Dynamic Tolling: Good for Most

By Jane Silfen

Variable toll pricing is used to regulate demand and, therefore, capture the value of motorists’ time savings.[1] Dynamic toll pricing is popular in Europe and limited U.S. evidence seems positive. However, faced with environmental, budgetary, and socioeconomic challenges, how should transportation authorities consider the benefits and complications of variable pricing?

Dynamic tolling does seem effective in reducing congestion and capturing perceived time savings.  A study of SR-91 in California concluded that most drivers use the express lane some, but not all, of the time dependent largely on the hour-by-hour price differentiation. The study also found that drivers overestimated—and thus were willing to overpay for—the amount of time they saved.[2] Increased interested in managed lanes is evident from Texas to Colorado to Virginia, among others, suggesting perceived environmental benefits from reduced emissions and economic benefits from reduced congestion and incremental revenues.

This narrative makes sense in theory, but I would add a practical concern about the economics of variable pricing. It seems harder to forecast, particularly for greenfield projects. Toll authorities (and potential investors) must speculate on both demand for a route and willingness to pay for that route. Amid tight public budgets and spooked markets, does variable pricing provide net incremental value or risk?

Equity is also a matter of theory versus practice. Dynamic tolling is theoretically fair. Those who ascribe a higher value to their time should use express lanes more frequently and at a higher cost. This argument seems to hold up with both motorists and the public, with the U.S. Department of Transportation concluding that, “the perception that congestion pricing is an inequitable way of responding to the problem of traffic congestion does not appear to be borne out.”[3] Practically, though, this means that rich people—whose time is worth more because they make more—take the express lanes, almost always, and poor people—whose time is worth less because they make less—take the free lanes, mostly. Might this give rich people more time to make more money, and poor people less time to make more money? In  a country marked by widening income dispersion, is good transportation policy good public policy?

On balance variable tolling seems good for most: drivers have more choice, roads make more money, air and noise pollution from congestion goes down. However, there are some additional questions that toll authorities should consider before continuing the rollout of managed lanes across the U.S.


[1] “Managed Lanes: A Cross-Cutting Study,” U.S. Department of Transportation, Federal Highway Administration Office of Operations, November 16, 2006 accessed via http://ops.fhwa.dot.gov/freewaymgmt/publications/managed_lanes/crosscuttingstudy/chapter3.htm on February 10, 2013

 

[2] “Continuation Study to Evaluate the Impacts of the SR 91 Value-Priced Express Lanes Final Report,” U.S. Department of Transportation, Federal Highway Administration Tolling and Pricing Program, April 20, 2011, accessed via http://ops.fhwa.dot.gov/tolling_pricing/value_pricing/pubs_reports/projectreports/sr91_expresslanes.htm on February 10, 2013

[3] “Income-Based Equity Impacts on Congestion Pricing – A Primer,” Federal Highway Administration Tolling and Pricing Program, May 8, 2009, accessed via http://ops.fhwa.dot.gov/publications/fhwahop08040/cp_prim5_04.htm on February 10, 2013

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Dynamic Pricing for a Dynamic World

By Yonatan

We live in a congested world and the trend of urbanization is only making it worse. Given limited real estate and financial resources, governments and municipalities use various allocation strategies to combat congestion and accommodate growing populations and vehicle use. Dedicated public transportation lanes, toll roads and HOV lanes are all means to encourage use of public transportation, increase vehicle utilization (i.e. carpooling) and tax vehicle use, while increasing productivity and reducing GHG emissions. In that sense, and as discussed in class, toll roads are an efficient means to capture time benefits via tariffs.

But what better way to force drivers to internalize the externalities associated with vehicle use than through dynamic pricing mechanisms? With advancements in technology and increased information collection, toll lanes with truly dynamic pricing – determined real-time based on current traffic in order to maintain a desired minimum speed – are now a viable, and quite attractive, option.

Dynamic pricing is not a new concept, yet still needs to be used with care. Consumers tend to be dissatisfied with what may be viewed as a cynical abuse of one’s needs. Coca-Cola, for example, learned this firsthand when it tried to introduce temperature-based pricing in its vending machines. Immediate consumer and media backlash led them to quickly stop the initiative [1]. Nevertheless, in some industries consumers have become adapt to such pricing schemes. Airlines, hotels and car rental companies all price based on real-time supply and demand, as do more and more online services and retailers[2]. So when is dynamic pricing appropriate? INSEAD prof. W.J.Reinartz identified 5 conditions required for price customization to work[3]:

  • Customers must be heterogeneous in their willingness-to-pay
  • The market must be segmentable
  • There is limited potential for arbitrage
  • The cost of segmenting and policing must not exceed revenue increases
  • It must not breed violations of perceived fairness

Though his research is focused on online services, it seems appropriate for other industries as well and transit in particular. Clearly, the main contention point is that of perceived fairness. In the context of toll roads, there is obvious concern that the imposed fee for using a road excludes the service from certain consumers who are not willing, or just unable, to pay for it. The counter-argument is that such arrangements can fund expansion of existing roads and transit infrastructure in a manner that alleviates some of the congestion burden in other parts of the system. Moreover, such routes don’t have to be restrictive for all vehicles. Such is the case in the Israeli “Fast Lane” project – an expansion of the road from Jerusalem to Tel-Aviv – in which public transportation and HOVs can ride free of charge[4]. The dynamic pricing mechanism can then be viewed as revenue-maximizing which in turn allows for a greater cross-subsidy.

Whether you find it fair or not, it is clear that the increasing convergence of information technology and infrastructure services (e.g. water and electricity) will lead to increased use of dynamic pricing as a means to manage scarce resources in our daily life.

[1] NY Times, “Why Variable Pricing Fails at the Vending Machine”, June 27th 2005: http://www.nytimes.com/2005/06/27/business/27consuming.html

[2] Information Age, “Liquid Commerce”, May 12th 2007:

http://www.information-age.com/channels/information-management/features/272211/liquid-commerce.thtml

[3] “Setting Prices in an Online World: When Price Customization Works (… And When it Doesn’t)”, Werner J. Reinartz, April 2001,

http://www.information-age.com/channels/information-management/features/272211/liquid-commerce.thtml

[4] Tel-Aviv Fast Lane, accessed 2/10/2013: http://www.shapir.co.il/en/content/tel-aviv-fast-lane