Congestion Charging

The Business Roundtable in their latest newsletter brought to my attention an excellent article by Andrew Leigh which appeared last month in the Australian Financial Review on congestion charging.

I am a fan of congestion charging.  It is the market at work, where in times of increased demand, you pay more.  In some areas in the US the congestion charge actually changes by the minute depending on how congested a road is.  This allows you to choose between a free road with no guaranteed time to reach your destination and a road where they can guarantee the time, but the price is variable.

In nineteenth century Britain, the law required all steam cars to be preceded by an attendant carrying a red flag. In cities, cars were not permitted to drive faster than 6 km/h. In twenty-first century Australia, convention requires that every peak hour driver in Australia must have steam coming out their ears, and be preceded by an equally red-faced driver. In cities like Sydney, this ensures that peak hour speeds average 12 km/h.

Congestion costs are a classic example of what economists call a ‘negative externality’ (or what your grandmother might have called ‘just plain selfishness’). In deciding whether to drive or take the train, I consider only on my own costs: fares, fuel, tyres and time. But I ignore the impact that my decision to drive has on you and everyone else on the roads.

A natural solution is to force drivers to ‘internalise’ the negative externality, by raising the price of driving into busy areas. Just as ’sin taxes’ on alcohol, tobacco and gambling recognise the potential harm that can be done to the rest of us, so a congestion fee is society’s way of making drivers take account of other road users.

Recognising the potential of congestion fees, London and Singapore now charge drivers a fee to enter the city during peak times. In April, New York has announced a plan to charge drivers US$8 to enter the southern half of Manhattan. Following successful trials last year, Stockholm will implement a congestion charge in July.

What is notable about these examples is that they come from across the political spectrum. In London, the chief proponent for the congestion fee was mayor Ken Livingstone (known as “Red Ken”). In New York, Republican mayor Michael Bloomberg is backing the charge. Congestion fees are a commonsense reform, not an ideological one.

In Australia, the use of public-private partnerships to build new motorways has led to a proliferation of toll-roads. Yet for the most part, those fees are not designed to reduce congestion. Busy old streets in the CBD are free. Quiet new toll-roads in the outer suburbs are pay-per-use. While a congestion fee should be higher in peak hour, Melbourne’s City Link and the Sydney Cross City Tunnel cost exactly the same whether you’re using them at 5pm or midnight.

With many cars now equipped with e-tags, Australia has the technology to get congestion charges right. An ideal system would charge commuters a fee to enter the city centre on weekdays. But simple changes could help immediately. For example, why not replace the $3 Sydney Harbour Bridge toll with a charge of $5 during weekdays, and $2 on nights and weekends?

Despite an outcry at the time it was implemented, British policymakers now generally recognise that the London congestion fee has been a success. Traffic volumes are down. Public transport usage is up. And average road speeds, which had fallen to jogging pace, are now increasing again.

As the Soviet Union eventually realised, queues help no-one. Time spent waiting in a traffic jam is neither devoted to productive activities, nor enjoyed with family and friends. With the typical worker spending the equivalent of seven days a year sitting in their car, coming up with clever ways to beat gridlock should be a high priority. A modest congestion fee might just be the solution that our lungs – and kids – have been looking for.