Road pricing in Singapore after 30 years.

• Author: Christainsen, Gregory B.

Traffic congestion continues to be a serious problem in major cities around the world. Congestion results not only in time lost while sitting in traffic jams. It also constitutes a disruption to company supply chains and the general flow of commerce. Idling vehicles contribute as well to air pollution.

Congestion thus reduces the quality of life, but government efforts to limit it have been, for the most part, woefully inadequate. Indeed, in many metropolitan areas people take for granted the fact that helicopters will patrol thoroughfares in order to inform drivers about locations where traffic problems are particularly severe.

Since 1975 Singapore has priced vehicle entry into its central business district (CBD). The main purpose of this pricing has been to manage traffic volumes rather than the collection of revenue. Prices have been adjusted as traffic conditions have changed.

Tolls for roads, bridges, and highways have a long history around the world, but the tolls collected have been used mostly to help pay for transportation infrastructure. Charges for "hot lanes" on highways in Southern California, which help to smooth out traffic flows, have been the exception and not the rule.

The city of London introduced congestion pricing in part of its downtown area in 2003. The pricing has succeeded in reducing traffic volumes by about 15 percent, and average traffic speeds have increased about 9.2 percent (The Economist, 9 June 2005). It is possible that road pricing will be instituted on a nationwide basis in the years ahead.

The idea of road charges remains politically contentious, with prominent politicians vowing to stop them. The Dutch government made elaborate plans for more than 10 years to introduce widespread road pricing, but when the time came to implement the proposal in 2001, politicians could not summon the will to do so.

In Singapore, by contrast, there is no doubt about the long-term survival of pricing as a means to control traffic volumes. Such pricing has already existed for three decades. Much can be learned from Singapore's experience.

It should be emphasized that road pricing is viewed in Singapore as only one part of an eclectic approach to transportation management, and even in Singapore--where one political party has dominated the government--there are some political barriers to effective pricing. The introduction of superior technology for toll collection is also a sensitive matter. Nevertheless, Singapore has clearly been road pricing's world leader.

The Economies of Road Pricing

Elementary economies teaches us that an excess demand for a good or service can be eliminated if its price is raised sufficiently high. The demand for roadway use is no exception. Chronic traffic congestion indicates that there is an excess demand for roadway use, but in most cases, there is no explicit price charged for driving on streets and highways.

Gasoline taxes may mildly discourage driving, but they do not charge vehicles according to time and place. Roadways may be mostly free of vehicles at some times and places, but they may be extremely congested at other times and locations. Moreover, traffic patterns may change over the years. Road pricing offers the possibility of targeting specific thoroughfares at specific times for more intensive traffic control.

If the prices charged bear a reasonable relationship to the supply and demand for roadways, there are also payoffs with respect to information about driver preferences and road construction. In response to a higher price, for example, some travelers may choose to carpool, change the time of their travel, or use an alternative form of transportation. The higher price signals to people that they should consider changing their behavior, but the people involved make the decisions based on their own information about circumstances of time and place (Hayek 1945). Some people may have close neighbors who commute to the same general area at about the same time and may prefer to carpool. Others may not know their neighbors very well, or their neighbors may commute to other locations. In the presence of a higher price, some people may prefer another form of transportation, and some people may not. Some people may continue to drive, but can take another route. Others cannot. In the long run, some people may even change where they want to live. Others would prefer to stay put.

By contrast, a decision by a public authority to set aside a highway lane for carpools during rush hours presupposes that a certain amount of carpooling is an appropriate response to the existence of traffic congestion. In fact, the carpool lane may be underutilized, and the congestion problems of the other highway lanes may actually worsen because most drivers are now denied access to one of the lanes.

The central issue is thus whether it is better to rely on the information available to a relative handful of public officials, who then make decisions for everyone else, or to just establish a market price to which thousands of people can respond on the basis of their own information.

Excess Demand for Roadway Use and the High Fixed Costs of Road Construction

As far as road construction decisions are concerned, the use of charges provides information as to whether additional roadway capacity is desirable, or whether in fact roadway construction in a particular area has already gone too far. If road charges--which could even involve a surcharge to help control air pollution--can more than cover construction, maintenance, and congestion costs (e.g., the value of time lost in traffic jams and the pollution caused by idling vehicles), it may be advisable to expand roadway capacity. If, on the other hand, charges cannot cover construction, maintenance, and congestion costs, the area may already be overbuilt with respect to roadways.

Construction of roadways involves very high fixed costs that do not depend on the volume of traffic. However, the expense necessary to offset the wear and tear to a roadway from one additional vehicle is rather low. If people's use of a roadway prevents others from reaching their destinations in a timely fashion, there are additional (congestion) costs associated with each vehicle-trip.

From the standpoint of neoclassical economics (e.g., Allen et al. 2005: 472-80), the basic user charge should correspond to the amount necessary to cover the costs of one additional vehicle-trip--that is, the marginal cost of a vehicle-trip. As long as drivers are willing to pay at least an amount that would cover the maintenance and congestion costs associated with additional use of the roadway, it is economically desirable that additional use occur.

Construction costs are costs above and beyond the marginal cost. If the basic user charge also included the construction costs (averaged over the total number of vehicle-trips), the charge would be too high. In the jargon of neoclassical economics, we should have marginal-cost (MC) pricing, not average-total-cost (ATC) pricing (unless ATC happens to equal MC).

How to Cover the High Fixed Costs of Constructing Roadways

The standard ways by which businesses can effectively price activities involving high fixed costs, but relatively low marginal costs, include price discrimination and the use of set-up charges to supplement the basic charge for actually using the good or service. If there is both a set-up charge and a user charge, economists speak of "two-part" pricing.

Price discrimination involves charging some users more than others for the same good or service. The surplus revenue collected from some customers can be used to help cover fixed costs. As long as the price paid by marginal users corresponds to the marginal cost, this pricing can be efficient.

Examples of set-up charges include cover charges (e.g., at some bars), charges for joining clubs (without having as yet used any facilities), and installation fees (e.g., for fixed-line telephone service). For each of these, the set-up charge is not for actual consumption (e.g., of a drink, a round of golf, or for the making of a telephone call), but instead covers fixed costs (of constructing a bar, a golf club, or a telephone network).

With respect to roadways, Singapore practices both price discrimination and two-part pricing. Different types of vehicles pay different charges for using priced roadways, and charges vary by location and time of day. The charges have covered the costs of the road-pricing infrastructure--including gantries and administrators--as well as being a tool for controlling congestion.

Set-up charges in this context involve the collection of annual road taxes--and related fees for vehicle ownership--in addition to user charges. The road tax that a vehicle owner pays is independent of the amount of driving done. It depends instead primarily on the engine size of the owner's vehicle. For example, a ear with a 2,000 cubic centimeter engine (and which is less than 10 years old) pays the equivalent of about $US1,000 per year in road tax] This tax defrays the fixed costs of roadway construction, and in the ease of Singapore, maintenance costs as well.

The revenue from congestion charges has been high enough to finance an annual rebate on road taxes in addition to covering the costs of the road-pricing infrastructure. This rebate was granted each year for five years ending in August 2003. The rebate was also independent of the amount of driving that an individual did, and it helped somewhat to make the whole...