Matt Nolan

Taxing congestion: How I might justify it

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I have not yet been convinced that congestion charging, as a general concept, makes sense (especially given the lack of any comments on the post 😉 ).  However, this does not mean that there won’t be a general set of circumstances where this type of toll charge does make sense.

One situation I can think of is as follows.  Suppose you have a long piece of road, and along the way vehicles join that road.  Now, the vehicles that are joining the stream of traffic create an externality for all the vehicles that are downstream of them – but they do not have to face the cost of this at any point.  As a result, they are not facing the full social cost of their actions.

If we look at the vehicles joining the traffic stream at this point as the “marginal” vehicles then we can see that, even though on average the cost externality falls on those that perpetuate it, at the margin an additional vehicle faces a lower cost for congestion than the congestion they create!  Since people make decisions at the margin we will have “too many” vehicles entering from side streets, and “too much” congestion.

In this case, we should toll the side roads coming onto the motorway.  Furthermore, the closer these roads are to the city (which is the likely destination of most of the vehicles) the greater the charge should be.

This is my attempt to justify a toll based on congestion.  Notice, in this case a blanket toll, or a toll based on the quantity of congestion isn’t the right toll – the suboptimal solution occurs because vehicles entering the motorway close to the city don’t have to face the congestion, and so do not internalise it.  As a result, this gives us a clearer idea about what actually drives the suboptimal outcome, and how we can solve it.

Feel free to tell me how and why I’ve missed the point 🙂

Matt Nolan

Taxing congestion: Is it helpful?

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A number of fine authors have come in behind taxing congestion today – namely Greg Mankiw and Stephen Dubner.

The justification for “taxing congestion” appears to be Pigovian – someone clogging up the road has a negative externality on everyone else, and so we should tax that externality. However, I feel that this is just half the story.

In the case of congestion, everyone else on the road is also holding up that one person. In fact, on average, one person on the road is suffering the same negative externality as they are providing. As a result, doesn’t the existence of congestion effectively cancel itself out? Sure putting a toll on will reduce congestion – but if we already have the optimal solution why would we want to introduce a tax on top of it. Note: It may be efficient to actually have some congestion, as the goal of policy is to maximise welfare – not minimise congestion.

Now I have made the argument for an externality in the past (here and here) – my thinking was that the externality fell outside of the drivers and on other areas with which driving was a means to (eg work). Of course, I can’t think of a single situation where there isn’t a “price” mechanism to sort this out (eg with work people wages will adjust to sort out the optimal labour market solution in the case of the “externality”).

I would like to hear if anyone has an externality justification for toll roads – bonus points for using the term “non-linearity”.

goonix

Cheers! We’re (possibly) efficiently taxing ourselves – Alcohol in NZ

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A few medical experts and lobbyists are calling for a “massive” hike in alcohol prices to solve a “national booze problem”.

According to the article, alcohol costs $425 million in ACC payouts, $655 million in the public health sector, and $1.17 billion in lost productivity each year and is a contributing factor to 70 per cent of emergency hospital admissions and well over half of all crime.

Alcohol is a product that is already heavily taxed. The question is: is the current level of alcohol tax sufficient to internalise all costs of alcohol consumption (including those outlined above)?

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Matt Nolan

Compulsory redundancy payments

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I see there is some talk of compulsory redundancy payments after this sad story.

Now even though it would be nice if those people hadn’t been left high and dry after all their years of commitment, it is important that we try to get an objective idea about the costs associated with the scheme.
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jamesz

Sharing the school uniform surplus

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The Commerce Commission appears to have found an unusual source of anti-competitive behaviour: schools forcing parents to use a monopoly supplier of school uniforms. Apparently schools often accept payments from clothing manufacturers in exchange for exclusive rights to sell the school’s uniform. Then the manufacturers extract large rents from their monopoly position by charging high prices to parents.

The Commerce Commission is concerned about the monopoly position that the manufacturers have but, recognising the convenience of a single contractor, recommends that the schools use a tender process to ensure value for the parents. Read more

jamesz

I don’t understand air fares

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I’ve been looking at air fares for overseas travel recently and somethign stood out. When you stop over in a city it costs a whole lot more to stop over for a few days than it does to just transfer flights and pass through. I would have thought that getting to your final destination faster was something people would pay for. Yet, the longer you’re happy to take over your trip, the more you end up paying! Read more