Traffic Congestion and Congestion Pricing

For several decades growth of traffic volumes has outstripped investments in road infrastructure. The result has been a relentless increase in traffic congestion. This paper reviews the economic principles behind congestion pricing in static and dynamic settings, which derive from the benefits of charging travellers for the externalities they create. Special attention is paid to various complications that make simple textbook congestion pricing models of limited relevance, and dictate that congestion pricing schemes be studied from the perspective of the theory of the second best. These complications include pricing in networks, heterogeneity of users, stochastic congestion, interactions of the transport sector with the rest of the economy, and tolling on private roads. Also the implications of congestion pricing for optimal road capacity are considered, and finally some explanations for the longstanding social and political resistance to road pricing are offered. The authors would like to thank Richard Arnott, André de Palma, Claude Penchina, Stef Proost and especially Ken Small for corrections and insightful comments on an earlier version of this paper. Any remaining errors, however, are the authors’ responsibility alone. Erik Verhoef is affiliated as a research fellow to the Tinbergen Institute. Erik Verhoef’s research has been supported by a fellowship of the Royal Netherlands Academy of Arts and Sciences.