Academic journal article Journal of Management Information and Decision Sciences

Pricing Congestion: Mathematical Model and Algorithm for Estimation

Academic journal article Journal of Management Information and Decision Sciences

Pricing Congestion: Mathematical Model and Algorithm for Estimation

Article excerpt


Congestion is becoming a problem all over the world and physical expansion of road networks is becoming not the best option due to cost and other reasons. This paper considers some option of a congestion pricing model and explains its rationale and parametric estimation. An algorithm is being proposed for the suggested model parametric estimation and price determination. A case of a city is exposed to reflect on the potentials of data collection mechanisms and public participation and awareness. A simulation of the case of a city is used as a basis to show how the parameters of the model would be estimated.


The relatively successful road-pricing scheme in Singapore has encouraged transportation planners and urban policy makers throughout the world to consider charging for the use of the road as an attractive alternative to deal with growing urban congestion problems (Rex Toh (1992)). With the increasingly tightened public budgets and the growing environmental concern of traffic pollution, physical measures to expand the network of roads seem neither politically feasible nor socially desirable. There are both pricing and non-pricing options to reduce traffic. The non-pricing options include: banning or restricting access to the road (e.g. high occupancy vehicle lanes policy (HOV)) or to a specific area, restricting car ownership, and transit fares subsidy. The pricing options include: parking fees, gasoline tax, and per mile charge per access charge congestion fees. Among the pricing options the congestion fee is the only one that directly targets congestion but also the most politically difficult to enact.


Economists were earlier convinced that congestion is a type of a user-user externality and that the only way to ration congestion is to charge the road user the full marginal social cost of his trip (Iman, R. (1978), Bordman, A. and Lave, L. (1977), Henderson, J. V. (1974) and Evans, A. W. (1992)). This marginal social cost includes both the private marginal cost incurred by taking the trip and the additional cost imposed on the other users. The cost imposed on the other users is the forgone value of their incremental travel time caused by the speed delay due to the presence of the last user. A parking fee or gasoline taxes are inefficient because they do not charge the user the exact social cost of his/her trip. The only method that charges the user the full cost of his trip is the congestion fee. Kraus, M. (1989) found that the congestion fee increases the household welfare gains by 40% higher than the gains from a revenue-equivalent gasoline tax.

A widely held argument against congestion fees and congestion pricing in general is that they are regressive in the sense that they favor the rich more than the poor. Because the rich has a higher marginal value of time, the rich benefits more from congestion pricing; while on the cost side, as a percentage of income, the poor is hit harder by the congestion fee. A recent study by Kanninen, B. (1995) on the distributional impacts of a proposed congestion pricing program in Twin Cities showed that the fee is indeed regressive and favors both the rich and the urban dwellers against the poor and the rural commuters. This not an argument against the efficiency of the congestion fees but rather a distributional issue that the policy maker has to be aware of when enacting such a policy. Since almost every enacted policy has winners and losers, on a Kaldor efficiency ground, such a policy should be enacted if the winners could compensate the losers in such way that no body is worth off.

Two possible methods suggested by the literature for handling the equity resulting from a congestion pricing are: to use the proceeds from the congestion fees to subsidize buses and improve road services or to use them to reduce other distortionary taxes, e. …

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