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

Priced Lanes: The Economics of Multi-Class Service

The preceding discussion describes the fundamental economic motivation for efficient pricing in its “pure” form. However, as noted earlier, the term congestion pricing has come to be applied to a variety of different practices of applying tolls or other road-user charges that vary based on time and space. One such form is tolled express lanes, in which a freeway is partitioned into two different classes (“priced” and “general purpose”), and tolls are charged on the priced lanes to ensure that traffic remains free-flowing on them. Although similar in some ways to the classical case of congestion pricing, the economic justification for offering multiple classes of service is actually quite different.

HOT Lanes

HOT lanes are a special case of tolled express lanes, in which high-occupancy vehicles (HOV; including carpools, vanpools, and transit vehicles) are allowed to use the special lanes for free, whereas low-occupancy vehicles are required to pay a toll to use the lanes. To date, most HOT lane projects in the United States have been conversions from existing HOV facilities.

The purpose of HOV lanes is to encourage more efficient use of highway capacity by increasing average vehicle occupancy, thereby accommodating high levels of passenger travel while reducing total traffic volumes. The lanes operate by establishing minimum occupancy thresholds (typically two or three passengers per vehicle) that are set high enough to keep traffic at low enough levels to ensure that the lanes remain free-flowing, even during peak demand periods. However, because these occupancy minimums must be set at whole numbers, the lanes often wind up with significant excess capacity available, even as the general-purpose lanes may be severely congested.

The purpose of converting such facilities to HOT lanes is to make use of the excess capacity in the HOV lanes, while still preserving the incentives for carpool and transit use (no toll and free flow). For example, several HOV-3 facilities in the United States, such as the reversible express lanes on I-395 in Northern Virginia, were initially constructed as exclusive busways; however, because the buses alone did not fully utilize the available capacity, carpools and vanpools were soon allowed to share those facilities. HOT lanes simply extend this further down the vehicle-occupancy scale, while introducing the element of pricing to manage demand more precisely.

Because most toll-paying users of the HOT lanes are likely to shift from the other lanes, congestion on these lanes will be reduced and travel times will be improved, whereas existing HOV users will see no reduction in the quality of the service they receive. The result is a pure gain to highway users.

Although many HOV lanes operate with excess capacity during peak hours, this is not always the case. In some places, growing traffic volumes have resulted in HOV lanes that no longer provide reliable, uncongested travel to HOVs, even if they did so when first established. One approach to returning such facilities to free-flow conditions is to increase the minimum vehicle occupancy standard for the special lanes, thereby reducing the number of vehicles that qualify to use them. The excess capacity that is created through such a move can then make the lanes a candidate for HOT lanes—in some cases, additional capacity for HOV lanes (or for HOV-to-HOT conversions) can be created through restriping or other improvements to roadway geometry and operations. By taking these two actions simultaneously (increasing occupancy standards and conversion to HOT), a poorly performing HOV facility can be transformed into a highly functioning tolled facility, while still allowing users who would otherwise be forced off the HOV lanes to continue using them by paying a toll.

Benefits From Product Differentiation

In addition to the capacity utilization benefits afforded by HOV-to-HOT lane conversions, express lanes can provide highway users with multiple classes of service quality from which to choose at different prices. This form of “product differentiation,” as economists refer to it, can produce significant benefits for consumers. The key is that users of a facility may vary significantly in the value that they place on travel-time savings. For some users, reducing travel times for a particular trip may be quite valuable, whereas others may be less sensitive to such reductions.¹ By partitioning the highway into tolled express lanes and free general-purpose lanes, users are given the option of selecting the price–quality combination that best suits them, rather than being forced into a “one-size-fits-all” solution.

It is important to note that the value of time savings reflects to the total value of all passengers in a vehicle, not just the driver. Thus, some of the highest value trips are likely to be those in buses or other transit vehicles, even if the riders individually have lower values of time than single occupant vehicle drivers. In addition, the value of time savings can vary from day to day, even for the same user, depending on the time sensitivity and value of the activities being pursued at the user’s destination (such as attending an important family function). This is reflected in the experiences on express lane projects such as SR-91, where a large number of facility users use the express lanes on an occasional basis, when their trips are most critical.

An important component of the appeal that express lanes can have for highway users is their reliability. Variable pricing on express lanes (particularly dynamic pricing based on real-time traffic conditions) can be used to manage demand in such a way as to virtually guarantee a free-flowing trip at all times, not just “on average.” Reducing the likelihood and severity of unexpected delays can be very valuable to users and may be an important component of their willingness to pay for the premium service afforded by express lanes. In this way, the introduction of express lanes can be viewed as a new product entirely (a guaranteed high-speed trip during peak hours), previously unavailable at any price (i.e., any price below that of private helicopter taxi services), that enhances consumer welfare. Such services do exist, of course, for the most extremely high-valued trips, such as emergency trips to trauma centers or ferrying top business executives around major cities.).

Impacts on Capacity and Delay

Although offering multi-class service can be appealing to road users, it may also have some drawbacks. When a road is partitioned into two facilities, it limits the ability of drivers to change lanes and fill gaps that develop in the traffic stream. Separating the roadways may also require barriers or pavement markings that take up space that could be otherwise used for shoulders or travel lanes. As a result, the combined capacity of the two separated facilities will be lower than the overall capacity that could be realized without the partitioning.

Providing free-flow conditions on the express lanes also requires tolls set sufficiently high to limit the number of vehicles that might want to switch from the free lanes. As a result, traffic and congestion levels may be quite high on the general-purpose lanes. Because delay functions are quite “non-linear” in the sense that each additional vehicle on a congested roadway causes more delay than the previous one, adding more vehicles to the general-purpose lanes causes overall user costs on the combined facility to be higher than they would be if traffic were more evenly allocated.

These capacity and delay-related drawbacks to providing multiple classes of service on freeways make it difficult to make general statements as to whether providing express-lane services will enhance or detract from overall economic welfare. Under some circumstances (particularly where there is significant variation in the value of time for different users), the gains from product differentiation may outweigh the increased congestion costs on the general-purpose lanes, whereas in other cases the latter effect may dominate.