Topic Area: Pricing Traffic Congestion

Geographic Area: London, England

Focal Question: Is a license system effective in decreasing traffic congestion and internalizing negative effects of congestion?

Source: Leape, Jonathan, The London Congestion Charge, Journal of Economic Perspectives, Vol. 20, No. 4, 2006; pgs. 157-176.

Reviewer: Caroline Allison, Colby College ‘08

Review:

Increases in traffic congestion have resulted in an increase in pollution for cities and surrounding communities and an increase in time loss and inefficiency to drivers. The costs of traffic congestion are often not borne by those who cause it. As more cars enter roadways, triggering intensified environmental impacts, the need to apply corrective measures in heavily congested areas becomes more necessary.

London, England has recently adopted a congestion charge for the inner-most section of the city that has produced successful and encouraging results. In 1995 the national Department of Transport examined the costs and benefits of a congestion charge, and concluded that a charge would indeed internalize some of the externalities associated with driving and decrease congestion. Prior to the implementation of the charge, the research found that the program should be confined to central London (about eight square miles) and should be implemented via a license that would allow the payee to travel in and out of the “zone” during the course of one day, as well as park there. Charging for the license was determined to be a more effective way to price access to central London than imposing a fare for each individual trip during the day and/or a work-place parking levy. At the start of 2003, a five pound daily charge was imposed on drivers who used the roads or parked their cars within central London between 7:00am and 6:30pm, Monday through Friday (with a heavily discounted price for individuals residing within central London). Instead of setting the congestion charge equal to the marginal cost of the externality (as economic theory would suggest), an analysis of household behavior and factors that influenced decisions to use public roads or not concluded that the percentage increase of net benefits was greatest for a range of charges between 2.50 pounds and 5 pounds. More recently (2005) the charge was increased to 8 pounds following a similar cost/benefit analysis.

A somewhat unique aspect of the congestion charge in London is that instead of pricing road-use according to peak travel hours during the day, a single flat-rate is imposed on all road use during the day. Due to the fact that the average speed in central London throughout the day was fairly consistent regardless of peak-rush hour, a stable price for the license was thought to be easier to implement than a time-of-day scheme and just as effective. The single charge increased the feasibility of implementing a charge by decreasing administrative costs and making the system more efficient. The charge itself can be paid through a variety of methods including text messages, online, kiosks, retail locations, and telephone charges. The combination of payment methods makes complying with the charge easier for drivers. Video cameras are used throughout central London to enforce compliance. The cameras register license plate numbers and match them with those cars that have a congestion license. The overall detection rate (considering the effectiveness of one camera as well as the probability that each car will drive by multiple cameras) is thought to be between 85-90 percent.

Prior to the implementation of the congestion charge, models forecasted a decrease in miles driven within Central London of about 20-25 percent with predicted traffic speeds expected to increase about 2mph. The actual results showed a larger decrease in miles driven than predicted, which has continued to occur. Although private vehicles decreased trips into central London by 33%, public transportation has increased, negating some of the reduction in traffic. Fortunately public transportation is more efficient and produces less congestion per person. Bus traffic recorded the largest increase in public transportation. As the number of private vehicles on congested roads decreases, buses on those same roads become more efficient and attract consumers. As the demand for bus lines increased and more routes and more frequent service were added more drivers have switched from personal cars to public buses, further decreasing road congestion.

The effect of the congestion charge on businesses within central London appears to be varied. Negative correlations have been found between the implementation (and later increase) of the congestion charge and some retail business sales, however, there does not appear to be a statistically significant effect. Furthermore many storeowners feel that the decrease in traffic is in fact improving the image of central London and increasing sales to tourists.

Although the costs and revenues of the congestion charge have not matched the predictions, net revenues have been positive. The decline in road use was sufficiently large that the revenues fell short of the predicted revenues. Initially compliance was low, increasing enforcement costs. The lower-than-expected net revenues triggered some political complications because the predicted revenues were earmarked for public transportation improvements, which were delayed as a result, thereby placing a heavier burden on low-income individuals and families, who were then expecting to have a better public transportation system to use as an alternative.

The estimates of the social benefits and costs show a clear net benefit. The considered social costs included administrative costs, scheme operation costs, setup costs, traffic management costs, and charge-payer compliance costs. The benefits included time-savings and reliability benefits, reduced accidents, reduced CO2 emissions, among others. Although the net benefits are positive, the operational costs of the program are higher than anticipated and leave room for possible efficiency improvements. The author suggests that perhaps the private contractor is displaying rent-seeking behavior, or some inefficient aspects of the system may be resulting in a decrease in marginal net benefits.

Overall the congestion charge has effectively decreased traffic congestion and emissions. Individuals are seeing a decrease in travel time, as well as improvements in public transportation, making travel and commuting into and within central London increasingly more efficient. The public transportation system in London, along with the layout of the city and the significant traffic problem were all factors that positively influenced the effectiveness of the charge. The success of the congestion charge in London suggests that charging for scarce road space can increase efficiency of travel under the right conditions.