Road Pricing 1: The Theory of Congestion Pricing

Abstract

Congestion pricing, popularly known as road pricing, aims to reduce excessive traffic during rush hours to the Central Business District. Since the social cost of a trip typically diverges from its private cost, a congestion charge is imposed by an economic efficiency-enhancing authority to internalize the external effect brought about by a motorist. By doing so, total travel times by motor cars and buses to and from the CBD, together with their vehicle operating costs, are saved. In a wider context, road pricing is the application of market-oriented principles to curtail excessive automobile traffic and to encourage the use of public transportation. This article develops the framework of the principle of congestion pricing that underlies the use of pricing as a quasi-market mechanism.