Working Paper

Pricing Urban Congestion

Nov 24, 2008 | Ian W.H. Parry


This paper reviews literature on the optimal design of pricing policies to reduce urban automobile congestion. The implications of a range of complicating factors are considered, such as trafficbottlenecks, constraints on which roads and freeway lanes in the road network can be priced, driver heterogeneity, private toll operators, other externalities besides congestion, and interactions between congestion taxes and the broader fiscal system. We also briefly discuss the incidence of congestion taxes and experience with this policy in the United States and elsewhere.Although the economics literature on congestion pricing has advanced considerably over the last 20 years, research is still needed on the empirical measurement of second-best efficient tolls for urbancenters and whether alternative design features have substantial implications for efficiency. More research is also needed on the design of schemes to promote feasibility by compensating adversely affected groups with minimal loss in economic efficiency.

Urban planners and local officials are eager to find more effective traffic congestion policies—and to deal with projected 50-percent increases in domestic automobile vehicle miles between 2010 and 2030. The problem creates both frustration and productivity losses: motorists in large U.S. urban areas lost 38 hours to traffic delays in 2005, up from 14 hours in 1982.

In a recent paper, “Pricing Urban Congestion,” RFF Senior Fellow and Allen Kneese Chair Ian W.H. Parry examines policy designs proposed over the last 20 years to ease crowded roads in densely populated areas. He notes that expanded mass transit schemes and fuel taxes have had limited impact. His conclusion: Peak-period road pricing—by which motorists pay fees when they travel on congested roads during peak hours—offer a much better solution, along with other pricing schemes, like those implemented in London, that allow only vehicles with access licenses into certain parts of the city.

Parry is optimistic about the prospects for eventual policy changes to address the problem. “It is an exciting time to be a transportation economist, with political and public opinion at last beginning, albeit perhaps only gradually, to come around to the idea of congestion pricing,” he writes. He cautions, however, that “economists have their work cut out in empirically assessing the optimal design of, and efficiency gains from, congestion pricing. They need to better reconcile efficiency and feasibility, particularly in the design of compensation schemes that avoid large burdens on politically influential motorist groups, at minimum cost in terms of forgone economic efficiency.”