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Economics: Pricing, Demand, and Economic Efficiency—A Primer


Photo. View of cars driving one way down a four-lane city street with tall buildings on either side. The fourth lane furthest to the right is an HOV lane.

Traffic congestion represents a significant and growing threat to mobility in the United States. According to recent data, the average driver in U.S. urbanized areas traveling in peak periods experienced 38 hours of total delay in 2005 (up from 14 hours in 1982), at a total cost of $78 billion in excess travel time and wasted fuel consumption.

To some extent, these trends reflect the vibrancy of our Nation’s cities, which have seen significant economic growth over the past 3 decades. They also reflect growing imbalances between travel growth and the development of new highway capacity, as the former has exceeded the latter for many years. However, in an important way, traffic congestion also results from the inefficient pricing of highway use, leading drivers to travel more than what is economically desirable, particularly during the height of morning and evening rush hours.

The fundamental economic problem in highway congestion is that highway users consider the costs that they bear themselves (such as fuel costs and travel time), but not the additional delay that they impose on others when using a congested facility. Economists refer to these latter costs as “external costs” or “externalities,” because they are not borne by the person whose use of the highway creates them. The goal of congestion pricing is to make drivers “internalize” these costs by directly charging them for use of the highway in proportion to the external costs that they cause for society. In doing so, the economic inefficiencies associated with underpriced and overutilized highways can be significantly reduced.

Congestion pricing is becoming increasingly viewed as an important strategy for improving the operational performance of the highway system. By moving from a system based on fixed or flat charges to highway users (e.g., vehicle fees and fuel taxes) to a more refined system of charges that can vary by the time and location of travel, price signals can be used to more efficiently and effectively allocate scarce capacity on our Nation’s highways.

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