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Parking economics

In many Australian cities an attempt has been made to regulate levels of parking by controlling levels of on- and off-street parking.  The dominant trend has been to heavily restrict on-street parking but to keep that which is available priced at relatively low levels. The resulting excess demands are rationed primarily by restrictions on the length of time that a spot can be occupied and by means of restrictions on the type of vehicle that can be parked such as residency permits.   Privately-owned off-street parking has been encouraged as a more higher-priced alternative to on-street parking.  A strongly-held policy objective is to discourage long-term parking.  The traffic congestion pricing models economists have worked with are often aggregative and downplay the issue of vehicle parking either by ignoring it (as in BTRE, 2007) or by treating parking costs as a fixed fee for taking a trip.  Yet road travel is a derived demand from such things as the need to get to work, to visit friends or to go shopping. Almost all these vehicle journeys involve the need to park a vehicle at some stage to implement the purposes of a journey.

Parking charges that exist at a destination influence the costs of travel which terminate at that destination but, to the extent they reduce such terminating traffic, provide incentives for increased flows of ‘through’ traffic (and traffic doing errands that does not require long-term parking) which will now face reduced congestion costs.  On the other hand if all traffic does terminate at a destination, where it must park, then parking charges substitute perfectly for congestion charges.   Parking charges that target congestion – even specific peak period charges – are attractive to government since they do not impose substantial administrative difficulties given that some sort of charging is normally already in place.

In principle ‘first best’ parking charges should not be directed at congestion costs associated with commuting at all if there is non-terminating traffic – the traffic itself should be subject to a congestion charge. Parking charges should instead target the elimination of costs associated with the act of parking itself such as wasteful searches for a parking spot (including search-induced external congestion costs) that stem from excess demands for limited parking spots. 

The effect of providing relatively cheap on-street parking is to create an excess demand for it resulting in high levels of congestion from attempts to secure a parking spot.  The preference for providing short-term parking options provides incentives for greater traffic densities averaged over a day but possibly a shift away from travel during peak periods.   The price differentials between on-street and privately-supplied parking provide incentives to search around for a cheap outcome, thereby increasing congestion.

 In major Australian cities however attempts have been made to adjust parking charges to influence traffic flows as a ‘second-best’ attempt to restrict congestion on roads. For example the Victorian Government, in 2006, introduced an $820 per parking spot levy on long-stay car parking spaces in Melbourne to ease traffic flow congestion and to reduce greenhouse gas emissions.  It was also intended to encourage more short-stay, off-street parking although, as mentioned, this might have counterproductive offsetting effects in increasing traffic flows.  The parking levy is administered by the Treasury (not the Department of Transport or VicRoads) and impacts on about 52,000 parking spaces in the city providing about $40 million fiscal revenues each year (Dowling, 2008). 

In Sydney, NSW too a Parking Space Levy (PSL) has operated since 1992 to discourage car use in major commercial districts.   The PSL is hypothecated to help fund infrastructure projects that make it easier to access public transport – these include ‘kiss and ride’ facilities that allow temporary parking for those dropping off or picking up travellers, park-and-ride facilities, bus shelters, taxi stands, transport mode interchanges, passenger information and security services.  The PSL is $950 in Category 1 areas (Sydney CBD, North Sydney, Milsons Point) and $470 per space annually in Category 2 areas (Bondi Junction, Chatswood, Parramatta, St Leonards). In 2008/09 PSL collections are estimated to be $47m and are, again, collected by a branch of the NSW Treasury on behalf of the NSW Ministry of Transport. 

At the same time as inner city parking costs are being increased in Melbourne extra free parking spots are being provided in outer Melbourne on each of the five major train corridors into Melbourne City. This encourages ‘park-and-ride’ approaches towards city commuting.  This can again be thought of as a ‘second-best’ attempt to deal with congestion without pricing it directly by providing free parking as well as rail journeys to encourage a modal shift away from private car use.  The key issue here is whether the value of the land appropriated to provide the parking spot exceeds the value of the congestion reductions provided by encouraging this shift.

The same policy is being pursued in Sydney under the umbrella of ‘transport interchange policy’.  If anything the cost of providing a parking place near a Sydney railway station would exceed that in Melbourne given higher land values in Sydney.

These ‘park-and-ride’ measures will reduce city congestion but the issue is whether this reduction is cost efficient. Land near railway stations often has a high opportunity cost. It could be used for homes, other buildings or for landscaping. Multi-level ‘structured’ parking stations involve, in addition, very substantial construction costs and will only ever be effective when land values are particularly high. The cost of providing a parking spot at a train station in Melbourne has been estimated by Green advocates at up to $17,000, which at first sight seems an expensive way of switching passengers from car to rail use to economise on congestion (Houston and Perkins, 2008).  This high cost estimate is consistent with estimates for other countries. Thus Shoup (2005), for example, estimates that the cost of providing a US parking spot typically exceeds the value of the cars occupying it. Litman (2009, p.5, 4.2) estimates  that, even apart from the opportunity value of land, that parking structure construction costs in the US average $15,000US per parking spot.

Clearly parking spots in city areas are anything but costless.  Despite this many ‘park-and-ride’ and other schemes typically leave parking unpriced.  A parking spot is not a public good, however, since its use is both excludable and rival. It should only be provided publicly at a subsidised price if the subsidy equals the external benefits flowing from reduced congestion. If purely private benefits are being delivered they should be recouped via metering at marginal cost. Otherwise land resources may be inappropriately converted into parking spaces because non-cost effective policies have been employed to address congestion.

It is straightforward to compute the scale of the daily external costs that must be eliminated to justify provision of a ‘free’ parking spot costing $17,000.  The minimum congestion cost that must be avoided at a discount rate of 4 per cent is $17,000*.04/1.04 or $653. Assuming that travellers use this spot 240 times annually, this means the current avoidable daily cost must be $2-72. With a discount rate of 6 per cent the minimum avoidable daily cost is $4-01. At 4 per cent discount rate journeys which average greater than 40 km will yield a higher external congestion cost, at an average price of 6.8 cents per km in Australian capital cities (compare BTRE, 2007), than the discounted cost of the parking spot.   The $17,000 capital cost figure seems high and might stop observers from thinking positively about the scope for ‘park-and-ride’ policies but the implied daily cost of free provision given relatively low discount rates is not particularly high.

Finally, free parking in areas where congestion is an issue provides a major source of excessive road demands which has an implied subsidy cost for making journeys. For the United States, Shoup (2005) estimates that a free parking spot is equivalent to a 14.5 cents US per km (22 cents US per mile) subsidy to the average American making his or her journey to work which reduces the cost of a commute by 71 per cent. In many cases this substantially exceeds the average marginal congestion cost of travel. Employer-paid parking reduces the cost of driving to work by more than double the average optimal congestion toll. Other authors (Litman, 2006) put the estimated subsidies of parking free at between 2-7 cents US per km (3-10 cents US per mile).  There is controversy about whether this is an external cost of parking per se because it really results from other pricing distortions including treating parking as a tax preferred fringe benefit. 

In large Australian cities free on street parking is almost non-existent with much of the growth in parking spots occurring in privately-operated parking stations. In addition, in Australia free parking provided to an employee is much less an issue since it is normally subject to a ‘fringe benefits’ tax of 46.5 per cent. This occurs if the parking spot provided to the employee is within a one km radius of a commercial parking station. In this case the tax rate is levied on the imputed parking benefit set at lowest daily charge levied by such a nearby parking station.  This eliminates distortions that arise on the basis of free employer-provided parking.

While some Australian parking is under-priced it should be pointed out that at airports parking is overpriced (ACCC, 2009).  Airport operators can extract monopoly rents because they can control landside access. This is particularly the case for short-term parking since there is often competition for longer-term parking from service providers removed from an airport.  In 2002 Southern Cross Airports Corporation Consortium, backed by Macquarie Airports, purchased Sydney Airport for $5.6b and, from 2003/04-2007/08, increased its short-term charges for 4 hour parking spots by 80 per cent.   These increases can reflect ‘monopoly’ rents rather than ‘locational’ rents that come about because motorists seek a preferred location to park (Forsyth, 2004).  Bids in airport privatisations will be high and attractive if operates foresee the possibility of charging monopoly prices for services. Of course if such monopoly rents are being earned then deadweight losses are being incurred by the travelling public who face reduced supply and extra parking costs. Upstream businesses such as airlines and tourism operators will also experience lost business.

In the United States, Shoup (2005) estimates for the United States, where drivers pay expressly for parking in only 1 per cent of their trips, that the cost of all parking spaces exceeds the value of all cars and may indeed exceed the value of all roads.  Moreover, an average of 30 per cent of traffic in 11 large US cities that Shoup examines is cruising for a parking spot. The average motorist takes 8 minutes to find a spot.  Motorists themselves attach high disutility to such searches – in Sydney, in one of the few such Australian studies, it has been determined that motorists will pay up to 3.5 times their wage rate to avoid this searching (Henscher & King, 2001).

Given the suggested scale of such costs it is indeed surprising that Australian public transport authorities have paid almost no attention to the issue of providing efficient levels of on-road and off-road parking in major Australian cities. Parking charges provide a useful adjunct to policy designed to address congestion costs. Transaction costs of substantially improving parking policies are low.  Parking policies are particularly effective when ‘second-best’ constraints rule out direct congestion pricing.

Poor parking policies create congestion through effects in creating search costs on motorists who seek a parking spot.  Where kerbside parking is permitted charges should be set so that parking markets readily clear.  There is no sensible rationale for low on-street parking charges. Cruising for parking is socially wasteful so charges need to be set high enough so that anyone, anywhere can readily find a parking spot. If this proposal is implanted then there will also be no search-related congestion costs. Traffic engineers normally recommend that about 15 per cent of parking places should be kept vacant to insure easy ingress and egress out of spots so setting charges to achieve this targeted vacancy rate will avoid socially wasteful ‘cruising’ (Shoup, 2005). 

Parking charges should ideally not be used to target commuting congestion but they can be ca useful adjunct to such policies and a useful second-best policy. They should be set to achieve equilibrium in parking markets so excess demands for parking are eliminated as well as wasteful search costs. 


R. Arnott, T. Rave & R. Schöb, ‘Some Downtown Parking Arithmetic’, in R. Arnott, T. Rave & R. Schöb, Alleviating Urban Traffic Congestion, The MIT Press, Cambridge, 2005, Chapter 2. 45-100.

Bureau of Infrastructure, Transport and Regional Economics (BITRE), Australian Transport Statistics June 2008, June, 2008c.

Bureau of Infrastructure, Transport and Regional Economics (BITRE), Moving Urban Australia: Can Congestion Charging Unclog Our Roads?, Working Paper 74, BITRE, Canberra, 2008a. 

Bureau of Transport and Regional Economics (BTRE), Estimating Urban Traffic and Congestion Cost Trends for Australian Cities, Working Paper 71, BTRE, Canberra, ACT. 2007.

A. Downs, Still Stuck in Traffic, Brookings Institution, 2004.

P. Forsyth, ‘Locational ajnd Monopoly Rents at Airports: creating them and Shifting Them’,  Journal of Air Transport Management, 10, 2004, 51-60

D. Henscher & J. King, ‘Parking Demand and Responsiveness to Supply, Pricing and Location in the Sydney Central Business District’, Transportation Research Part A, 35, 2001, 177-196.

C. Houston & M. Perkins, ‘Latest Problem on Train Networks – Car Parks’, The Age, May 27, 2008.

D. Shoup, The High Cost of Free Parking, Planners Press, Washington 2005.


10 comments to Parking economics

  • conrad

    The problem with all these suggestions you have on traffic has nothing to do with how reasonable or unreasonable they are (I find most of the arguments quite compelling). The problem is that most people don’t want them and would rather wait in traffic even if it really costs them more. I’m amazed at how impossibly hard it is to convince many people of these types of things, even in places like Sydney where traffic is a disaster.

  • hc

    Not always true – people attach very high costs to waiting in traffic as the Henscher et al. paper I cite suggests.

  • Matt C

    Interesting article Harry. I also have wondered about parking charges at hospitals. It appears that these are in the airports category of extracting monopoly rents. I personally think they can be particularly pernicious given the additional costs of having to worry about parking while you usually have a lot else to worry about while at hospital.

  • I’m not convinced that we in Melbourne have real congestion in our CBD where the parking taxes are. There’s more congestion outside the CBD in selected spots.

  • John Mashey

    You might find Streetline Networks interesting:

    Don Shoup is on its Advisory Board (as am I), and at least some of its technology is geared to help cities implement ideas like his.

  • hc

    John, Thanks for that – useful links and obviously interesting technology. I’ll read the articles and post again when i get a chance.

  • Amruta

    Very interesting article and a vital issue that everyone has been ignoring. I completely agree that parking promotes car use and it should be discouraged. Do you have any more articles that are specifically related to CBD parking for Melbourne? If yes then please post them.

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