tolls are not a tax grab. Governments must show that all groups are advantaged with efficient pricing. Economists know that with appropriate compensations they can be but this needs to be spelt out to those affected. Tolling charges can be explicitly linked to tax savings elsewhere or to ear-marked infrastructure improvements, such as improved public transport, that benefit transport consumers.
The net benefit of a revenue-neutral switch to congestion pricing roads in the cities stems from the ‘double dividend’ green tax advantages of such charges. Congestion charges yield a revenue dividend but target a social ‘bad’ congestion rather than other taxes which target work effort or savings. Congestion charges can reduce reliance on socially dubious gambling taxes that depend on revenue streams that generate considerable community harm and which are widely despised in the community. Finally, congestion charges can displace reliance on stamp duty charges on housing which diminish labour market mobility and lower the efficiency of labour markets.
In thinking about introducing congestion taxes it is important to focus on promoting their distributional acceptability. This is a major policy design concern not a detail that can be swept under the carpet.
Other aspects of improving policy acceptability include providing alternative travel opportunities to those ‘tolled off’ roads because they are unwilling to pay tolls. This can mean providing options to travel under congested conditions as an alternative to travelling on low congestion tollways. It can also mean ensuring that public transportation reforms provide substitute public services although, again, these do need to be provided at efficient prices.
Finally, on distributional concerns, Donald Shoup has argued that market-determined curbside parking policies gain greater local political support if revenues are returned to local communities. This helps obviate their immediate cost impacts on local users and help ensure their local political acceptibility.
Second-best issues
Comprehensive pricing of all the roads in any Australian city is probably infeasible at present. Tolls are more likely to be applied only to major motorways or to CBD areas using cordon pricing schemes. These partial pricing policies will inevitably direct traffic flows from priced onto unpriced roads where the resulting congestion will reduce the gains from the piecemeal pricing reform. These ‘second-best’ constraints modify desired pricing and road expansion plans.
The economics of ‘second best’ suggest that, if there are constraints on efficient pricing of all resources, so that only piecemeal policy reform is feasible, that attempts to price the resources that can be priced at social marginal cost may not improve economic efficiency. To make this clear consider, for example, the situation where a major road can be priced but where transactions costs of monitoring traffic flows prevents pricing roads carrying lower traffic volumes that run nearby to it. Then pricing the major road at marginal cost may divert traffic onto these substitute roads – a phenomenon referred to as ‘rat-running’. This may even lead to a worse overall congestion problem than when the major road was unpriced. Similarly a cordon pricing scheme around a city’s CBD may create severe congestion problems on its boundary that undoes the advantages of pricing within the cordon.
Pricing Major Roads Alone. Piecemeal pricing of major roads alone will direct traffic towards unpriced roads where resulting congestion reduces the gains from pricing. Therefore charges on priced roads should be ‘adjusted lower than they would be with comprehensive pricing to reduce traffic spill-overs. Traffic diversions can be further reduced by ‘traffic calming’ – by reducing travel speeds along unpriced roads with street architecture, restrictions on turning and so on, so that travel along them is inconvenient for longer journeys. Thus tolls should be set low enough so that the relative expense of traffic diverting to travel down unpriced roads is too high to make it worthwhile compared to the cost of just paying the toll.
In a city like Melbourne there can be selective pricing of all major radial arterials and ring roads with traffic calming used to minimise ‘rat-running’ onto substitute roads. Details of such a proposal are set out in a recent paper by Harry Clarke and Andrew Hawkins.
Road tolls should be set at adjusted social marginal cost (adjusted downwards to optimise traffic flow spill-overs onto unpriced roads). Tolls should not be set at average costs in order to recover project costs. While cost-recovery provides distributive justice by charging in accord with ‘user pays’ principles, prices will be too high to ensure efficiency. Pricing at average cost has two disadvantages. First, it means prices will be too high which excessively discourages traffic, particularly when traffic can move onto untolled roads. Second, with average cost pricing tolls will not depend on current congestion, a prerequisite for smoothing peak traffic flows. The desire is to encourage motorists to switch from travelling during peak periods of high congestion to off-peak times where congestion is lower. This is ideally achieved by pricing travel less during less congested periods. Zero charges should be levied if traffic is operating under free flow conditions,
Thus while the role of the private sector in constructing and designing toll-roads is not seriously disputed by anyone, the requirement that tolls be set at short-run marginal cost means that private sector should not manage such operations. It may well be that efficiently-operated tollways operate at a loss. Where poorly-designed contracts have already been set, as they have on most of Australia’s toll roads, they should be ethically renegotiated to make certain that motorists are paying only adjusted short-run marginal cost for journeys.
Second-best constraints that limit pricing to a subset of a city’s roads do diminish the gains from efficient pricing but they do not provide a convincing case against pricing at all. They simply provide a case for adjusting downwards the tolls that should be levied. The extent to which tolls need to be adjusted downwards depends on the extent to which traffic diversions can be limited onto un-priced roads by using traffic calming and other measures.
The approach of pricing major roads alone can be viewed as an interim step before cities move towards comprehensive electronic pricing of all road use, based on GPS or other technologies. It introduces citizens to the notion of pricing and makes the final transition to more comprehensive pricing less abrupt.
Pricing Within a CBD Cordon. Cordon pricing means that charges are levied on travel within certain highly congested areas of a city. Periphery cordons levy tolls on motorists entering a city’s CBD and make sense for cities such as Melbourne and probably Sydney where sound parking policies are in place. Area cordons which levy charges that depend on the time spent in a CBD are less relevant in Australia than in other world cities, such as London, where congestion problems are more directly related to the duration of a car’s stay within the cordon.
Periphery cordons will create ‘boundary problems’ on the cordon periphery since motorists have incentives to park in this periphery and to either walk or take other means of public transport into the CBD. This problem becomes less important the broader is the scope of the periphery and the more effective are market-oriented curb-side and off-street parking policies there. Parking policies are discussed below. Given market-based parking policies, a broad enough cordon should encourage ‘park and ride’ policies that involve less car travel even from areas distant to the cordon. If a CBD worker who lives in a city’s periphery understands they will face hefty charges for entering the CBD or for parking on its boundaries, their incentives will be to drive their car to a convenient radial public transport link close to their departure point rather than to attempt to achieve most of a city-directed journey by car. It is precisely these types of incentives that cordon pricing seeks to foster.
A significant advantage of cordon pricing is that spill-over costs are smaller with it than with the selective pricing of major tollways because the substitution options involving private travel by a vehicle are less.
Although cities like Sydney and Brisbane possess multiple foci which induces greater complexity in designing cordon pricing approaches, the difficulties with these more complex city structures are not insurmountable. Cordon pricing schemes have been successfully introduced in Stockholm and London and Australia can learn from these experiences.
Parking
The congestion pricing models used by economists are often too aggregative even when ‘second-best’ constraints are admitted. On the supply-side planners do not typically focus on aggregative capacity per se but on a myriad of supply related decisions. On the demand side, parking until recently has been a neglected issue with congestion pricing studies downplaying its role by treating it simply as a fixed fee for taking a trip. Transport economists have emphasised that higher parking charges impact mainly on terminating traffic thereby encouraging greater ‘through traffic’ which can swamp congestion-reduction effects.
Recently Donald Shoup has focused attention on the role of off- and on-street parking and on the congestion caused by cars cruising for parking. Free or underpriced curbside parking provides analogous incentives to encouraging excess travel as unpriced roads and leads to an excessive allocation of space to off-street parking and to excessively disagglomerated CBDs. The correct pricing of parking is a major factor in managing urban traffic congestion. Shoup shows that, in the United States, 99 per cent of all automobile trips involve ‘free’ parking which is, in fact, anything but free – it has high social cost. The average US parking spot costs more than the average car occupying it. Underpriced curbside parking distorts transportation choices, debases urban designs, damages the economy and degrades the physical and aesthetic environment.
Free curb parking constitutes an urban commons so that society devotes too many resources to it. Parking occupies an excessive fraction of our urban landscapes and cities and reduces the social and economic agglomeration benefits derived from living in dense urban structures. As a consequence of free parking and free roads, motorists travel too much by car. For example, a free parking spot is equivalent to a 22 cent per mile subsidy to the average American making his journey to work.
Most significantly a significant fraction of American and Australian urban traffic congestion is associated with cruising for a parking spot. Thus subsidised parking encourages motorists to do things that harm other people and may even harm the motorists themselves. Shoup estimates than an average 30 per cent of traffic in a selection of 11 large cities is cruising for a parking spot with the average motorist taking about 8 minutes to find a spot. Moreover, motorists attach high disutility to this activity – in Sydney they will pay 3.5 times their wage rate to reduce search time.
Some parking opportunities are precluded entirely by the desire to optimise traffic flows. Where curbside parking is permitted, charges should be set so that markets for parking readily clear. The basic idea is that cruising for parking is socially wasteful so charges need to be set that anyone, anywhere can promptly find a parking spot. Traffic engineers normally recommend that about 15 per cent of parking spots should be kept vacant. Setting variable parking charges during the day so that this is vacancy rate is approximately achieved will avoid sociially wasteful cruising.
Sprawl
It is difficult for politicians to embrace the idea of comprehensive road pricing. The distributional and second-best constraints are difficult to reconcile with concerns in the electorate where despite the best efficiency and compensation arguments, citizens may resent paying for something they have previously enjoyed without explicit cost. Pricing major arterials and cordon pricing a city’s CBD can help relieve congestion if comprehensive pricing is impractical but even this limited pricing response is often ruled out political considerations as opposition to the Bracks Government’s move to price the Mitcham-Frankston Road makes clear.
If roads are unpriced then such things as travel to work and driving kids to school will be socially underpriced. This means that citizens, who make home and school siting decisions and indeed, work choice decisions, will pay inadequate attention to commuting costs. The result is excessively disagglomerated cities and excessive urban sprawl with insufficient respect paid to travel costs.
An alternative approach to promoting a more sensible city structure is to regulate directly the ‘sprawl’ consequences of unpriced congestion by setting definite city boundaries to foster urban consolidation. This will increase land rents and provide incentives to reduce ‘sprawl’ – here defined as car-dependent, low-density urban communities. Increased rents will foster agglomeration benefits from non-market exchanges and reduce the disutility of taking lengthy congested private car journeys in the suburbs by facilitating provision of effective public transport options.
It is thus claimed that pursuing compact cities reduces the average costs of providing infrastructure and particularly public transport. The economies of scale required to make this argument work can be thought of as a second-best constraint requiring a planning intervention since, in this situation there is a market failure induced by the implied monopoly power. This claim is contentious generally but particularly so with respect to urban travel by public transport. Rail requires huge numbers of users to achieve an efficient scale of operation – these are economies that are very unlikely to be realised in sprawled-out Australian cities. With respect to bus travel there are limited scale economies so that the argument is irrelevant here – except to make the general point that bus travel is likely to be much more cost efficient than rail in most such settings.
It should be emphasised that, in any event, the case for regulating city size requires a second-best constraint such as the inability to price roads or economies of scale in public transport. Without such a constraint setting limits on city boundaries will not improve efficiency. For example if land, travel and parking markets work effectively then individual agents will select the type of housing and residential choices that suit them best so there is no need for a public intervention.
But even if there are second-best constraints, there are problems with the policy of setting boundaries as a substitute for effective transport pricing.
One difficulty lies in the fact that there are various externalities operating. There are, for example, opposing centrifugal (moving from the centre) and centripetal (moving towards the centre) city externalities. The dominant centripetal forces are the agglomeration benefits that arise from the non-market exchange of information and informal contracting – interaction externalities - that occur in concentrated business areas such as a city’s CBD. The centrifugal externalities are transport costs which are increased by traffic congestion. When interaction externalities cannot be subsidised directly, so that there are insufficient incentives for agglomeration, a second-best policy is to reduce transport costs by reducing congestion charges to encourage interactions. The difficulty in accounting for agglomeration benefits is that little is known empirically about the size of interaction externalities.
As argued by a host of authors, such as Bruegmann and Moran, the case for curtailing sprawl is uneasy because the desire to encourage compact development need not reflect choices made by free agents. In part the desire to live in apartments in compact cities is a desire by planners not the desire of most citizens who prefer free-standing houses with gardens. There can be a selfish and elitist type of resentment towards the ‘nouveau rich’ who settle into luxurious so-called MacMansions.
If compact cities are provided even though people prefer stand-alone housing, the consequence will be the high land and therefore house prices that we have seen in Australia over recent decades. Since these high prices reflect a failure to deal directly with congestion by imposing charges, which provides efficiency in making travel decisions, they impose unnecessary social costs.
This same argument applies to alternative approaches to ‘compactify’ a city. Corridor development might permit an expanded use of rail or even tolled radial roads but the difficulty is that most journeys in a city’s periphery are cross-town. Journeys might involve travel to destinations to deposit people or goods cross-town and will often be by car. In this case corridor development along major train lines may still leave high levels of congestion in the periphery. The imperative again is to price the congestion.
Other Issues
Traffic planning issues are not only a matter of congestion pricing. Other means of addressing congestion should also be considered and congestion modelling should become more down-to-earth and specific.
Second-best constraints mean that specific urban freight delivery policies, staggered working hour policies, incentives for designing more congestion efficient cars (such as cars less prone to accidents), efficient road design, encouraging bicycling and the role of land use taxes and controls are all useful policy options in a second-best world.
Different forms of congestion also need to be considered - not only those related to traffic volume (or link congestion) but also congestion at intersections and freeway exits (nodal congestion), pedestrian-car interactions and gridlock stemming from the physical length of cars.
Conclusions
Most Australians live in cities where they are subject to increasing traffic congestion and diminishing opportunities to address congestion using supply-side measures. Comprehensive pricing of all roads in our cities if impractical for the moment so that pricing of major roads and CBD areas using cordon pricing schemes make sense. This means pricing at lower than social marginal cost in an environment where all roads are priced to optimise traffic spill-over effects. It also suggests a case for restricting traffic flows onto unpriced roads by using traffic-calming and other policies and for pricing parking on the boundary of city cordons. Distributional impacts should be addressed by promoting tax-neutral policies with beneficial double-dividend properties.
Parking policies are often assigned a minor role in overall congestion management. This paper argues that market-based curb-side pricing is crucial for achieving efficiency.
Attempting to deal with congestion indirectly by imposing constraints on sprawl has various secondary costs. Most notably it will raise land and housing prices. Piecemeal pricing policies will outperform urban planning attempts to drive more compact cities.
References
R. Arnott, T. Rave & R. Schöb, Alleviating Urban Traffic Congestion, The MIT Press, Cambridge 2005.
R. Bruegmann, Sprawl: A Compact History, University of Chicago Press, Chicago, 2005.
H. Clarke & A. Hawkins, Economic Framework for Melbourne Traffic Planning, Agenda, 13, 1, 2006, 63-80.
M. Fujita & J.-F. Thisse, Economics of Agglomeration: Cities, Industrial Location and Regional Growth, Cambridge University Press, Cambridge, 2002.
A. Moran, The Tragedy of Planning: Losing the Australian Dream, Institute of Public Affairs, Melbourne, 2006.
Donald Shoup, The High Cost of Free Parking, Chicago: Planners Press, 2005.
Monday, October 23, 2006
Free public transport for the young
I am ambivalent about Mr Baillieu’s proposal to offer free public transport to young people and full time tertiary students in Victoria.
Fares on buses and trains in Victoria are well above marginal cost (and a long way above social marginal cost given un-priced congestion externalities) but I do not believe these marginal costs are zero so this measure will induce inefficient travel – this is the reason I have opposed zero priced public transport in the past.
But these transport costs are a heavy burden for young people on low incomes who benefit, in any event, from concession fares already. At an estimated cost of $70 million annually it is not an ideal policy but not the worst either. It would be costly to means test it so the sons and daughters of wealthy parents will benefit from the policy. But, as handouts go, I am less annoyed by this proposal than I normally would be. The Bracks Labor Government seems on a par with most of the debt phobic state governments in Australia, recently achieving a state budget surplus of $825 million.
The ‘free fares’ policy does nothing to improve service frequency or to rid the bus system of foolish regulations regarding route choice. Nor will it provide improved incentives for the private sector to enter these markets and provide better alternatives to travel than the use of a private car. Anonymous Lefty likes the policy but not the fact that it is made by the Liberal Party.
Fares on buses and trains in Victoria are well above marginal cost (and a long way above social marginal cost given un-priced congestion externalities) but I do not believe these marginal costs are zero so this measure will induce inefficient travel – this is the reason I have opposed zero priced public transport in the past.
But these transport costs are a heavy burden for young people on low incomes who benefit, in any event, from concession fares already. At an estimated cost of $70 million annually it is not an ideal policy but not the worst either. It would be costly to means test it so the sons and daughters of wealthy parents will benefit from the policy. But, as handouts go, I am less annoyed by this proposal than I normally would be. The Bracks Labor Government seems on a par with most of the debt phobic state governments in Australia, recently achieving a state budget surplus of $825 million.
The ‘free fares’ policy does nothing to improve service frequency or to rid the bus system of foolish regulations regarding route choice. Nor will it provide improved incentives for the private sector to enter these markets and provide better alternatives to travel than the use of a private car. Anonymous Lefty likes the policy but not the fact that it is made by the Liberal Party.
Wednesday, February 08, 2006
How London priced road access to its CBD
London’s population is 3-4 times that of Melbourne, although it is 25 per cent smaller in area. Like Melbournians, Londoners prefer living in residential suburbs, segregated from industry and therefore have high car-dependence.
Like Melbourne too, most jobs, retail, entertainment and educational institutions are located in central and inner suburbs while most people live in the periphery. Thus most journeys are radially directed to or from the city. Unlike Melbourne high costs of fuel, road congestion, parking and the availability of an extensive public transport system, make public transport the preferred mode of travel, accounting for 84 per cent of trips to central London.
Nevertheless, London has suffered all-day congestion, with drivers spending long periods in traffic jams and with peak periods approaching gridlock. Estimated congestion costs were £2 billion per year with residents also suffering health and aesthetic costs due to some of the worst quality air in Europe. Demand-side congestion reduction tactics, such as parking restrictions and high fuel taxes, have failed to curb congestion.
London’s public transport consists of an Underground Rail, surface rail and bus services. The quality of this system has deteriorated over recent decades due to public expenditure restrictions. The network has developed a reputation for poor punctuality and for being uncomfortable and unsafe. High fares exacerbated the problem. Buses, primarily responsible for cross-town journeys, have experienced declining productivity due to congestion, funding cuts and mismanagement.
On 17th February 2003 London implemented cordon pricing to rejuvenate its failing transport system. The cordon covers central London including the centres of government, business, finance and entertainment. Its perimeter is formed by the Inner Ring Road, use of which is uncharged. The cordon is designed to reduce traffic entering central London and on the radial arterials, while improving the efficiency of road-based public transport. By reducing traffic overall congestion was predicted to fall 20-30 per cent.
London has opted for an area cordon so vehicles parked on the street within the cordon are liable for a charge, regardless of whether they cross its perimeter. This is done because much congestion is caused by illegal parking. The cordon is electronically monitored using video stream and automatic number plate recognition to view automobiles.
While start up costs of £200 million the cordon was expected to generate substantial future net revenues to be reinvested in public transport. Reduced congestion and other transport benefits from charging were estimated at £180 million per year against costs of £130 million. The normal cordon toll is £5 giving all day access between 7:00am and 6:30pm on weekdays. Hefty fines and penalties are levied on non-payers. Exemptions from tolls are made for taxis, motorcycles, mopeds, buses, emergency vehicles, alternative fuel vehicles, health service and vehicles driven by the disabled and there is a ninety per cent discount for residents.
The cordon has significantly reduced vehicle numbers entering central London. It has reduced congestion, increased travel speeds and travel time reliability. Overall traffic flows within the cordon have fallen 10-15 per cent with journey times across the cordon down 14 per cent. Journey times and traffic speeds in central London have shown small improvements and traffic delays have fallen thirty per cent. Journey time reliability has increased by thirty per cent. Average speeds on roads in the cordon have increased from 14.3 to 16.7 kilometres per hour.
Only 4,000 people per day have stopped coming into the city area because of the cordon. Of those not entering the cordon 20-30 per cent have diverted around the cordon; 50-60 per cent have transferred to public transport; 15-25 per cent have switched to carpooling, bicycle, motorcycle, travel outside of hours or are not making trips. There has been no substantial shift in the timing of journeys.
Outside the cordon there has been a small reduction in congestion on the Inner Ring Road. Radial roads immediately outside the inner ring road have had significant reductions in congestion. On outer arterial roads there has been no noticeable change.
Average commuting times from outer London to the cordon have fallen from 46 to 40 minutes . There has been no significant traffic displacement to local roads around the cordon due to £100 million spent on ‘traffic calming’ boundary roads.
Revenues are lower than expected as vehicle numbers entering the cordon are lower than anticipated and levels of attempted evasion much higher.
London has spent the revenue generated by the cordon on upgrading the public transport system. The bus network has been the primary beneficiary of both reduced road traffic and extra revenue from fares. Three hundred extra buses have been added ) and the number of seats available has increased by 11,000 due to higher frequency trips, new and altered routes and larger buses. Bus delays due to traffic inside the cordon have reduced by 50 per cent. Excess waiting times for buses have reduced by over a third on routes servicing the cordon area.
Overall the London experience of using cordon pricing has been successful.
Like Melbourne too, most jobs, retail, entertainment and educational institutions are located in central and inner suburbs while most people live in the periphery. Thus most journeys are radially directed to or from the city. Unlike Melbourne high costs of fuel, road congestion, parking and the availability of an extensive public transport system, make public transport the preferred mode of travel, accounting for 84 per cent of trips to central London.
Nevertheless, London has suffered all-day congestion, with drivers spending long periods in traffic jams and with peak periods approaching gridlock. Estimated congestion costs were £2 billion per year with residents also suffering health and aesthetic costs due to some of the worst quality air in Europe. Demand-side congestion reduction tactics, such as parking restrictions and high fuel taxes, have failed to curb congestion.
London’s public transport consists of an Underground Rail, surface rail and bus services. The quality of this system has deteriorated over recent decades due to public expenditure restrictions. The network has developed a reputation for poor punctuality and for being uncomfortable and unsafe. High fares exacerbated the problem. Buses, primarily responsible for cross-town journeys, have experienced declining productivity due to congestion, funding cuts and mismanagement.
On 17th February 2003 London implemented cordon pricing to rejuvenate its failing transport system. The cordon covers central London including the centres of government, business, finance and entertainment. Its perimeter is formed by the Inner Ring Road, use of which is uncharged. The cordon is designed to reduce traffic entering central London and on the radial arterials, while improving the efficiency of road-based public transport. By reducing traffic overall congestion was predicted to fall 20-30 per cent.
London has opted for an area cordon so vehicles parked on the street within the cordon are liable for a charge, regardless of whether they cross its perimeter. This is done because much congestion is caused by illegal parking. The cordon is electronically monitored using video stream and automatic number plate recognition to view automobiles.
While start up costs of £200 million the cordon was expected to generate substantial future net revenues to be reinvested in public transport. Reduced congestion and other transport benefits from charging were estimated at £180 million per year against costs of £130 million. The normal cordon toll is £5 giving all day access between 7:00am and 6:30pm on weekdays. Hefty fines and penalties are levied on non-payers. Exemptions from tolls are made for taxis, motorcycles, mopeds, buses, emergency vehicles, alternative fuel vehicles, health service and vehicles driven by the disabled and there is a ninety per cent discount for residents.
The cordon has significantly reduced vehicle numbers entering central London. It has reduced congestion, increased travel speeds and travel time reliability. Overall traffic flows within the cordon have fallen 10-15 per cent with journey times across the cordon down 14 per cent. Journey times and traffic speeds in central London have shown small improvements and traffic delays have fallen thirty per cent. Journey time reliability has increased by thirty per cent. Average speeds on roads in the cordon have increased from 14.3 to 16.7 kilometres per hour.
Only 4,000 people per day have stopped coming into the city area because of the cordon. Of those not entering the cordon 20-30 per cent have diverted around the cordon; 50-60 per cent have transferred to public transport; 15-25 per cent have switched to carpooling, bicycle, motorcycle, travel outside of hours or are not making trips. There has been no substantial shift in the timing of journeys.
Outside the cordon there has been a small reduction in congestion on the Inner Ring Road. Radial roads immediately outside the inner ring road have had significant reductions in congestion. On outer arterial roads there has been no noticeable change.
Average commuting times from outer London to the cordon have fallen from 46 to 40 minutes . There has been no significant traffic displacement to local roads around the cordon due to £100 million spent on ‘traffic calming’ boundary roads.
Revenues are lower than expected as vehicle numbers entering the cordon are lower than anticipated and levels of attempted evasion much higher.
London has spent the revenue generated by the cordon on upgrading the public transport system. The bus network has been the primary beneficiary of both reduced road traffic and extra revenue from fares. Three hundred extra buses have been added ) and the number of seats available has increased by 11,000 due to higher frequency trips, new and altered routes and larger buses. Bus delays due to traffic inside the cordon have reduced by 50 per cent. Excess waiting times for buses have reduced by over a third on routes servicing the cordon area.
Overall the London experience of using cordon pricing has been successful.
Melbourne’s priced roads: Some facts
Melbourne’s has, or will have, two types of priced roads: The CityLink tolled roads that operate as a radial link from the North and from the East to Melbourne’s city centre and the proposed cross-town road, the Mitcham-Frankston Project that links the Eastern Freeway in Donvale to the Frankston Freeway near Seaford. Neither of these two projects is (or will be) effectively congestion priced. Pricing is based on a ‘user pays’ principle which recovers project costs and yields a return to the private sector operator. There is a case for renegotiating the agreements the State Government of Victoria has with the operators of these projects.
CityLink Roads. Transurban was given the concession to operate these roads in 1996. The concession was generous with the project costing $1.8 billion to build and shareholder equity in the operation now amounting to $5 billion. Revenues are of the order of $250 million which would have been sufficient to support $6 billion of investment which exceeds the cost of both the CityLink and the Mitcham-Frankston projects by $1.5 billion. Tolls are claimed to be at least twice the level required to recover the cost of a publicly-funded tollway. The traffic catchment area for the project covers about half of Melbourne. Transurban is entitled to compensation if future Victorian Governments develop plans to improve alternative forms of transport that would divert revenue from CityLink.
Tolls currently depend on where motorists enter and where they exit CityLink as well as on the type of vehicle used (car, light commercial (LCV), or heavy commercial (HCV)). In the main however charges are independent of the extent of congestion on the roads. A 24 hour day pass ranges from $9-95 for a car to $18-95 for a HCV. The maximum charge on either section of the road is $5-20 for a car and $6-95 for a HCV during day hours discounted to $5-20 between 8pm and 6am. That higher charges are levied for larger vehicles and that a discount is offered to LCVs and HCVs overnight is consistent with the spirit of the congestion pricing philosophy but these effects are modest. Overall charges are congestion-independent. There are substantial ‘boundary problems’ reflecting the accumulation of congestion externalities in areas such as Essendon adjacent to CityLink as motorists divert around the tolled road. These problems would be reduced with congestion-pricing and thus more even traffic flows.
Mitcham-Frankston Road. The concession to operate this project was awarded to the ConnectEast Group led by Macquarie Bank, Thiess Pty Ltd and John Holland Pty Ltd. Thiess and John Holland are responsible for design and construction. The project comprises 39 km of toll road including 1.5 km of tunnels. It will be a fully electronic tollroad using short-range microwave transponder tags and advanced video camera technology. The tags will also operate on CityLink. The project is forecast to cost $2.5 billion and is scheduled to open in late 2008. .
Unlike CityLink the Mitcham-Frankston prospectus states there are no restrictions on government upgrades to competing roads and public transport. Some have suggested that government should upgrade bus services in the area and replace urban level crossings with grade separations along the Ringwood Railway line to allow roads such as Stud Road to compete more effectively with the proposed tollway. This would reduce the market value of the Mitcham-Frankston Road and permit a public buyback of the tollway at reasonable prices as suggested by the Victorian Branch of the Liberal Party.
As it stands the maximum toll set will be $4-43 for cars (in 2004 dollars) with neighbourhood and weekend discounts for cars. While the proposal does not involve congestion pricing, tolls are low enough to minimise boundary problems on substitute routes such as Springvale and Blackburn Roads. With congestion pricing there would be low induced congestion on these congested substitute roads. Indeed traffic pressure on these roads should substantially fall.
CityLink Roads. Transurban was given the concession to operate these roads in 1996. The concession was generous with the project costing $1.8 billion to build and shareholder equity in the operation now amounting to $5 billion. Revenues are of the order of $250 million which would have been sufficient to support $6 billion of investment which exceeds the cost of both the CityLink and the Mitcham-Frankston projects by $1.5 billion. Tolls are claimed to be at least twice the level required to recover the cost of a publicly-funded tollway. The traffic catchment area for the project covers about half of Melbourne. Transurban is entitled to compensation if future Victorian Governments develop plans to improve alternative forms of transport that would divert revenue from CityLink.
Tolls currently depend on where motorists enter and where they exit CityLink as well as on the type of vehicle used (car, light commercial (LCV), or heavy commercial (HCV)). In the main however charges are independent of the extent of congestion on the roads. A 24 hour day pass ranges from $9-95 for a car to $18-95 for a HCV. The maximum charge on either section of the road is $5-20 for a car and $6-95 for a HCV during day hours discounted to $5-20 between 8pm and 6am. That higher charges are levied for larger vehicles and that a discount is offered to LCVs and HCVs overnight is consistent with the spirit of the congestion pricing philosophy but these effects are modest. Overall charges are congestion-independent. There are substantial ‘boundary problems’ reflecting the accumulation of congestion externalities in areas such as Essendon adjacent to CityLink as motorists divert around the tolled road. These problems would be reduced with congestion-pricing and thus more even traffic flows.
Mitcham-Frankston Road. The concession to operate this project was awarded to the ConnectEast Group led by Macquarie Bank, Thiess Pty Ltd and John Holland Pty Ltd. Thiess and John Holland are responsible for design and construction. The project comprises 39 km of toll road including 1.5 km of tunnels. It will be a fully electronic tollroad using short-range microwave transponder tags and advanced video camera technology. The tags will also operate on CityLink. The project is forecast to cost $2.5 billion and is scheduled to open in late 2008. .
Unlike CityLink the Mitcham-Frankston prospectus states there are no restrictions on government upgrades to competing roads and public transport. Some have suggested that government should upgrade bus services in the area and replace urban level crossings with grade separations along the Ringwood Railway line to allow roads such as Stud Road to compete more effectively with the proposed tollway. This would reduce the market value of the Mitcham-Frankston Road and permit a public buyback of the tollway at reasonable prices as suggested by the Victorian Branch of the Liberal Party.
As it stands the maximum toll set will be $4-43 for cars (in 2004 dollars) with neighbourhood and weekend discounts for cars. While the proposal does not involve congestion pricing, tolls are low enough to minimise boundary problems on substitute routes such as Springvale and Blackburn Roads. With congestion pricing there would be low induced congestion on these congested substitute roads. Indeed traffic pressure on these roads should substantially fall.
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