A justification for taxing congestion: Multiple equilibria with a roading alternative?

Recent posts below (see “Taxing congestion: how I might justify it“) have sought reasons as to why toll-roads are so often touted as an economically efficient measure. For my part, I am quite sceptical that the are universally efficient, and struggle to find a compelling reason why they are even efficient most of the time. However there are some circumstances where it is quite conceivable that they can be efficient. Where there is a (slower) alternative to the road with a congestion charge, and different drivers place different values on congestion free travel, congestion charges/tolls can lead to an efficient sorting of road users between the (faster) toll road and the (slower) free road, resulting in socially optimal outcomes.

The intuition goes something like this:

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The Jedi, Economists, and public choice theory

In some of my most egotistical (although sometimes cynical) moments, I enjoy ranting about the similarities between economists and Jedi’s (at some point I might do a post – if I can actually be bothered trying to figure out what the similasrities are :P ).

In this context I found this old dialogue between Tyler Cowen and Bryan Caplan fascinating (ht Marginal Revolution).

On one side, Tyler argues against the Jedi order – effectively the existence of the order creates the very evil it means to prevent. Byran on the otherside believes that the Sith (the bad guys) would still exist in the absense of the Jedi – but would have no-one to truly counter them.

Both sides are right in part, and the ultimate result depends on an empirical relationship – does the Jedi order destroy more evil than it creates.

For fun, lets bring this back to an economics example. In this sense, if we heroically took economists to be Jedi’s my guess is that market failure would the Sith. Economists believe that their form of analysis helps to prevent, or improve outcomes in the face of, market failures. However, is it possible that the very act of economic analysis shifts peoples actions in a way that makes market failures MORE likely.

For an example we can go to “Freakonomics“. There is a story about how a daycare centre set a fee for “additional after hours care”. Once they set this fee, a the prior “tacit” agreement between the day care and its patron to avoid leaving children after the set hours collapsed. Even when the price was removed, this tacit agreement could not be restored.

As a result, the existence of economists and the need to set explicit prices destroy implicit institutional relationships that exist in society may thereby create the failures that economists are charged to prevent!

Taxing congestion: How I might justify it

I have not yet been convinced that congestion charging, as a general concept, makes sense (especially given the lack of any comments on the post ;) ).  However, this does not mean that there won’t be a general set of circumstances where this type of toll charge does make sense.

One situation I can think of is as follows.  Suppose you have a long piece of road, and along the way vehicles join that road.  Now, the vehicles that are joining the stream of traffic create an externality for all the vehicles that are downstream of them – but they do not have to face the cost of this at any point.  As a result, they are not facing the full social cost of their actions.

If we look at the vehicles joining the traffic stream at this point as the “marginal” vehicles then we can see that, even though on average the cost externality falls on those that perpetuate it, at the margin an additional vehicle faces a lower cost for congestion than the congestion they create!  Since people make decisions at the margin we will have “too many” vehicles entering from side streets, and “too much” congestion.

In this case, we should toll the side roads coming onto the motorway.  Furthermore, the closer these roads are to the city (which is the likely destination of most of the vehicles) the greater the charge should be.

This is my attempt to justify a toll based on congestion.  Notice, in this case a blanket toll, or a toll based on the quantity of congestion isn’t the right toll – the suboptimal solution occurs because vehicles entering the motorway close to the city don’t have to face the congestion, and so do not internalise it.  As a result, this gives us a clearer idea about what actually drives the suboptimal outcome, and how we can solve it.

Feel free to tell me how and why I’ve missed the point :)

Taxing congestion: Is it helpful?

A number of fine authors have come in behind taxing congestion today – namely Greg Mankiw and Stephen Dubner.

The justification for “taxing congestion” appears to be Pigovian – someone clogging up the road has a negative externality on everyone else, and so we should tax that externality. However, I feel that this is just half the story.

In the case of congestion, everyone else on the road is also holding up that one person. In fact, on average, one person on the road is suffering the same negative externality as they are providing. As a result, doesn’t the existence of congestion effectively cancel itself out? Sure putting a toll on will reduce congestion – but if we already have the optimal solution why would we want to introduce a tax on top of it. Note: It may be efficient to actually have some congestion, as the goal of policy is to maximise welfare – not minimise congestion.

Now I have made the argument for an externality in the past (here and here) – my thinking was that the externality fell outside of the drivers and on other areas with which driving was a means to (eg work). Of course, I can’t think of a single situation where there isn’t a “price” mechanism to sort this out (eg with work people wages will adjust to sort out the optimal labour market solution in the case of the “externality”).

I would like to hear if anyone has an externality justification for toll roads – bonus points for using the term “non-linearity”.