*** This is a collaborative post by Peter Nunns and Stuart Donovan ***
One criticism of road pricing is that it is merely a regressive method for raising revenue that will widen existing social inequities. That could be true – except that we would suggest road pricing is not in fact a revenue-gathering measure at all, but instead a method for increasing the efficiency of our road system.
In this post we argue that – when implemented for the “right” reasons and in the “right” way – road pricing should not only reduce the costs of congestion – and thereby allow us to avoid the need to expand transport capacity at great expense – but do so in a way that does not necessarily worsen social inequities.
So what is the right reason to introduce road pricing? It’s understandable there is some confusion about this question, which was not helped by the “Keep Auckland Moving” discussion document. That document presented road pricing as a way to raise revenue for costly road projects; its effects on the demand for travel was mentioned only in passing:
Rather than being a measure intended to raise revenues by charging a “captive audience” of road users, we view road pricing as a measure aimed at improving the efficiency of the transport system. When you look at it in this way, it becomes possible to implement road pricing without necessarily widening existing social inequities. In fact it could even, under the right conditions, be relatively progressive.
First, it is worth mentioning that economists, such as ourselves, often try to distinguish between:
- Measures designed to improve the efficiency of the economy, and
- Measures designed to improve the equity and fairness of the economy.
Most people (including us!) aspire for an economy and society that is both productive – in the sense of allowing us to get the maximum aggregate reward for our efforts – and equitable – in the sense of ensuring that people are neither reduced to poverty nor alienated from the rewards of their labour. However, it’s generally possible and often desirable to consider these two issues separately.
People have come to accept this logic in many areas of life.
Food, for example, is a basic necessity of life if there ever was one. Food is currently priced by the market, which means that farmers and retailers charge the highest price they are able to get, even if it means that some people can’t afford the food they’re selling. We accept this state of affairs because it often results in more efficient outcomes compared to alternative approaches, such as food subsidies.
On the other hand, most people generally don’t want their fellow New Zealanders to starve to death.
For this reason New Zealanders have individually voted for a social welfare system that uses progressive taxation and transfer payments as a way of ensuring equitable access to food (and housing and other necessities of life). We allow food to be sold in response to price signals, but then redistribute some of the economic gains that results to ensure everyone has access to food.
We would argue that what’s true for tomatoes is true for transport. In the words of the UK’s Eddington Transport Study:
Similarly, a 2010 study by the Australian Treasury, titled “Australia’s Future Tax System”, recommended the introduction of road pricing – but not primarily to raise revenues. The study was quite clear that the main gains, or economic benefits, arises from reduced congestion and a more efficient transport system:
In fact, this study explicitly recommended that road pricing be revenue-neutral and that all revenue collected should be recycled back into the (public) transport budget:
Hence, in most other places the primary objective of road pricing has clearly not been to raise revenue. Instead, it seeks to improve efficiency, which in turn improves aggregate well-being: Less time wasted in traffic, more productive businesses and workers, and less need for costly public investment in road capacity.
Notwithstanding these benefits, we accept that road pricing is likely to have an adverse impact on some low-income households.
This is largely because transport demand is relatively inelastic in the short run. People have chosen to live in certain places and work in certain jobs, and as a result will need to travel at peak times. As a result, the short run effect of road pricing would be to impose costs on everyone who needs to travel at peak times, regardless of their income, and some low-income households will be adversely affected.
In the long run (say 5+ years), these households are likely to adjust their behaviour in response to road pricing. People would choose to live closer (or further away) from work and school, businesses would adjust work hours, and transport agencies would (hopefully) provide more public transport and walking and cycling infrastructure.
But it takes time to change those patterns – to change jobs and homes, or to create new transport options on given routes. It’s understandable that economists’ halcyon “long run” is little comfort to the people facing unsupportable costs in the here and now. So this brings us to our second question: What is the right way to implement road pricing?
We agree that the distributional effects of road pricing – or any pricing mechanism, for that matter – are an important consideration. However, when confronted with the risk of adversely affecting low income households it seems to us that the most appropriate response is not to persist with an inefficiently managed transport system, but instead to identify supplementary mechanisms that can compensate affected low-income households.
That means using the financial gains from road pricing to offset potential negative impacts on low income households. This could be done in a number of ways. For example, we could:
- Expand public transport services and walking/cycling infrastructure, particularly in low-income areas. This would give people more transport choices and hence increase their ability to respond to road pricing.
- Provide direct financial compensation to households adversely affected by congestion charges, by increasing transfer payments to low-income workers or reducing taxes on lower incomes.
- Reduce the cost of travelling at off-peak times, e.g. lower fuel prices and an off-peak public transport discount. Low income households tend to travel disproportionately more at off-peak times.
These options are only possible if road pricing is not seen primarily as a revenue-gathering exercise, but first and foremost as a way of improving the efficiency and productivity of an urban transport system. Thus, when implemented for the right reasons and in the right way, road pricing might help us to achieve a society that is both more efficient and more equitable.
About the authors: Peter Nunns and Stuart Donovan are friendly bearded economists based in Auckland. They have a passionate interest in transport (past, present, and future), smoked salmon, and beards. The opinions expressed here are our personal views and do not reflect upon the position of any organisation with which we are associated, or constitute professional advice.