Pricing policies

Marginal Social Cost Pricing

• Objective of public policy should be to achieve
efficient use of existing transportation facilities
• It will be inefficient if users do not pay the marginal
social cost
• Thus pricing should include the marginal social
cost.
• It implies that each road vehicle should be
charged:
 time lost, vehicle operating expenses and
accident costs for other road users due to
congestion
 pollution damage or other costs imposed on non-
users
 Wear and tear of the road.
• Similarly, given the number of mass transit vehicle
hours of service, each rider should be charged for
congestion costs imposed on other riders in the
form of increased discomfort and travel time.
Two suggested methods are:
 road user charge based on mileage to pay for
maintenance costs of road
 Annual vehicle and operator license fees to pay
for costs borne by road authorities which are
independent of road usage,
Congestion Charges
• Principle of marginal social cost pricing to an
existing congested transportation system
• Assume: There is no wear and tear of road or
pollution damage.
• It is logical that when density of vehicles
increases (vehicles per km), speed decreases,
travel time per km increases.
• In addition vehicle operating costs and risk of
accidents may increase.
• As a result, travel cost per vehicle-km, which
consists of value of travel time, VOC and value of
accident costs increases with density.
Moderate congestion:
• Cost curve represents relationship between cost of
travel per vehicle-km (includes time, vehicle
operating cost and expected losses due to
accident) and vehicle flow.
• There is no congestion or moderate congestion.
• There is no congestion as long as the density of
vehicles and speed are such that the flow of
vehicles is equal or less than 30kmph.
• After that moderate congestion starts.
• Data in table (4.2) is just for an example (different
from the previous one)
• If the government does not charge when there is
congestion, facilities will be used inefficiently.
• If they do not pay marginal social costs they
impose on others, users will not bear the full
marginal social cost of their trips
• Thus some people would take trips which they
value at less than marginal social cost.