Road pricing: good economics – and not even bad politics
6 September 2021
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Energy and Environment
Education
9 September 2021
Economic Theory
11 November 2024
If you ever talk to a civil servant, or even an MP, who knows something about economics, they are often keen to respond to free market arguments by citing the problem of ‘market failure’.
They do this with no sense of irony or any apparent awareness of the failure of governments. Governments do not have perfect knowledge or foresight and they do not act in the interests of the community as a whole. We see this in continued support for disastrous land-use planning policies, big-ticket infrastructure projects such as HS2 and, perhaps most of all, in the continued refusal of governments to have a rational system for pricing roads.
When you don’t have prices, you get queues. This happens in healthcare in this country and it happens on our roads. Prices help regulate demand and call forth more supply. They also provide the funds for capital investment.
The subject of road pricing was first investigated for government by the Smeed Commission, which published its report in 1964. It is one of the best government reports ever produced and those who work in the field today would argue that there is little that could be added to its analysis. Since then, think tanks such as the Institute of Economic Affairs have called for the implementation of systems of electronic road pricing whereby motorists would pay as they use the roads. There is unanimity on the subject pretty much across the spectrum of thinkers outside the political class.
The latest call comes in a report this week from the Tony Blair Institute for Global Change, which says road pricing would be a way to both reduce congestion and replace the tens of billions of fuel duty revenue the Government will lose once the ban on new petrol and diesel cars kicks in.
How might such a system of road pricing work? Broadly speaking, road users would pay for roads at a rate determined by how far they travelled, where they travelled, at what time of day they travelled and how congested the roads are. The Institute’s report suggests this could be done with an Uber-style app that monitors congestion and gives a real-time price estimate for different routes.
And although the report suggests road pricing is a way to compensate for the switch to electric vehicles, you could just as well argue that road pricing negates the need to ban petrol and diesel cars at all. Instead, you could have a system in which cars that emitted CO2 and noxious gases were simply charged more than electric vehicles to reflect the costs imposed on the community. We could then move in an ordered and voluntary way to electric cars rather than having the transition dictated by government regulation.
Faced with prices that reflect the cost of their journeys, people would travel less, travel more by public transport, change the times of their journeys or choose to pay the price. Roads would become less congested – dramatically so.
Some amazing modelling of how this would work was done by Daniel Graham and Stephen Glaister for the IEA in the early 2000s. The models are dated now, but many of the results would still hold. They predicted that there would be big increases in speeds in London and other conurbations. In rural areas, the cost of motoring would actually fall because any road charges would be lower than the current vehicle excise duty and petrol tax. Indeed, the modelling suggested that much of the network should not be subject to road-user charging because congestion was close to zero. It would probably make sense to have some kind of vehicle excise duty (though below current levels) to finance the fixed costs of road provision in areas where there was no road pricing.
There would, of course, be winners and losers. Winners would be pensioners, those who choose to car-share and people who can vary their journey times, as well as people living in less congested areas of the country (some Red Wall areas, perhaps). Losers would be people who live in congested places (which, as it happens, now return a disproportionate number of Labour MPs – notably, London and Manchester).
But any system of road pricing needs to rein in the politicians who are, without doubt, the biggest problem. Opponents of road pricing believe that politicians will turn the system into a milch cow.
How do we stop that? Firstly, we need to have a straightforward mechanism to ensure that private roads can be built which can set their own prices and therefore be a constraint on government profiteering. A second approach could involve privatising large parts of the road network. Short of this, the Government could pass legislation which laid out the principles by which road charges should be determined and which ensured that the Competition and Markets Authority could monitor abuses of government monopoly power. The Treasury should not determine road prices any more than it determines the price of advertising on Channel 4 (another nationalised industry). Road charges should be determined by economic principles, not revenue-raising needs.
If it is such a good idea, why have we been waiting a lifetime (in my case, literally a lifetime – the Smeed report was published the year I was born)? Alec Douglas Home’s response to the report was to ‘take a vow that if we are re-elected we will never again set up a study like this one’. Any government reform involves winners and losers, and losers shout louder than winners – which brings us back to government failure. But now is a good time to implement it, even if 1964 was a better time. Road pricing would allow vehicle excise duty and other car taxes to be scaled back. And it would allow petrol tax to be eliminated. Courage is in short supply in politics, but, as it happens, given the electoral geography, the implementation of road pricing might just pay off for this government.
This article was first published on CapX.
They do this with no sense of irony or any apparent awareness of the failure of governments. Governments do not have perfect knowledge or foresight and they do not act in the interests of the community as a whole. We see this in continued support for disastrous land-use planning policies, big-ticket infrastructure projects such as HS2 and, perhaps most of all, in the continued refusal of governments to have a rational system for pricing roads.
When you don’t have prices, you get queues. This happens in healthcare in this country and it happens on our roads. Prices help regulate demand and call forth more supply. They also provide the funds for capital investment.
The subject of road pricing was first investigated for government by the Smeed Commission, which published its report in 1964. It is one of the best government reports ever produced and those who work in the field today would argue that there is little that could be added to its analysis. Since then, think tanks such as the Institute of Economic Affairs have called for the implementation of systems of electronic road pricing whereby motorists would pay as they use the roads. There is unanimity on the subject pretty much across the spectrum of thinkers outside the political class.
The latest call comes in a report this week from the Tony Blair Institute for Global Change, which says road pricing would be a way to both reduce congestion and replace the tens of billions of fuel duty revenue the Government will lose once the ban on new petrol and diesel cars kicks in.
How might such a system of road pricing work? Broadly speaking, road users would pay for roads at a rate determined by how far they travelled, where they travelled, at what time of day they travelled and how congested the roads are. The Institute’s report suggests this could be done with an Uber-style app that monitors congestion and gives a real-time price estimate for different routes.
And although the report suggests road pricing is a way to compensate for the switch to electric vehicles, you could just as well argue that road pricing negates the need to ban petrol and diesel cars at all. Instead, you could have a system in which cars that emitted CO2 and noxious gases were simply charged more than electric vehicles to reflect the costs imposed on the community. We could then move in an ordered and voluntary way to electric cars rather than having the transition dictated by government regulation.
Faced with prices that reflect the cost of their journeys, people would travel less, travel more by public transport, change the times of their journeys or choose to pay the price. Roads would become less congested – dramatically so.
Some amazing modelling of how this would work was done by Daniel Graham and Stephen Glaister for the IEA in the early 2000s. The models are dated now, but many of the results would still hold. They predicted that there would be big increases in speeds in London and other conurbations. In rural areas, the cost of motoring would actually fall because any road charges would be lower than the current vehicle excise duty and petrol tax. Indeed, the modelling suggested that much of the network should not be subject to road-user charging because congestion was close to zero. It would probably make sense to have some kind of vehicle excise duty (though below current levels) to finance the fixed costs of road provision in areas where there was no road pricing.
There would, of course, be winners and losers. Winners would be pensioners, those who choose to car-share and people who can vary their journey times, as well as people living in less congested areas of the country (some Red Wall areas, perhaps). Losers would be people who live in congested places (which, as it happens, now return a disproportionate number of Labour MPs – notably, London and Manchester).
But any system of road pricing needs to rein in the politicians who are, without doubt, the biggest problem. Opponents of road pricing believe that politicians will turn the system into a milch cow.
How do we stop that? Firstly, we need to have a straightforward mechanism to ensure that private roads can be built which can set their own prices and therefore be a constraint on government profiteering. A second approach could involve privatising large parts of the road network. Short of this, the Government could pass legislation which laid out the principles by which road charges should be determined and which ensured that the Competition and Markets Authority could monitor abuses of government monopoly power. The Treasury should not determine road prices any more than it determines the price of advertising on Channel 4 (another nationalised industry). Road charges should be determined by economic principles, not revenue-raising needs.
If it is such a good idea, why have we been waiting a lifetime (in my case, literally a lifetime – the Smeed report was published the year I was born)? Alec Douglas Home’s response to the report was to ‘take a vow that if we are re-elected we will never again set up a study like this one’. Any government reform involves winners and losers, and losers shout louder than winners – which brings us back to government failure. But now is a good time to implement it, even if 1964 was a better time. Road pricing would allow vehicle excise duty and other car taxes to be scaled back. And it would allow petrol tax to be eliminated. Courage is in short supply in politics, but, as it happens, given the electoral geography, the implementation of road pricing might just pay off for this government.
This article was first published on CapX.
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