*** 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:

Keep Auckland Moving 4Rather 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:

Eddington 2 Eddington 3

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:

Australian Treasury 1

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:

Australian Treasury 2

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. 

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31 comments

  1. Brilliant summary on how its not about making money but managing demand.
    Clearly feeding the money collected into public transport is exactly how to make Travel Planning successful.
    The focus from Auckland Transport needs to be on how to reduce congestion and not just assume it is going to get worse no matter how much money is spent, and this clearly shows it can be done.

  2. Bang on Stu and Peter. I would add a clarification which is to say – road pricing should apply to particular roads/ areas at particular times, where this makes the roading network more efficient. So they should be applied in cities, not rural areas and small towns.

    The gains aren’t only from decongestion, it’s also about reduction of noise and air quality in built-up areas.

    Cars have some costs wherever they are used, but those should be addressed through petrol taxes or per-vehicle charges, as it’s cheaper to do it that way. It’s odd that the UK talk about the prices taking into account “carbon impacts”, as those are the same wherever the car is, and should definitely be dealt with through petrol taxes – petrol usage being exactly proportional to emissions.

    1. Yes, good point. Road pricing would definitely apply primarily in cities – however I’ve also wondered why we don’t use variable tolls on the Northern Gateway, for example, with higher tolls being charged during holiday periods. Re: carbon impacts I think there are 1) some emissions benefits from avoiding stop-start driving conditions no plus 2) general reduction in driving would reduce emissions.

      1. Sure, and there would certainly be emissions benefits with road pricing, but the UK thing says their pricing takes account of emissions, which is a bit baffling. Anyway, I don’t suppose we’d do that here, since the ETS scheme is already applied to the retail price of petrol and diesel. Not that it makes much difference with current prices.

  3. I agree, excellent work. Now we need a practical proposal for Auckland. One that doesn’t lead to unwelcome behavioural changes like a swamping of local roads if the motorway network were priced. Nor one with high costs nor invasive tracking systems…..?

    Additionally: Peter’s beard is frightening enough (70s porn star) but Stu, say it ain’t so; a ginger beard? Nooooo! Isn’t it sufficiently socially limiting being an economist already?

    1. Thanks Patrick.

      Yes, I agree re: unintended consequences. It’s for this reason that I would insert an additional step: We need to start doing some practical research into practical proposals. I’ve suggested we use a voluntary GPS based schemes, which gets around the invasion of privacy issues normally associated with those schemes. There may be other things we can trial – but either way I think we should get testing.

      We need to know, for example, how long it takes low income households to respond to road pricing so that we can in turn time-limit some of our transfer mechanisms accordingly.

    2. P.s. My beard is like ginger icing on my snow white complexion. In terms of socially limiting, once one has hit rock bottom it does not matter whether you keep digging or not.

        1. the hue varies depending on the time of day and surrounding environs. Post dinner-time at Peter’s house my beard does tend to adopt a more smoked salmon tone.

    1. True, good point. It would pay for us road pricing advocates to keep coming back to that point.

      I would note that they are already paying higher Fuel Excise Duties (FED) than the norm in that case. We should compare the road pricing policy incrementally against the status quo — not against a counterfactual scenario of no taxes at all.

      Also, the lower socioeconomic classes don’t tend to travel across the region in the same rat race patterns as the middle classes (to CBDs on mass transit and major arterials), and as Stu said, often don’t travel at peak time. So congestion charges would generally be lower (if they were administered as an economist would).

      I’d also like to think that it’s possible for congestion charges to offset general fuel excise/road user charges, perhaps to such an extent that total overall transport taxes are lower. (This is an alternative to using the funds to invest in more transport — because we wouldn’t need to invest as much in transport.) (That, however, would require a fundamental reform of how FED and RUC are levied, so that regional variation in congestion charge payments (such as if it was just an Auckland thing) wouldn’t create all sorts of perverse incentives and needless administrative complexities. That said, with mainstream electric vehicles on the long-term horizon a complete overhaul of the FED and RUC regimes is going to happen at some stage anyway.)

    2. First point: It’s not necessarily regressive if you reinvest the revenue in a progressive manner, such that the income effects of the latter outweighs the former. And they easily could, because the gains are so large, in terms of additional revenue and reduced expenditure on road construction.

      Second point: Low income households already travel disproportionately less by car in congested conditions. So from the outset you would tend to be pinging high income households, depending of course on the design of the scheme. The low income households that are affected would need to be the target of the redistributive mechanisms noted in point one.

    3. Good comments Doloras and Chris.

      While we didn’t directly address differences in travel pattern by income, we did say that the fact that “people have chosen to live in certain places and work in certain jobs, and as a result will need to travel at peak times” would impose costs on some low-income households. How many? Good question!

      I’m a bit hesitant about speculating in advance of data. It’s easy to get the impression that Auckland’s well-heeled residents are increasingly clustering around the (high-paying jobs in the) city centre. (A trend reflected in house prices in the city fringe.) But there are also quite a few people commuting long distances from outlying places like the North Shore and Botany – not exactly Auckland’s most proletarian suburbs!

      We could use Census microdata to quantify the impacts on low-income households, as people are surveyed on their place of residence, place of work (if any), household income, and primary means of transportation. When the 2013 Census data is available it could be used to get an extremely detailed picture of the potential impacts on Aucklanders, including whether low-income residents are more likely to travel by road, or commute longer distances.

      Research project design aside, I’d note that we shouldn’t be sanguine about the equity implications of the current transport system, which requires lots of low-income New Zealanders to own cars or be unable to travel. The costs of car ownership are high relative to alternatives like PT and active modes, placing high financial pressures on low-income households.

      1. “We shouldn’t be sanguine about the equity implications of the current transport system, which requires lots of low-income New Zealanders to own cars or be unable to travel. The costs of car ownership are high relative to alternatives like PT and active modes, placing high financial pressures on low-income households”. – absolutely. And I seem to remember reading something by Tim Harford which suggested that, in the UK, higher-income households spent a larger proportion of their income on transport… unlike the US and here, no doubt, but road charging and fuel prices may not always be regressive if households make more use of PT.

      2. “reinvest the revenue in a progressive manner”

        One things we haven’t discussed yet would be the strong status-quo calls for reinvesting the money in ROADS. I.e. the punter in his car shouting at politicians that they damn well better widen the (remaining, non-tolled) roads, because he’s now paying extra to drive, and once he arrives on the arterial roads network, he finds it even worse than before, because of the added load from people avoiding the tolled parts.

        I am not disagreeing with your basic assumptions – however, I am worried that a lot of the money will get siphoned off, not into the general treasury (that is a bit easier to prevent) but into roading schemes (or Cameron Brewer “bus schemes”, i.e. bus lanes that then get turned into T2 lanes that then get abolished after the next Council election swing, or whenever AT is having a particularly weak backbone-week).

  4. Hi Stu, Peter

    Great article. Good work. I like the ‘different tools to solve different problems’ approach. I also like the food analogy, and the short-run versus long-run distinction.

    Up there with the self-evident food analogy, you could ponder upon what other sectors of the economy would look like if we stopped using prices and just used queues to ration demand. Eg, cellphone networks would become overloaded, there would be queues and shortages at supermarkets and petrol stations, etc… Those historic pictures of impoverished soviet communities comes to mind.

      1. I approve of these comparisons. Wish I’d thought of describing congestion as a way of rationing through queues!

  5. (This is a positive comment, but it starts out by explaining a negative scenario). You note the need for increased public transport prior/in-response, but it’s worth restating:

    In the absence of prior upgrades to public transport, such a policy would be a disaster. It would fail logistically – people would be forced onto services which are insufficiently frequent, insufficient in capacity, and more likely to suffer unreliability. It would also be a disaster from the user perspective, as the experience existing users had worsened, and new users came on board to experience a poor service.

    Not to mention the political impact, with a confluence of those affected above and the car-users who objected strongly. These combined would doom this initiative.

    Of course, disaster is not inevitable.

    But the gap between provision and need would have to look like it was being addressed rather comprehensively before coming to this point. London already had a very good Tube before it came into place. We’ve got Britomart and a spaghetti of bus maps. Those will both change, but this is more a 2025 solution than a 2015 solution. If we treat it as a future instrument, then we can use it to address the massive planning gap (whoops, “funding gap” [sic]) we’re being faced with.

    1. Yes, I agree: Time is on our side. But my only caution with the “let’s wait” is that we should be doing a lot of research/engagement now, which will leave us much better placed to implement such a scheme in the future.

      Personally, I would pencil it in for post-CRL. That’s the perfect opportunity to apply some pressure to people who are persistently driving at peak times just because “it’s what they have always done” In fact, you could do them almost simultaneously – open the CRL in the early 2020s and road pricing a few months thereafter (once patterns have settled down).

      1. Yes this, and de-car Queen St then too. But this timing reinforces that this is a measure that can’t be used to fund the necessary Transit improvements. These must come from the existing sources which can happen the moment the govt. stop distorting Auckland’s needs by only allowing 3% of the new infrastructure budget to Transit. Wind back the road building to half and we can have a transformed city ready for these road pricing measures to additionally free up the existing and lavish road network.

    2. Hi George. Excellent point – I agree that road pricing will be most equitable in an environment with relatively mature PT and active mode. That’s why we included the option of direct financial transfers to affected low-income households.

    3. Not sure I agree the policy would be a disaster. We will still have all the existing road capacity we do now. Buses would obviously have a high “ability to pay” and so would have first pick of the uncontested roads. So we’d need a few more buses. I don’t know what level of mode shift you might need to decongest the roading network? Maybe 15-20%? With a combination of moving trips around, car pooling and extra buses that could be achieved with maybe a 2 year lead in period.

  6. Great post – it should be required reading for road pricing debaters. I will say a couple of things: I am not against the revenue from road pricing going into the consolidated fund – it is the governments asset after all (although they could privatize at some point). However I don’t see the point in using the money to subsidie public transport. In fact the idea that public transport should be subsidies tends to contradict the main points in your post. Investing in active modes is a bit different and I would be all for this however. Also investment in new roads shouldn’t be completely curtailed – capacity should be expanded if the investment is projected to be profitable in terms of raising additional revenue. Otherwise you are just being a greedy monopolist!

    1. Depending on the road pricing scheme, money might also be being raised of the local road network. Are you suggesting that money also go to the consolidated fund? If it went to the roads owner (the councils) it would certainly see a massive shift in the amount of money central government has to play with and very much strengthen the position of local authorities.

      1. Yeah you’re right – the councils should get the return from their roading assets. Perhaps the government should get a share given their historic investment.

        1. I’d be more inclined to do make some wholesale changes to funding arrangements. Government get the revenue from State Highways, councils the revenue from local roads. Most state highway projects tend to have very localised benefits i.e. Aucklander’s are the the ones to benefit the most from say Waterview, then it should be up to the locals to help pay for that upgrade. In effect you would end up with a system where local roads are fully funded by local authorities and the state highway network is partially funded by the state and partially by the local authorities.

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