Economics: Pricing, Demand, and Economic Efficiency—A Primer
Forms of Congestion Pricing
The discussion above describes the classic economic case for congestion pricing, based on mitigating congestion externalities. However, as used today, the term congestion pricing has come to be applied more broadly, to any projects involving tolls or other charges for road use that vary by the level of demand. The degree of variation in such applications can range from simple policies that apply different prices in peak and off-peak periods (with no toll at all being sometimes applied in the off-peak) to rates that change within peak periods, often targeted at maintaining a specific level of service. Variable charges may be applied on the basis of a pre-set schedule (updated periodically) or dynamically (changing as often as every 3–6 minutes) in response to real-time changes in demand.
Congestion-pricing projects that involve tolls may be categorized according to their extent of application, as follows:
- Priced Lanes: Pricing is applied on a limited number of lanes of a roadway, leaving other travel lanes on the facility unpriced. The priced facility (commonly referred to as express lanes, managed lanes, or high-occupancy toll [HOT] lanes) is typically separated from the other lanes, with limited access points. Examples of priced lanes in the United States include SR-91 in Orange County, CA; I-15 in San Diego; I-394 in Minneapolis; SR-167 in Seattle; and I-10 and US-290 in Houston.
- Priced Roadways: Congestion pricing is applied on all lanes of a roadway facility. This is frequently done on existing toll facilities that convert their fixed toll regime to a system that varies by the time of travel. Examples include bridges in Lee County, Florida; the Dulles Greenway in Northern Virginia; and freeways in Singapore.
- Zone-Based or System-Wide Pricing: Pricing is applied on all roadways within a specified zone. Pricing can take the form of cordon pricing, in which vehicles are charged as they cross a cordon line into the priced zone, or broader based tolling that is applied to trips within the zone as well. Projects of this type that have been implemented to date have typically focused on congested central business districts, such as those in London, Stockholm, and Singapore; however, future applications may include larger districts, perhaps encompassing entire urban areas.
The Congestion Pricing Overview primer includes more information on the practical application of these different approaches.
Variable Pricing in Other Sectors
Although a relatively new concept to highway transportation, charging different prices in peak and off-peak demand periods is a well-established practice in many other sectors and industries. This is especially common in industries in which supply (e.g., the number of available hotel rooms or the capacity of the water delivery system) does not vary significantly in different demand periods. By charging higher rates during high demand periods, proprietors are able to better allocate demand to optimize the utilization of the available capacity.
Examples of such common practices include higher rates for lodging and other amenities in tourist areas during the “high season,” discounts for afternoon showings at movie theaters, and evening and weekend discounts for telephone use. More recently, other industries have moved in this direction, including professional sports teams (which have begun charging more for tickets to more desirable games, reflecting long-standing practices in the aftermarket for tickets) and electric utilities (in which advanced electronic meters now allow usage at different times of day to be recorded).
