[sustran] Breathing Space: Combating traffic congestion

[Vinay Baindur]

http://www.dnaindia.com/analysis/standpoint-breathing-space-combating-traffic-congestion-1961691







*Breathing Space: Combating traffic congestion*Thursday, February 13, 2014
- 11:02 IST | Agency: DNA
Lalit Contractor

The average growth rate of vehicular traffic in Mumbai was 7% over the past
seven years, with 300-350 new vehicles entering service every day.
Crippling congestion requires alleviatory measures like tolls, which are
discussed from a theoretical and practical perspective.
Image for representational purposes RNA Research & Archives



Every urban Indian probably has a traffic horror story, one he/she
initially thinks is so terrible it deserves an audience of sympathisers,
only for subsequent experience or casual conversation to prompt a
revaluation. Indian cities, those sprawling vortices of life, have oft been
touted as the "engines" of future growth, going by the role that similar
agglomerations like New York and London have played and continue to play
for their and the global economy.

Yet most developing countries witness awful traffic snarls on a daily basis
that should be considered synonymous with the development process, but only
highlight the progress to be made. The economic, environmental, even
physical (think tension, road rage and accidents) costs of congestion are
all too evident to a denizen of these afflicted cities, consequently
becoming of interest to policymakers as well, who rely on various
instruments to either directly or obliquely tackle traffic congestion and
its concomitant problems, to varying effects.

A recent proposal motivated by this agenda was a 200% increase in tax on an
additional (i.e. beyond the first) automobile owned by a family in Mumbai.
It was felt that this would help congestion, rather bluntly, by reducing
the potential number of vehicles plying the roads of the city. While the
proposal received meagre press coverage, it and the abysmal state of roads
in Mumbai today, excavated and reduced to strips, highlight the growing
realisation that the present situation is untenable. Congestion is by no
means an Indian, or even emerging or poor country phenomenon, and many
developed countries have increasingly resorted to certain forms of
incentivised traffic control that suggest the way forward.

This article considers the Mumbai reform proposal, by articulating some
results of the congestion pricing literature and describing other nations'
attempts to implement the prescribed policy measures, while also briefly
remarking on some other features of our urban development.



Congestion pricing in theory

The earliest and simplest model dealing with congestion is static in
nature, focusing on a single road, and is based on the realisation that
traffic congestion is an externality imposed by motorists on their fellow
travellers.

As in traditional economic analysis, one requires some conception of
"travel demand", which here is measured by vehicle flow, i.e. the quantity
of trips demanded per unit of time. Travel is in some ways an intermediate
good or service for a consumer, a means to an end (like work, shopping,
recreation etc.). The cost of travelling depends on various things, like
fuel costs, the opportunity cost of time spent in a queue as against
working, costs of delayed/early arrival at destination etc. The dominant
measure here is obtained from the speed-flow relationship. The fewer the
number of vehicles, the higher the speed a vehicle can travel at. This
speed declines with the number of vehicles, but if congestion is excessive,
speeds may even increase, as more travellers opt away (termed
"hypercongestion"). Travel costs then use the time cost interpretation
(while also adding other costs like fuel and maintenance), and are derived
from the speed-flow curve.

Traditional analysis equates the price of travel to private marginal cost
(equal to the average social cost when there are many travellers), which
neglects the externality effect. The social marginal cost includes this
effect, and its incorporation into the analysis determines the efficient
outcome, which can be arrived at through the imposition of a toll, the
difference between these two marginal costs, called the Pigouvian tax.

By accounting for the "proper" cost of travel, the toll raises the price
faced by travellers and thus reduces the number of trips demanded.
Inevitably, this reduces consumer welfare as fewer people (those with a
lower willingness to pay lose out, although they might resort to other
modes of transport) travel, and those that do pay a higher price.

On the other hand, the toll leads to an efficient outcome, resulting in
gains from its implementation vis-à-vis the no-toll scenario. Finally, the
proceeds from the toll (accruing to the government) could be channelled
back to citizens, directly or indirectly (e.g. by reducing other tax
burdens, or by funding infrastructure projects, preferably linked to the
congested area itself). Social welfare increases as the efficiency terms
dominate. However, the worsening of consumer welfare post-toll indicates
why relatively few nations have actually implemented congestion pricing,
another reminder of the importance of political considerations and
acceptability for successful policy promulgation.

Things look more promising from an implementation perspective once one
introduces a dynamic component, such as the dependence of travel demand on
time or the evolution of travel flows over space and time. The most
tractable approach involves considering congestion at a "bottleneck", in
recognition of the fact that they are quite pervasive and require a
different sort of analysis.

Now, individuals are assumed to care about both the cost of travel delays,
analogous to the time cost above, and also a schedule delay cost incurred
when one arrives at the destination at a time other than his/her preferred
time. The bottleneck is assumed to have a fixed capacity (i.e. only a
limited number of vehicles can traverse the stretch at a point in time).
Consequently, the traffic inflows and outflows help determine the length of
a queue (if any) and the duration of traffic delay and also schedule delay.
Naturally, if inflows are below full capacity, there is no bottleneck queue
and the rate of inflows equals that of outflows. In the other case, there
is queuing and outflows equal the capacity of the bottleneck. It is assumed
that travellers can decide their starting times (the time taken to reach
the bottleneck from the origin, and to reach the destination from the
bottleneck are assumed to be identical for all agents and often ignored).

In the no-toll case, the outcome is a Nash equilibrium with the choice
variable being the departure time. An individual's choice would depend on
his relative evaluation of the costs of travel versus schedule delay, which
are often correlated with the income level. The optimal outcome is one
determined by a hypothetical social planner maximising citizen welfare.
Both the decentralised outcome and the optimal outcome result in no travel
delays as traffic flows are maintained at capacity for the duration of the
period. However, at the optimum, departure times are chosen so as to
minimise aggregate schedule delays.

The social optimum could be achieved with the aid of a time-varying
congestion toll, which would depend on a variety of factors (including
preferences over arrival times) and could be quite complex. However, the
time delay cost would vanish, and schedule delays too might be lower,
although travel costs would be higher under the toll. The toll would also
tend to benefit those who valued travel time more, suggesting
regressiveness. The fact that only departure times differ between the
decentralised and optimal outcomes suggests a greater degree of
"acceptability", i.e. a higher chance of implementation.

This model has been extended to cover elastic travel demand, heterogeneity
in travel costs, preferences over arrival time etc. The last extension in
particular suggests more gains from the imposition of a toll, as arrival
times could be tailored according to preferences, raising welfare. Another
extension has been to the study of networks, and the pricing of various
constituent links. Here, the optimal outcome is for each linked to be
tolled efficiently, which is often infeasible. A related concept is cordon
pricing, wherein access to and within an entire area is tolled.

These two approaches are simple, focusing on a single congested path
(although several authors have used more realistic settings). Naïve
adoption of an optimal congestion toll without consideration of other
distortions in the system (e.g. other taxes) can reduce welfare, an
accounting of which leads us to the theory of the second-best. Many studies
have sought to move away from the ideal, first-best scenario highlighted
above toward a constrained sort of analysis. Inevitably, welfare gains will
be lower than what could be achieved in the ideal scenario.

One example is when not all links in a network can be tolled, for political
or even logistical reasons. This includes an often seen situation where
tolled and toll-free routes coexist. The existence of a (perhaps imperfect)
substitute suggests travel demand elasticity is a factor. Indeed, the
optimal second-best toll includes not only a marginal congestion cost for
the tolled route, but also accounts for route diversion effects owing to
toll spillovers on the toll-free route, which in turn depend on price
elasticity of travel demand and route capacities.

The relative efficiency with regard to the ideal depends on the degree of
information available and the reach of the instrument at hand. Second-best
tolls are also more complex, so even well intentioned programs could be
damaging if potential spillovers are not accounted for. Allowing for
dynamic aspects brings efficiency gains following the aforementioned
channels.

It is difficult in practice to implement a time-varying toll such as the
one suggested by bottleneck analyses. A compromise has been the
introduction of differential pricing over time slots, e.g. during rush hour
and off-peak hours, which compare favourably from an efficiency perspective
with flat (invariant) tolls. The more the number of steps in such a "step"
toll, the greater the efficiency.

Another issue might be the inability (due to informational or political
problems) of differentiating between users, which could produce further
distortions, like possible substitution between modes, besides direct
efficiency losses. One should also consider the interactions with other
distortions that motivate the second-best theory. Tolls raise the cost of
living and thus lower the real wage rate, thereby discouraging work
incentives. This could be mitigated through judicious use of toll revenues,
like improving capacity, but simple redistribution could further dampen
labour supply.

We would also do well to realise that individuals might not always be able
to predict what traffic will be like, either due to general or
idiosyncratic uncertainty. In such cases, real time information sharing
systems could be useful (e.g. through radio, GPS and sites like
Traffline.com)

Tolls might also affect incentives for capacity expansion, which has been
the long-standing palliative for congestion problems. On the one hand,
travel costs go down with an increase in capacity. On the other hand, the
number of trips made goes up as well when the price of a trip declines.
With underpricing of road use, the second effect is negative (using the
argument in the simple model that marginal social benefits are less than
corresponding costs), so the net effect is ambiguous. Choosing a toll lower
than the first-best level could raise the marginal benefit from expansion,
as the first positive effect would dominate. In the bottleneck model,
expansion would alter departure times, which should be accounted for while
setting tolls.

Two topics that bear some relevance in a second-best environment are
parking fees and public transport, both of which are sometimes used as
indirect decongesting mechanisms. Parking is a vital problem in most
developing nations, with encroachments rampant and not enough facilities.
Parking fees are a significant component of total travel costs, and so
optimal pricing should follow the marginal cost approach described earlier.
This is rarely practiced, however, distorting both incentives for
travellers regarding modal choice, and the possible creation of facilities
on account of an effective zero charge due to encroachment. A spatially
differentiated parking toll could bring about a desired parking pattern.

If the ultimate aim of any policy is to bring the number of vehicles down
(which also reduces emissions), one must consider alternative arrangements
like public transport that, as seen above, would also affect second-best
road tolls. Marginal cost pricing would suggest low public transit fares
(when capacity is adequate), which neglects the impact of underpriced roads
on fares that would tend to subsidise public transit (to reduce overall
congestion). The subsidy would depend on scale economies in public transit,
as well as on the degree of congestion reduction due to modal diversion
(which would not matter if road travel were optimally priced).The first
factor arises when marginal costs are below average costs, for example due
to fixed costs or a decline in waiting time when frequency increases. The
relative importance of these two factors is time, mode and location
specific. In practice, public transit subsidies are often motivated by
distributional concerns, and the related idea of acceptability.

>From theory to practice

Actual congestion pricing schemes are hardly universal, with the incidence
of higher tolls on travellers, regressiveness and consequent acceptability
issues being prime factors. The complexity of optimal tolls obtained in
more realistic settings is also not ideal. Nevertheless, the sweeping
transformation that information technology has brought to our lives
suggests that such complexity can be handled at an increasingly lower cost.

The classic application of congestion pricing is the Area License Scheme
(ALS) OF Singapore, instituted in 1975 in the business district, which has
been increasingly reliant on technology like smart cards. Spillover effects
onto substitute routes have been a problem over the years, despite the
gradual accounting for of such effects in toll setting. The tolls are time
varying, depending on average speeds measured in the last quarter, and are
frequently revised.

The London cordon-pricing scheme, applicable to vehicles traversing its
business district, began in 2003 and relied on video identification using
number plates. It has been successful in that traffic has declined in the
area while road speeds have gone up, with the already extensive tube and
bus systems proving very useful. The United States too employs time varying
tolls in certain areas in an approach called "Value Pricing", where some
routes have to be left toll free, but results have been mixed with
spillover effects often underestimated.

In the context of what we have learnt, a higher tax on additional vehicles
would be a crude tool (although other proposals include revised parking
charges and fuel taxes).

Automobile expansion is inevitable, being a facet of a higher standard of
living and a tangible embodiment of social mobility. In the absence of
capacity expansion plans, it is true that a congestion toll would reduce
the number of vehicles plying a route. Yet, the ideal congestion toll
brings about the socially efficient outcome, and more realistic tolls are
designed to get close to that outcome.

The proposed tax hike would distort consumption decisions, for example by
inducing consumers to switch to cheaper modes of transport (although it is
not difficult to imagine congestion itself as a factor in a vehicle
purchasing decision). Further, route or even cordon pricing is applicable
to specific areas or roads, while such a tax hike would dissuade consumers
from overall travel. Given the obvious correlation between income and the
number of vehicles owned, such a tax would be progressive, although the
behavioural response to so exorbitant an increase (captured by elasticity)
hints at limited revenue being actually generated. Considering also that
the affluent would tend to have a greater willingness to pay high tolls,
potential revenue could also be forgone.

One could also question the impact such an increase would have on
congestion, as multiple vehicle owners are unlikely to make up a
significant proportion of the vehicle driving population. The muted
response of automakers is surprising as well, and could be construed as
scepticism regarding the plan's outcome and even its implementation.
Finally, issues of fairness in treating purchasing cohorts differently and
penalising large families should be considered.

Interestingly, a committee under the aegis of the Mumbai High Court last
March mooted the idea of congestion pricing through a sort of cordon tax
imposed on vehicles in the Central Business District, while also
recommending paid parking for residents and in older, less capacious areas
(see here). It especially advocated the use of technology in gathering and
disseminating information and setting tolls (recall that the use of
instruments like GPS alleviate uncertainty discussed above). They too
proposed a cap on new registrations alongside these measures.

A few final points are in order. First, vehicles have other externalities
as well, the most insidious being accidents and pollution. The fuel tax and
emission standards are the appropriate instruments with regard to the
latter, and India too has been utilising them. Second, it is imperative
that a decongesting plan employing whatsoever instrument should also keep
in mind the availability of alternatives, and not just from a pricing
viewpoint. While the aim of keeping road traffic manageable is laudable, a
policymaker must realise that although he could certainly influence
mode-specific demand, he should not try to distort overall travel
decisions, i.e. going to work, making purchases etc., which he could do via
ill-thought policies.

Public transit is a natural outlet for decongestion, and urban planners and
local, state and central governing agencies have focused increasingly on
improving their quality, through schemes like the JNNURM, metropolitan area
metro services (including monorail services) and Bus Rapid Transit schemes
(BRTs). There are questions regarding the viability of the Metros, and the
half-baked nature of implementation of BRTs, which often do not have
separate lanes and therefore lose most of their raison d'être.
Nevertheless, the successful implementation of BRTs in some cities like
Ahmedabad bodes well.

References for the curious reader

The pioneer in the field of congestion pricing was the versatile economist
William Vickrey, who proposed the simple bottleneck model. A comprehensive
account of his work and that of his peers and followers can be found in the
(technical) text, The Economics of Urban Transportation, 2007, Routledge,
by Kenneth Small and Erik Verhoef, particularly chapters 2 and 3.

Good and less technical reviews are 'Traffic congestion and road pricing'
by Robin Lindsey and Verhoef in the Handbook of Transport Systems and
Traffic Control, Pergamon, 2002; and 'The Rationale for Road Pricing:
Standard Theory and Latest Advances' by Kenneth Button in Road Pricing:
Theory and Evidence, Research in Transport Economics (Volume 9), 2004.

An account of the externalities imposed by automobiles with a decidedly
American perspective is 'Automobile Externalities and Policies' by Ian
Parry, Margaret Walls and Winston Harrington in the Journal of Economic
Literature, June 2007.

There have been papers on urban poverty and transport using data from
Mumbai by authors affiliated with the World Bank. Note also that transport
costs (including those due to congestion) play a key role in theories of
trade and economic geography. A good resource on road taxes is the study,
'Road User Taxes in India' by Mahesh Purohit and Vishnu Purohit,
commissioned by the Planning Commission (available here).

An interesting experiment conducted by researchers affiliated with Stanford
University and Infosys in Bangalore (called INSTANT) provided decongesting
incentives to commuters, described here.



Lalit Contractor has a MPhil in Economics from Oxford University and is
curious about Economics and its interactions with politics and society.