One idea raised at this week’s tax talkfest was road congestion charging. Economists on both sides of the political spectrum seem to love it, citing London, Manchester and Stockholm as example of successfully implemented schemes.
What is most surprising is the silence surrounding economic arguments against congestion charging (although Gary Banks, Productivity Commission Chairman, warned about the use of taxes to change behaviour yesterday). It is high time something was done about this.
I’ll let Felix Salmon start the inquiry:
For me, the strongest argument against a congestion charge is that there’s a decent chance that it will be a very expensive way of achieving not very much.
Indeed, this appears to have been the case in London where traffic is back up to the level seen before the implementation of the congestion charge. In economic speak, the long-term price elasticity of demand for road space appears to be zero.
Taxing with the intention to change behaviour works when there are close substitutes. But if there are no close substitutes, such as the limited bus and rail network in Brisbane, the tax will raise revenue but not change behaviour. Especially if the trains and buses are full in peak hour when the tax will be in force.
Of course, proponents of congestion charging suggest that revenue would be spent on improving alternative transport options.
The second problem relates to implementation, and can loosely be called a boundary problem. Where do you draw the line in the city for a charge area boundary? One would expect, as has been the case in London, that land use patterns would be affected. If the tax works, and people stop driving, retailers relying on passing traffic will be affected, while those just outside the boundary may benefit. The boundary may very well create its own traffic problems as people drive alternative routes to avoid the charge.
Another criticism is based on the principle of rationing public goods through price (I use the term public goods a little loosely). As one commenter notes:
The fee is a method of rationing, but why should it be in the form of monetary compensation to the state? There are many other methods of rationing scarce road space available. The reason for utilizing a fee is obviously because it transfers wealth to the state.
Why not charge an individual fee for faster fire and police service?
Another criticism is that congestion charging, while it may be progressive in terms of revenue, is regressive in terms of utility (the poor are made worse off by the tax). As one researcher in the field recently noted:
A critical assumption in many of the previous analyses of congestion charges is that there only exists a single value of time. This is somewhat surprising since one of the main features of a congestion charge is that it sorts people related to their value of time, given the existence of feasible transport alternatives
This incidence of the tax burden is easily demonstrated in the table below. In this example a number of commuters who value a trip and their time differently is shown. In the top panel all commuters except B drive this route and with seven commuters the trip takes 30mins. In the bottom panel, a $4 congestion charge is introduced, and the number of commuters drops to six, and the trip time drops to 20mins (the figures are not meant to reflect reality, simply to demonstrate the point).
What we find is that the commuters with the lowest value of their time are the ones with the greatest reduction in utility and are the ones who stop commuting due to the charge. Commuter C, with a high value on their time and a low value for the trip actually starts to make this commute.
So yes, one could summarise this argument as – a congestion tax gets poor people off the roads so rich people can drive faster:
What we also notice from this example is that the tax reduces total social welfare (utility) from 108 to 99. This means that this group is worse off after the tax (as you would expect).
Making a congestion charge a net benefit requires that government spend the revenue in a way that makes up this welfare gap. The question is, will spending on alternative transport expansion be sufficient? I have my doubts.
Also, I can’t quite understand why economists don’t believe that congestion is a good allocation mechanism for road space. Congestion itself is a cost to users that rations the space, and people who commute in peak hour must still be deriving a benefit from their trip.
My personal view is that if one wants to reform transport taxes the Dutch probably have a far better model to replicate. It is:
Sort of the love child of a congestion pricing program and a gasoline tax, the scheme will use satellite technology* to track every vehicle in the country and charge them per-mile-driven according to a flexible rate schedule. Initially the program will cover just commercial trucks, expanding over time to all vehicles by 2018.
Their’s is also promised to be revenue neutral as it replaces other taxes. It will be an interesting experiment for the congestion charging brigade to watch unfold.
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