Economics: Pricing, Demand, and Economic Efficiency—A Primer

The Primer Series and the Purpose of This Volume

States and local jurisdictions are increasingly discussing congestion pricing as a strategy for improving transportation system performance. In fact, many transportation experts believe that congestion pricing offers promising opportunities to cost-effectively reduce traffic congestion, improve the reliability of highway system performance, and improve the quality of life for residents, many of whom are experiencing intolerable traffic congestion in regions across the country.

Because congestion pricing is still a relatively new concept in the United States, the Federal Highway Administration (FHWA) is embarking on an outreach effort to introduce the various aspects of congestion pricing to decision-makers and transportation professionals. One element of FHWA’s congestion-pricing outreach program is this Congestion Pricing Primer Series. The aim of the primer series is not to promote congestion pricing or provide an exhaustive discussion of the various technical and institutional issues one might encounter when implementing a particular project; rather, the intent is to provide an overview of the key elements of congestion pricing, to illustrate the multidisciplinary aspects and skill sets required to analyze and implement congestion pricing, and to provide an entry point for practitioners and others interested in engaging in the congestion-pricing dialogue.

The concept of tolling and congestion pricing is based on charging for access and use of our roadway network. It places responsibility for travel choices squarely in the hands of the individual traveler, where it can best be decided and managed. The car is often the most convenient means of transportation; however, with a little encouragement, people may find it attractive to change their travel habits, whether through the consolidation of trips, carsharing, by using public transportation, or by simply traveling at less-congested times. The use of proven and practical demand-management pricing that we freely use and apply to every other utility is needed for transportation.

The application of tolling and road pricing provides the opportunity to solve transportation problems without Federal or state funding. It could mean that further gas tax, sales tax, or motorvehicle registration fee increases are not necessary now or in the future. Congestion pricing is not a complete plan of action. It has to be coordinated with other policy measures to maximize success.

This volume describes the underlying economic rationale for congestion pricing and how it can be used to promote economic efficiency. It lays out the basic theory of travel demand and traffic flow and shows how inefficient pricing of the road network helps create an economic loss to society, as well as the means by which this can be alleviated through pricing. The impact of congestion pricing on highway infrastructure investment and the revenue implications of congestion pricing will be discussed in a separate volume in this primer series.