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Price discrimination & congestion pricing

I have long advocated congestion pricing of urban roads.  The idea is to charge people the short-run marginal cost of making journeys to redirect travel plans away from the morning and afternoon peak periods towards less congested periods.  This means that the most valued journeys will occur at peak periods and the less valued journeys will be made off-peak.  It is a standard piece of microeconomic theory that such policies deliver efficiency gains and this has been well understood since, at least, the 1960s.

Private owners of roads have incentives to move towards congestion pricing themselves.  Not exactly, but approximately at least. Those making high-valued journeys will pay more and can be charged higher prices. This is third degree price discrimination – charging those with higher willingness-to-pay  (with “less elastic demands”) more for using roads during peak times.  Price discrimination mimics such ideal congestion tolls. The greed of a monopoly like Transurban can therefore, to some extent, advance the social interest.  Indeed after the traffic fiasco in Melbourne yesterday they have this morning advanced a case for congestion pricing themselves.  (HT to DP for spotting this). 

Such pricing would still need to be regulated – they are monopolists and would have incentives to charge excessive prices*. But there should be a pretty broad basis for a sensible deal here between traffic authorities and road owners.   There is a literature on this issue and, if I get a chance, I will search for it.  It is known that such things as bottlenecks have large consumption costs and hence provide an intensified case for pricing. My guess is that the fly in the ointment here is not the economic theory but the populist politicians who scream blue murder at the idea of charging different prices – and wrongly inflame the views of the public.  But from the viewpoint of pricing congestion it makes perfect sense to charge higher prices for a road that is scarce because it is in peak demand.

BTW the terrible delays experienced as a result of computer failures on CityLink yesterday would have been relieved had congestion pricing been in place. Congested traffic is much more susceptible to even minor disturbances than more free flowing traffic.

* For example genuine congestion pricing would involve a zero toll when there is no congestion and Transurban is unlikely to want this!

4 comments to Price discrimination & congestion pricing

  • derrida derider

    Harry, strike while the iron is hot. Write a quick op-ed while its topical – this post will be a good starting point. If you’ve not got enough time for that, at least get a pourno on the phone & see if you can induce him to run a little par. Think of a juicy quote.

    These days if an academic wants to influence policy he or she simply has to be a shameless media tart.

  • hc

    Something is planned, Harry.

  • conrad

    Just out of interest sake if you didn’t know, but I was just up in Adelaide last weekend, and they have different prices on their bus system depending on whether you go in peak hour or not.

  • Jim Rose

    The Swedes had a really cleaver way of introducing cordon pricing and congestion charges.

    Trial them for 7 months, stop charging the cordon prices or congestion charges for 5 months, and then hold a local referendum on whether people want to go back.

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