IDEAS home Printed from
   My bibliography  Save this paper

Economic fundamentals of road pricing : a diagrammatic analysis


  • Hau, Timothy D.


The author presents a conceptual framework for road pricing based on a rigorous diagrammatic - but nonmathematical - framework derived from first (economic) principles. His analysis of traditional arguments about road pricing shows why implementing congestion pricing as practiced in the past has encountered obstacles. Partly, it is because both types of road users - the tolled and the tolled off (those who avoid the road to shun a toll) - are shown to be worse off under a constant value of time, except for the government. And when differences in time valuation are taken into account, primarily those with very high time values are better off. Unless congestion toll revenues are earmarked and travelers perceive that the money is channeled back in reduced taxes, lower user charges, or improved transport services, neither the tolled nor the tolled off will support road pricing. Only where there is hypercongestion is everyone better off with congestion pricing. In the absence of scale economies or diseconomies, the level of economic profits - toll revenue collections less a road's fixed and non-use-related costs - serves as a surrogate market mechanism indicating that a road should be expanded or downsized. The decision to let roads deteriorate over time is itself an act of disinvestment. The author shows that if a road authority levies economically efficient charges for congestion, it is possible to make money on a road. Roads can be profitable in urban areas in the long run because land rents are high; congestion tolls reflect the associated high opportunity costs. On urban roads with indivisibilities and diseconomies of scale, efficient pricing may curtail the extent of profitable undertakings. On rural roads with indivisibilities and economies of scale, marginal cost pricing can produce short-run profits. Economic efficiency is enhanced by pursuing optimal pricing in the short run and optimal investment in capacity in the long run. The rule is to implement short-run marginal cost pricing while varying road capacity over the long run. Insights by Newbery, Small, and Winston - about the economic implications of the extensive damage that heavy vehicles cause to roads - enrich the basic Mohring model. Charging for both the external and variable cost of road damage, by assigning a fee based on vehicle weight per axle, can help cover deficits arising from road congestion. Even if a road network is broadly characterized by increasing returns to scale in building and strengthening roads, the deficit could be closed by diseconomies of scope. A road network that accommodates both cars and trucks costs more than the sum of an autos-only and a (smaller) trucks-only road system. So the surplus associated with diseconomies of scope offsets the potential loss associated with scale-specific economies. A dedicated road or transport fund is all the more viable because road users are charged not only for the damage caused by trucks and heavy vehicles but also for congestion.

Suggested Citation

  • Hau, Timothy D., 1992. "Economic fundamentals of road pricing : a diagrammatic analysis," Policy Research Working Paper Series 1070, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1070

    Download full text from publisher

    File URL:
    Download Restriction: no

    More about this item


    Roads&Highways; Economic Theory&Research; Urban Transport; Public Sector Economics&Finance; Environmental Economics&Policies;


    This item is featured on the following reading lists or Wikipedia pages:
    1. Folkomröstningen om trängselskatt i Stockholm in Wikipedia Swedish ne '')
    2. Trängselskatt in Wikipedia Swedish ne '')


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:1070. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.