Roads and Restaurants: The Need for Effective Pricing
Have you ever eaten at a restaurant with no prices for the food? This happens regularly at all-inclusive resorts. Since you have prepaid for all food, you can order as much as you like from the menu every time you sit down to eat. The incentives are completely misaligned; you lose nothing by ordering more food than you can or should eat, and the servers and chefs have little to gain by providing anything spectacular. The result would not be surprising to transportation economists: the food is not very good and you wind up eating too much of it.
The same phenomenon occurs in the way we pay for our roads in the U.S. and much of the world, except it is even worse. In the U.S. we generally pre-pay for roads, and we often do so through opaque taxes, such as gas taxes, that are very low and not collected or disclosed at the pump, or general taxation. Unlike the case of the resort, we usually do not have much of a choice about whether to pay for a given road or to use a different road or mode of transportation. Then, not surprisingly, people overuse the roads, and often they are not preserved in the most cost-effective manner.
The idea that we need to price our roads more effectively is not new. But despite years of argument by economists and planners alike, implementation of better road pricing remains largely elusive. There are some large cities around the world – Stockholm, London, Singapore – that have implemented congestion pricing for their cores. There are some places in the U.S. where congestion pricing has been implemented on new lanes of highways, such as the I-495 Beltway in Northern Virginia, the I-95 HOT lanes in Miami-Dade County Florida, and SR-91 in Orange County California. Some New York City area river crossings have peak pricing as well. But in general, we continue to see bad food (roads in poor condition) and too much food (traffic congestion) in virtually every major American city.
The reason for this is simple – witness what happens when private companies try to get you to pay for something that used to be “free”. When banks introduced ATM fees or when airlines introduced baggage fees, they faced a tremendous backlash from customers. But their bottom lines were at stake, and their shareholders knew it, so these private companies were eventually able to move forward and customers eventually accepted the new norm. Roads, on the other hand, are typically owned and operated by government agencies. When elected officials get a backlash from customers, who can fire them rather easily, they have little incentive to stand firm just to reduce traffic congestion.
This is where the federal government comes in. Virtually every recent example of congestion pricing in the U.S. has come about because the federal government has created an extra incentive for elected officials to move forward. The Urban Partnership Agreements (UPA) under the George W. Bush administration successfully moved forward road pricing in metropolitan areas by effectively holding out funds for public transit as an incentive. New York City came within a hair’s breadth of introducing congestion pricing in its core because of UPA. And yet despite these successes and near successes, the program disappeared in 2008 and was never revived or replicated.
UPA seems unlikely to return in the current environment. The political problem with UPA was that it empowered the executive branch to make decisions about transportation spending that otherwise could have been made by the legislative branch. A Republican Congress with a Democratic President is unlikely to enable a new version of this program. However, as Congress begins drafting a new authorization bill, there are some other more incremental steps they could take that might encourage better road pricing:
- Permit tolling for the purpose of managing demand on the Interstate.
Current law still prohibits tolling Interstate highways except for new capacity. President Obama suggested reducing this prohibition in the administration’s reauthorization proposal (Generating Renewal, Opportunity, and Work with Accelerated Mobility, Efficiency, and Rebuilding of Infrastructure and Communities throughout America, or the GROW AMERICA Act). When that proposal was released, many media outlets mistakenly assumed that the federal government was proposing tolling the Interstate. Rather, what GROW AMERICA was attempting to do was to give states and localities more flexibility with respect to tolling the roads they operate. Tolling is often perceived by legislators and the press as a funding solution when it functions more effectively as a method of managing demand. Perhaps if tolling were permitted to manage demand, rather than simply to provide a source of funding, permissiveness for tolling could become more palatable.
Truckers are often some of the biggest opponents of lifting the ban on tolling the Interstate. Ironically, trucking companies would likely be some of the greatest beneficiaries of congestion pricing if it effectively reduced congestion at some of the biggest national bottlenecks by tolling a portion of existing lanes. Not only would trucks have the option of bypassing congestion by paying a toll when it is economically beneficial to them, but they could also benefit even when they do not pay. Congestion pricing in practice has demonstrated that often the users of untolled lanes can be beneficiaries of pricing as well. Allowing tolls to manage demand on the Interstate would not spur a new round of congestion pricing, but it could be an easy way to remove at least one barrier.
- Create a pricing component for existing discretionary grant programs.
While UPA may not return, there are still some discretionary grant programs that could be used to encourage better road pricing. Two potential programs are Transportation Investment Generating Economic Recovery (TIGER) and New Starts. TIGER is a multimodal discretionary grant program that provides the U.S. Department of Transportation with great discretion with respect to criteria for distribution, but was part of the American Recovery and Reinvestment Act (ARRA) rather than the surface transportation bill. If Congress codified and authorized this program in the next reauthorization bill, which they seem to like since they keep funding it, they could also specify criteria for distribution of funds. One potential criterion could be the use of effective demand management.
Similarly, New Starts is a well-established discretionary grant program for new capital investment in transit. There may be no better opportunity to introduce better road pricing than when a new transit line is constructed. With a new transit line in place, drivers have an alternative to get to work if they prefer not to pay a toll. Establishing congestion pricing as a criteria that is encouraged for New Starts applicants could go a long way towards encouraging governors and mayors to propose road pricing in order to improve their chances of receiving a federal grant for transit investment.
- Use pricing, not congestion, as a performance metric.
The Federal Highway Administration (FHWA) has yet to conclude the rulemaking process for performance measures under current surface transportation law (MAP-21). One measure they have yet to define is that of congestion, a measure Congress specifically requires as part of the Congestion Mitigation and Air Quality (CMAQ) program. Eno and others have highlighted concerns about congestion as a performance metric, since in many urban areas, congestion is not always considered to be a negative. For example, congested areas in which people can freely reach destinations by walking, biking, or transit still provide high levels of mobility and can be highly desirable places to live.
Instead of making congestion the metric it would be wiser to evaluate demand management. States and localities could report on how extensively they are using demand management techniques on federal-aid highways under CMAQ, including the use of pricing. This would enable performance of CMAQ funds to be evaluated not on the extent to which they reduce congestion, but rather the extent to which they use proven congestion mitigation techniques. This could be more palatable to highway advocates and transit advocates alike.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of The Eno Center for Transportation.