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64 I N T E R N AT I O N A L P E R S P E C T I V E S O N R O A D P R I C I N G
BOX 1
Pigou and Knight on Congestion Pricing
PIGOU ON CONGESTION PRICING IN 1920 the roads in such proportions that the cost per unit of
Suppose there are two roads, ABD and ACD, both lead- transportation, or effective result per unit of investment,
ing from A to D. If left to itself, traffic would be so will be the same for every truck on both routes.
distributed that the trouble involved in driving a "repre- As more trucks use the narrower and better road,
sentative" cart along each of the two roads would be congestion develops, until at a certain point it becomes
equal. But, in some circumstances, it would be possible, equally profitable to use the broader but poorer high-
by shifting a few carts from route B to route C, greatly to way. The congestion and interference resulting from the
lessen the trouble of driving those still left on B, while addition of any particular truck to the stream of traffic
only slightly increasing the trouble of driving along C. In on the narrow but good road affect in the same way the
these circumstances a rightly chosen measure of differen- cost and output of all the trucks using that road.
tial taxation against road B would create an "artificial" It is evident that if, after equilibrium is established,
situation superior to the "natural" one. But the measure a few trucks should be arbitrarily transferred to the
of differentiation must be rightly chosen. broad road, the reduction in cost, or increase in out-
put, to those remaining on the narrow road would be
Source: Pigou 1920 (see especially p. 194). a clear gain to the traffic as a whole. The trucks so
transferred would incur no loss, for any one of them
KNIGHT ELABORATING ON PIGOU IN 1924 on the narrow road is a marginal truck, subject to the
Suppose that between two points there are two high- same relation between cost and output as any truck
ways, one of which is broad enough to accommodate using the broad road. Yet, whenever there is a differ-
without crowding all the traffic which may care to use it, ence in the cost, to an additional truck, of using the
but it is poorly graded and surfaced, while the other is a two roads, the driver of any truck has an incentive to
much better quality road but narrow and quite limited in use the narrow road, until the advantage is reduced to
capacity. If a large number of trucks operate between the zero for all the trucks.
two termini and are free to choose either of the two
routes, they will tend to distribute themselves between Source: Knight 1924.
was on providing a fundamental road network to get of administration, tollbooths themselves created travel
farmers "out of the mud" and to enable citizens to drive delays and traffic safety hazards. Motor fuel taxes were
over longer distances between towns. In Europe, respon- seen as imperfect substitutes, but they had the advan-
sibility for building new main roads most often fell to tage that they were easily administered and that the
national governments, while in the United States respon- costs of administering them were closer to 3% or 4% of
sibility for providing mile after mile of new highways their proceeds. Hypothecated motor fuel taxes were
fell primarily to the states. Many states found them- popular among truckers, automobile clubs, newspapers,
selves spending a major proportion of their general tax and politicians, and they played a central role in provid-
revenues on road building, yet congestion was worsen- ing the basic road infrastructure that was at that time so
ing because of rapid growth in travel rather than being desperately needed (Brown 2001).
eliminated by these projects. Over many decades we became so accustomed to
At exactly the time that Pigou and Knight were writ- paying earmarked fuel taxes, including those levied
ing, Oregon had set the tone before 1920 by adopting a since 1932 by the federal government, that we gradually
motor fuel tax that was hypothecated or earmarked to forgot there had ever been discussions of tolls as a supe-
be spent only on road construction and maintenance. rior means of financing transport systems. As road
Dozens of states adopted such taxes in the 1920s. Inter- capacity expanded, we also failed to note that discus-
estingly, texts of the debates held by state legislatures at sion of congestion tolls was highly relevant to public
that time indicate that most of them consciously debates about how to manage congestion on roads and
adopted the fuel tax as a second-best approach. They simultaneously to raise revenue needed to build roads as
believed that tolls were inherently the most appropriate part of that management program. Most Americans,
way to raise money for roads, since the beneficiaries unfortunately, think that where tolls are not charged
would pay at the time and place of use, but tolls were their roads are "free," while of course they are paying
expensive and awkward to collect. In addition to for their travel through a variety of other taxes and fees
absorbing a fifth to a quarter of their proceeds in costs that they may not even know of.
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THEN AND NOW 65
In Europe, tolls, fuel taxes, and hypothecation were and even sport-utility vehicles today are more econom-
also debated at just about the same time that Pigou and ical of fuel than were standard sedans three decades
Knight were writing. Hypothecation was much more earlier (Wachs 2003). In the United States the federal
rarely adopted in Europe than in the United States. In gasoline tax now stands at 18.4 cents per gallon, and
most instances fuel taxes were merged with government state motor fuel taxes range from a low of 7.5 cents per
revenues from other sources while appropriations for gallon in Georgia to a high of 29 cents per gallon in
roads were made from general government funds. Nev- Rhode Island. If the fuel tax had risen sufficiently since
ertheless, fuel taxes emerged as sources of revenue for 1957 to keep pace with the Consumer Price Index, the
governments that, in Europe as in North America, were average tax per gallon among the 50 states would today
building thousands of miles of new roads in response to be 9.7 cents per gallon higher than it is. If measured in
the growth of automobile travel at the time. revenue per vehicle mile of driving, the effects of
Over many decades growth in travel continued to improved fuel economy make this comparison even more
create congestion, but through motor fuel taxes and dramatic. In Virginia, for example, the combination of
tolls levied on some major long-distance highways and state and federal fuel taxation today produces revenue
many bridges, growth in travel also produced growth in that is 42.4% below the proceeds per mile of driving in
revenue that was used to build and maintain the trans- 1957. On the one hand, the method of raising revenue
port system. It was not until the 1960s that this method for transportation projects does not meet rising costs,
of infrastructure finance and management began to and so the condition of the system deteriorates and the
show signs of deterioration. capacity of the system expands much more slowly than
Population and economic growth after World War II travel volumes. For example, between 1980 and 1999
led to urban congestion. In response, urban and subur- vehicle miles of travel on U.S roadways grew by 76
ban highways and freeways were constructed to allevi- percent, while lane miles increased by only 3 percent
ate overcrowded city centers. (Wachs 2002).
Gradually, the earlier solutions came to be seen as On the other hand, the method of collecting revenue
inadequate. The costs of new roads grew as higher design does not itself induce more efficient use of the system, as
standards were used; more property was taken; and com- many believe congestion pricing would do. It was there-
munities demanded mitigation measures to address fore quite logical that as the fuel tax gradually produced
increasingly controversial losses of homes, businesses, less revenue in relation to travel, many started to renew
and recreational facilities. Gradually, too, citizens and the call for congestion pricing. Proponents like William
politicians became increasingly reluctant to raise the rate Vickrey took cognizance of its complementary proper-
of motor fuel taxation, and highway budgets became ties. It produces needed revenue while encouraging more
more limited as inflation reduced the real value of tax col- efficient use of existing road capacity by inducing some
lections (Taylor 1995). In addition, many jurisdictions to shift their travel to off-peak times, to other modes,
believed that it was appropriate to spend highway user and to less crowded roads. These properties are noted
fees for nonhighway purposes. In some places, it was seen so persuasively by Vickrey in his own writings that I
as reasonable and proper to use motor fuel tax revenues have reproduced some of his statements here rather than
to support public expenditures on maintaining and paraphrasing them (see Box 2).
upgrading public transit systems as they gradually were It was not at all coincidental that calls for increased
transferred from private to public ownership. In other application of congestion pricing arose in the 1960s and
jurisdictions, motor fuel tax revenues were used for non- 1970s and accelerated in the 1980s and 1990s as high-
transportation purposes. In Texas, for example, one- way programs were affected simultaneously by conges-
fourth of the proceeds of motor fuel taxes are earmarked tion resulting from growth in economic activity and
for expenditures on public education. However well jus- declining revenue from the motor fuel taxes in relation
tified these policies were seen to be by many citizens, they to travel. While Singapore had adopted congestion pric-
were seen by others as a "diversion" of what rightfully ing with some success, it remained largely untested in
should be spent on highway programs (Roth 2003). And, the United States and Europe, a reflection of political
whether or not fuel taxes rightfully should be reserved for realities that always make it difficult to shift direction in
highway programs, highway spending in real dollars has more than incremental ways in democratic societies.
declined in relation to growth in population and travel Despite growing attention to road pricing by scholars
for several decades. and sophisticated policy wonks, it was difficult to find
The effects of these trends on highway programs many practical politicians who advocated pricing. Alt-
have been exacerbated by the gradual increase in fleet- shuler (1965) had noted several decades ago that poli-
average fuel economy. While new cars typically trav- cies are adopted when they spread benefits broadly and
eled about 12 miles to the gallon in 1950, today average concentrate costs narrowly, while those that spread
new car fuel efficiency is well over 20 miles per gallon, costs more widely, like road pricing, are far more diffi-
