Intelligent Tolls

When a driver uses a busy road he is imposing a delay cost on all other drivers.  However, as road users we do not take the costs we impose on others into account, thus roads like most common resources are over used and society is worse off.

Road pricing is a method to try and internalise the costs drivers impose on others and to encourage more efficient use of the road network.  London use a congestion charge for cars entering the centre of London, and makes some mild claims about it's effectiveness.  The problem with the London congestion charge is that it is too blunt a tool.  It is a fixed charge that does not respond to demand and increased congestion.  When roads are moving freely the congestion charge should be low, when roads are choked the charge should be high to encourage drivers to find alternatives.  This is the basis of Vickrey congestion pricing.

Singapore is one of the best examples of Vickrey pricing in action.  Here is a recent report from the Financial Times and the video below the fold gives a television news report on the charges.