National Economic Panel



ESA National Economic Panel Polls





Got an Idea?

Overview of poll results by Dr Leslie Martin

Leslie Martin

Leslie Martin

By Dr Leslie Martin, Senior Lecturer, The University of Melbourne

The Bureau of Infrastructure, Transport and Regional Economics (BITRE) estimates that avoidable congestion costs Australian capital cities up to $16.5 billion per year, due primarily to private and business time costs. Infrastructure Victoria estimates that by 2030 traffic congestion will cost every resident of Melbourne $1700 per year.

Traditional approaches to reducing congestion have been ineffective. Duranton and Turnershow that supply options often fail: when we expand road and public transport networks, the number of new users increases almost 1-to-1 due to induced demand.

We’re using the misery of being stuck in traffic to ration our roads. There must be a better way.

For years, economists have advocated for road charges that reflect congestion costs to leverage existing transport infrastructure and better allocate scarce road resources (Vickrey 1963). Recently in Australia, congestion-based charges have been recommended by the 2009 Henry Tax Review, 2014 Productivity Commission, 2014 ACCC Harper review, 2015 report by Infrastructure Victoria, and 2017 report by the Grattan Institute. The net overall gains of these charges are overwhelmingly supported by the economists of the National Economic Panel as well. 96% agreed or strongly agreed with the statement:

In general, using more congestion charges in crowded transportation networks - such as higher tolls during peak travel times in cities, and peak fees for airplane takeoff and landing slots - and using the proceeds to lower other taxes would make citizens on average better off.

Congestion charges can take several forms. The most cost-reflective prices vary with market conditions, dropping to zero when there is no traffic. On a road with dynamic toll lanes, drivers have the option to switch out of free but congested lanes into paid lanes where prices are set dynamically to guarantee free-flow. Dynamic prices can also be coupled with pre-pay options, which allows risk averse households to lock in non-varying prices, while still providing incentives at the margin. Other coarser price instruments vary with location and time of day, like the cordon charge for entering London, or the fee for crossing the Sydney bridge.

Congestion charges are a canonical example of a Pigouvian tax, a tax on externalities. Drivers currently internalize private costs (time spent in traffic, risk of being in an accident) but not the cost their driving imposes on others (additional delays for others, higher risk of accident for others, air pollution). Under prices that reflect the full social cost of driving, households may choose different routes, times or transport modes, link destinations to reduce overall kilometers traveled, or avoid redundant trips, like repeat trips to the supermarket.

Congestion charges provide incentives to reduce trips that are particularly low value or high cost, trips that provide the least net benefit to society. As John Freebairn explains, “In the short run and for available capacity, setting congestion charges would better allocate scarce capacity from less valued to higher valued uses for a net efficiency gain.”

Congestion charges reduce time spent traveling and make travel times more predictable. Recent research (Bento, Kreindler) shows that some of the largest gains from congestion charges come from reducing schedule costs, like the cost of being late to the airport, a job interview, or school pick-up.

John Freebairn also highlights the benefits that congestion charges provide identifying future investment needs. “In the longer run, the information on congestion prices and usage would better signal the choice of national productivity investments to create additional capacity.”

New technologies facilitate the implementation of congestion charges and reduce response costs. GPS transponders and dynamic toll gantries make it easier to measure actual road use and price dynamically as a function of current road conditions. Data on millions of hours of driving patterns is making it easier for drivers to anticipate and avoid high price areas. Ride sharing apps make it easier to match and coordinate passengers. And remote working technologies facilitate flexible working hours and reduce the need to commute at peak times.

Clearly there are economic gains from improving our allocation of road resources. But there is also a real fear that congestion charges could price the poor off the road for the convenience of the wealthy.

Janine Dixon highlights the need to consider the effects on “low-wage workers that are often afforded less flexibility in working hours and locations and may find it difficult to adjust their road or transport usage in response to a congestion charge.” Households that live far from the city, for whom home or work are underserved by public transport, who have little flexibility in work start and end times, and have relatively low value of time are the ones that are worse off under congestion charges.

But many other groups are expected to be better off, especially if collected revenues are used to offset annual motor vehicle registration charges, stamp duties on the sale of new and used vehicles, or other distortionary taxes in other sectors. Gigi Foster also recommends using revenues to reduce the personal income tax on any bracket below the top or the Medicare levy. Chris Edmond highlights the opportunity to recycle revenue in a progressive way.

Two key vulnerable groups, the low-income unemployed and the elderly, are likely to be significantly better off almost regardless of how revenue is recycled. They travel less, especially at peak times, so currently contribute disproportionately to the many fixed charges associated with vehicle ownership (Martin and Thornton 2017).

Will the median household gain, potentially guaranteeing the votes needed to implement such a program (Uwe Dulleck)? Will the average household gain? Consensus from the National Economic Panel is an overwhelming yes.

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