The Hindu Business Line : Congestion pricing

Mumbai or Manhattan, traffic gridlocks are a way of life. Recently, my friend and I were stuck for nearly an hour amidst a long line of cars and trucks on our way to the airport. My friend wondered whether it would make sense for State governments to charge a fee for using the arterial roads during peak hours. My friend belongs to a breed of software engineers who understand every funny-looking electronic gadget in the town but are woefully unaware of world economics. For what my friend commented is called congestion pricing in economics. What is it?

Congestion pricing refers to a structure where prices increase during certain period to charge the users for negative externalities. A negative externality occurs when a transaction or an event incurs costs for third-party.

Negative externality

Driving a car on the road causes negative externality for two reasons. One, it causes pollution which damages the environment and causes health problems for all. And two, it causes traffic gridlocks, leading to wasted time and frustration for the road users.

Congestion pricing is about charging higher fees for using the road during peak hours — exactly what my friend mentioned.

William Vickerey who won the Nobel Prize in 1996 first proposed congestion pricing for the New York subway. Congestion pricing is now part of the road system in Singapore and London.

Traffic gridlocks

It makes sense to introduce such a system in India too. At present, our government is busy building more roads and freeways. While newer roads will increase the traffic speed, it could eventually lead to more negative externality! Perverse as it may seem, freer roads will prompt more people to use cars. And more cars will lead to more gridlocks leading to greater negative externalities.

Traffic congestion has become an integral part of urban economics. Economists who are mathematically initiated use laws of fluid dynamics to understand traffic flows!

Physicist-economists can help us balance infrastructure development and negative externalities. Using congestion pricing and converting some roads into pedestrian walks could discourage unnecessary use of cars.

(The author is a Chennai-based investment strategist.)

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