Traffic congestion and congestion pricing.

Traffic congestion is a consequence of the nature of supply and demand: capacity is time-consuming and costly to build and is fixed for long time periods, demand fluctuates over time, and transport services cannot be stored to smooth imbalances between capacity and demand. This chapter is concerned with congestion pricing as a tool for alleviating traffic congestion. The insight for congestion pricing comes from the observation that people tend to make socially efficient choices when they are faced with all the social benefits and costs of their actions. Congestion pricing is widely viewed by economists as the most efficient means because it employs the price mechanism, with all its advantages of clarity, universality, and efficiency. Pigou (1920) and Knight (1924) were the first to advocate it. But it was William Vickrey who steadfastly promoted congestion pricing for some 40 years, who was arguably the most influential in making the case on both theoretical and practical grounds. In one of his early advocacy pieces, Vickrey (1963) identified the potential for road pricing to influence travellers' choice of route and travel mode, and its implications for land use. He also discussed alternative methods of automated toll collection. Another of his early proposals was to set parking fees in real time as a function of the occupancy rate. An overview of Vickrey's contributions to pricing of urban private and public transport is found in Arnott et al. (1994). Section 2 of this chapter starts by outlining the basic economic principles of congestion pricing in a simple static ("time-independent") setting with one road. Section 3 adds a time element by considering travellers' time-of-use decisions and time-varying tolls. Various complications are addressed in Section 4, including pricing in networks, heterogeneity of users, stochastic congestion, interactions of the transport sector with the rest of the economy, and tolling on private roads. Section 5 considers the implications of congestion pricing for optimal road capacity. Explanations for the long-standing social and political resistance to road pricing are offered in Section 6, and conclusions are drawn in Section 7.