Congestion Costs and Congestion Pricing for the Twin Cities

Abstract

This report offers an economic analysis of the impact of road pricing. Optimal pricing of congested roads would produce substantial revenues and efficiency gains. However, the direct effect of road pricing would be to make most drivers worse off, particularly those with low incomes. In the Twin Cities, pricing all congested roads optimally would generate $1.50-$1.75 in revenues for each dollar of additional costs to travelers. The revenues offer a source of potential funding to compensate those who lose while leaving appreciable toll revenues for highway improvements and other public purposes. The authors believe that unless such toll-revenue redistribution occurs, opposition to road pricing will be substantial. Researchers calculated network equilibria for a variety of congestion-pricing and analyzed these potential income-distributional effects. They allowed the demand for travel to be price-sensitive and for drivers to differ in the valuations they place on time. Pricing all congested roads optimally would increase total travel costs by 18-42 percent, depending on the elasticity of demand for travel. With unit-elastic demand, pricing would increase travel costs by 31 percent and 5 percent for, respectively, the lowest and highest income groups examined.