An iron law of economics states that demand always expands beyond the supply of free goods to cause queues. There is no better illustration of this law than the traffic congestion in virtually every major city and also in many smaller cities that has resulted from allowing city roads to be used without paying any fees. During much of the day, traffic moves slowly not only in NY, Los Angeles, Chicago, and many other American cities, but also in Mexico City, San Paulo, Paris, Rome, London, Tokyo, Beijing, Shanghai, and Bombay.
Congestion has greatly increased over time, and traffic has become congested not only during morning and evening rush hours on commutes into and then out of cities, but also during rush hours in the opposite direction as well. That is, traffic is heavy and progress is slow also going out of cities into suburbs during the morning rush hours, and back into a city during evenings. The direct cause of the growth in road congestion in developing countries like Brazil, China India, and Mexico is the huge increase in the number of cars. The number of cars also rose in the richer countries, partly due to the increase in the labor force activities of married women who drive to work.
Despite the greater traffic congestion on roads, most men and women still choose to drive since that gives them greater flexibility about the times to travel for leisure or working. In addition, cars have become more comfortable, reliable, and safer with power steering, four wheel drive, improved tires, air conditioning, cell phones, and advanced audio equipment. Opposition to the building of additional highways on environmental and other grounds slowed down the construction of highways in many countries to accommodate the growing number of cars on the road.
The Texas Transportation Institute estimated that the extra time and fuel spent in driving as a result of traffic congestion in 1994 was worth over $75 billion. They assumed about one and one quarter persons per car, and that the average value of time per person was $11 per hour. The increase in congestion and in the value of time since then would suggest that a comparable figure for 2005 would likely exceed $150 billion, or more than one per cent of American GDP. Moreover, these estimates do not account for any pollution damage caused by the excessive driving that causes congestion.
Like the weather, everyone talks about traffic - Goggle lists over 11 million web sites that discuss traffic congestion- but aside from some new roads and public transportation system, little has been done to reduce this congestion. Congestion is inevitable when people live in cities and in highly built up suburbs. But there is a fundamental reason why the amount of traffic congestion is greater than the efficient amount. When a person decides to drive to work during rush hours, he takes into account any extra time it will take because of congestion on the roads at those times. But he generally does not take account of the effects of his driving on the congestion faced by others.
Economists call this increase in the congestion he causes others a negative externality. Of course, each person that decides to drive during a congested period only imposes a very small harm on others since he only increases traffic times by a tiny amount. But adding up all these small externalities over thousands of cars sums to a large aggregate externality, and a large increase in traffic congestion, that does not enter in any individual's decisions about whether to drive or not, or whether to avoid rush hour traffic.
The optimal way to induce drivers to take account of the congestion they cause to others is to charge them fees for driving during congested periods that would vary with the degree of the congestion. So these fees would be higher during rush hours than during other hours of the day, and they would be lower on weekends when traffic is generally lighter than on weekdays. Fees should be greater when it is raining or snowing since congestion is greater with bad weather, in part because driving is slowed down by the weather, and in part because more people decide to drive rather than walk or take public transportation when it rains.
No city has such a sophisticated form of congestion pricing. But interestingly, it took a left-wing mayor of London, Kenneth Livingstone (sometimes called "Red Ken"), for London to become the first really large city to introduce an extensive congestion road tax, although Singapore pioneered this approach with a license system that began in 1975. In 2003, Livingstone implemented a pricing system for cars entering the central part of London during business hours. Owners of cars that cross the cordon around central London were initially charged ¬£5 for each time their cars crossed; that fee was raised in 2005 to ¬£8. Cameras record the license plates of cars as they cross, and anyone who is caught trying to avoid paying their accumulated charges is fined. This simple system has done much better than some analysts expected, although economists know from many other examples that people find ways to substitute for any good or activity that becomes more expensive. This fundamental law of demand applies to driving during peak hours as well. Car traffic in the central city of London has fallen by about 20 per cent, average traffic speed in the center has increased from about 8 to 11 miles per hour, and both car and bus delays during peak traffic periods have fallen by even larger percentages.
People adjusted by using public transportation, car-pooling, bicycling, or walking into central London instead of driving. More people ended up switching to buses rather than trains because bus travel became a lot faster due to the reduced congestion on central city streets as the number of cars competing with buses for space on the central city streets dropped a lot. In the long run, this toll would induce some companies and shops to move their offices and stores outside the central part of London.
The London system is rather effective, but it is still a crude pricing system since the amount charged for entering the central city does not vary during the business day, even though congestion does vary, due sometimes to changes in the weather. The Deputy Mayor of London told me that they are contemplating introducing a more sophisticated system. Anyone who enters the central city would need to have a device on his car, a tracking system, that would transmit information to electronic toll collectors on the locations of the car at different times. The charge to an owner would then depend on the degree of congestion at the times his car was in the central city. At the end of each month, car owners would be assessed the congestion charges accrued during the prior month.
Such a more sophisticated pricing system would have all the advantages of the present system plus some additional ones since it would raise the tax when traffic was moving more slowly, and lower it when traffic flowed more quickly. Such congestion based tolls would, in addition, encourage some companies to stagger their opening and closing times to avoid the peak rush hours when fees were greater. It would encourage weekday shoppers to wait until rush hours were over before going into the central city, and to leave before traffic became heavy at the end of the working day.
A toll on cars is more efficient than others ways of reducing congestion. Some cities allow cars to enter the central part only on alternative days, an approach that takes no account of the different values placed by different drivers on the advantages of entering every day. A tax on gasoline reduces driving and in this way helps to reduce congestion, but it takes little account of the greater effect on congestion of driving during heavy traffic periods than the effect of driving when traffic is light.
A few weeks ago Mayor Michael Bloomberg of New York rejected the imposition of a tax on cars that passed a cordon imposed around New York‚Äôs downtown area. Apparently, the city administration gave no attention at all to a more sophisticated form of congestion taxing. New York's decision is not unusual since many other cities have considered and then rejected imposing tolls to help relieve the terrible congestion during business hours in order to speed up traffic. Partly, the opposition comes from businesses and shops in the downtown area that might have fewer customers and have to pay more for employees. The opposition comes also from car owners and some conservatives who see this as just another tax to raise government revenues.
I certainly have no desire to increase the already heavy tax burden in cities and elsewhere. Ideally, I would like any increase in revenue from congestion tolls to be offset by reductions in other taxes-that is, to be revenue-neutral. However, congestion is a tax too, but a hidden tax on the time of people rather than on their pocketbooks because it increases the amount of time wasted in heavy traffic. This tax on time from congestion is a very inefficient tax because it is not paid to anyone, but in effect just throws away time, the most valuable resource that people have. Unless the government would do great damage with the revenue collected from congestion tolls, these tolls are much more efficient than the current taxes on time that result from traffic congestion.
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