1. Urban Tolls: Price and congestion -Some lessons for a better urban public policy- Seminar April 21th, 2015 Pierre KOPP

2. “A price is a solved political problem” Abba Lerner

3. 1. Congestion and Toll

4. 4 1. Theory says (Vickrey)  Congestion is an externality: you slow me!  A toll can reduce congestion  The price has to be set up in order to force individuals to internalize their external cost  The toll is optimal when it equalizes price and full cost that changes every single minute….  In practice: is Lerner right?

5. A B C L G H E YX J H F P H Cost Road use (q) Marginal social cost S(q) Marginal private cost I(q) D(q) Loss Externality Proceeds Time gains 5

6. 2. The Stockholm toll

7. 7/35 1. The Stockholm experiment  Stockholm urban area: 1.8 million inhabitants Stockholm municipality: 800,000 inh. Stockholm center: 350,000 inhabitants Toll in center imposed by central government. Coalition: Green and Red To overcome local resistance: -All costs borne by the center paid by Sweden -Experiment (Jan-July) followed by vote

8. 8 2. Systeme in place  Cordon toll: vehicles pay as they enter/exit the tolled zone Between 6.30 AM to 6.30 PM At varying rate according to time  Modest fees: -1.10 €, 1,7 €, 2.2 €, peak hours, off peak hours -Maximum 6.60 € per day -Entirely automated

9. 9

10. 10 Per day (pass * km) Private transportation Public transportation Trips in Stockholm county28,30017,960 Average length (km)13,513,6 Average time (min)2240 Average speed (km/h)36.820.4 Centre/periphery5,8898,422 Average length (km)17.215.4 Average time (min)3144 Average speed (km/h)33,822,2 Centre/Centre 288758 Average length (km)3.73.8 Average time (min)162,4 Average speed (km/h)13,99,5

11. 11 3. Widely described as an unmitigated success  System functioned: engineers love it  Road traffic reduced -Registered reduction: 20% -Toll-induced reduction: 15%  Referendum positive: 53%: politician love it  There is a need for policy assessment  It’s a job for an economist  Maybe it will teaches us something new about congestion’s theory

12. 3. Costs and benefits

13. 13 The Net Social Benefit from a government policy is given by the difference between the cost and the benefit linked to the project (Boardman and al. 2001) The Stockholm toll is socially beneficial if it increases the Net Social Benefit Under most circumstances the changes in producer’s surplus, consumer surplus, externalities & government revenue provide a good measure of the monetary value of a government policy benefit and cost 1. Framework: Cost-Benefit analysis

14. 14 2. Welfare variation

15. 15 4. Calibration for Stockholm  Speed (S) and Density (D): a linear relation No good speed measure A sample of 2,200 measurements Several points, for several days, for 48 periods of 15 minutes, for two directions Center: floating cars

16. 16 5. Calibration for Stockholm  Speed = cumulated flows /cumulated densities Several points, for several days, for 48 periods of 15 minutes, and for two directions) 2005 : S = 49.48 km/h ; 2006 : S= 51.05 km/h. 2005 speed is generated by a road usage of q=410,000 trips,

17. 17 6. Time gain and loss BeforeAfter Number of trips410,000389,000 Speed radial49,4849,9 Speed center22,923,8 Time gain (M€/year)17,2 Loss for evicted (M €/year)-4 Benefit-Cost +13,2

18. 18  Benefit of CO 2 reduction  C0 2 reduction=∆ vehicles * fuel/km * C0 2 /l. -60,000 trips/day -17.2 km/trip -0.1 liter/km) -CO 2 /liter (2.35 kg)  =300 tons/day - Market price of CO 2 (25 €/ton)  = 64 million Euros/year 7. Environmental gains: CO 2 reduction

19. 19  Benefit of air pollution decrease ( + 7.36 M€ )  Number of vehicle * km per day * French marginal value of 1 vehicles * km in dense urban areas  Accidents reduction (+1.7 M€)  Toll increase speed and accidents decrease road use and accidents  Fatal accidents increase by 3%, severe accident decrease by 2% 8. Air pollution decrease and accident

20. 20  Capital costs = 201 M€  Yearly costs = 56 M€ -+Amortization/8 years = 26,5 M€ -+Opportunity cost 5% = 10,5 M € -+Marginal cost public funds 30% =10,5 M€ -+Operation costs --18,6 M€ 9.Total implementation costs

21. 21  If there is a road shortage, an increase in PT is needed, or mobility will decrease  PT is costly (price=50% of the cost)  The cost is conversely  Subsidies=taxes=distorsion  Quality decrease with the new crowd 10. Impact on Public transportation

22. 22 Time value Quantity Total cost T.C Road TC Road Tolled road TC Value of the time

23. 23 Value of the time Quantity Total cost T.C Road TC Road Tolled road G1G2G0 T.C+ Better TC

24. 24 11. Impact on Public Transportation  Toll-induced increase in PT patronage: (+45.000) about 50% of evicted car users representing 5% increase in PT patronage  Either - a transport quality decrease cost (if supply constant), -or increased supply cost (if quality constant), or both —as in Stockholm

25. 25 12. Costs of increased public transport supply CostAmount Investment costs63.8 millions Euros Yearly cost Amortization (5 years)11.7 millions Euros Opportunity cost of capital (5%) 3.2 millions Euros Marginal cost of public funds (30%) 3,5 millions Euros Operation costs 37.5 millions Euros Total cost/year-55.9 millions Euros

26. 26 13. Cost of increased congestion in PT  Degradation: % of standing passengers: +1.3 % point % of users satisfied: - 4 % points  Difficult to value (promising research area)  Estimate based on … Stockholm PT practices: standing time=2*seated time. 9,000 additional hours of standing time —> -18,5 M€

27. 14. Impact on Public Finance  Toll proceed : 87 M€ neither cost nor benefit  Toll and fuel taxes are less distorsive than another taxes -MCPF on ∆ fuel taxes (30%)= +3,3 M€ -MCPF on the proceed (30%)=-25,7 M€ 27

28. 28 15. A Negative welfare change Cost and benefitAmount Gain and loss/congestion+13.2 Environmental gains +10.7 Cost of implementation-56 Gain and cost for TP -7 Cost of increased PT supply-56 Public finance +20 Total -74 M€ (M€=million €)

29. 29  Transactions costs are 5 time the value of the decrease in congestion  The cost of increasing PT supply=5 time decongestion gains  Toll is slightly beneficial for Stockholm.  Congestion-related, environmental gains, time gains for the new bus benefit Stockholm residents and enterprises, as well as the cost of increased PT congestion.  All of the other elements (except for the gain in CO2, which benefits mankind at large), are costs for the Swedish gov, and for all Swedish citizens 16. Lessons

30. 30  Three directions to reduce access to a service : Shortage, discrimination, prices  Prices are our favorite  Highest social value trips are selected  User’s fees > taxes: less distortive  Is it regressive?  Yes, if there is a correlation between low time value and low income  Yes, if center’s inhabitants do not pay the toll  Yes, if poor suburbs’ inhabitants quit cars and are left over with no good PT system 17. Distributive effects are complex

31. 31  Positive votation  But a strange question : “Should it be continued?”  The logical question is “Do you approve?”  Simple econometrics leads to a negative result 18. A contested political choice

32. 32 19. A contested political choice Yes NoTotal%Yes Municipality23921245153% 14 other12819432240% Total 367 40677347%

33. 4. Discussion

34. 34  Congestion costs are often said to represent 1% or more of GDP  Congestion costs = net gains from reducing congestion to optimal level: 4.8 M€  GDP of tolled zone = 22.9 Billion Euros/year  Congestion costs in most congested zone of Sweden: 0.02%  Estimates for Paris & London: 0.1% 1. Congestion is overestimated

35. 35  Optimality is a nice target  Three conditions are requested for a successful urban toll  Severe road congestion (London/Stockholm)  Low implementation costs (S=L/3)  Low marginal costs in public transportation (Never) 2. Three conditions for a successful urban toll