Toll roads

Road Rent – On the Opportunity Cost of Land Used for Roads

| David Levinson

There are a number of ways to view the cost of automobile travel. For instance

This post looks at the idea of road rent. At the margins, what is the value of road space, and how might that cost look on a per vehicle-km traveled basis?

Real Estate

Land has value. Land used as roads has value both as a road and potentially for other uses. What if the value for other uses was higher than that for use as a road?

In Greater Sydney land values range from to $AU210,000 per m² in Barangaroo on Darling Harbour to under $AU1000 per m² in Western Sydney [link].  In Minneapolis, we estimated a few years ago that average assessed land value as $144 per m² for roads and $30 per m² for highways. [Junge, Jason and David Levinson (2013) Property Tax on Privatized Roads. Research in Transportation Business and Management. Volume 7. pp. 35-42.] It seems that assessed value is about 2/3 of market value in Minneapolis.

In some places it is much higher, in some places much lower, the examples used herein are simply an illustration.

The idea is that there is land holder (such as a government land agency) that has to decide whether to allocate land to road uses or for other purposes.

Parking Rent

Consider a typical suburban residential neighborhood with `free’ parking in front of houses. The land is valued at $1,000 per m². Each house requires one parking space out front, and parking is permitted 24 h per day. Conservatively, a car takes 10 m² when parked (the road is the access lane, we consider that separately). It would cost $10,000 for the land owner to purchase the land equivalent of the parked car. The annual rent on that would be $400 (at 4% interest).

In this example $400 is how much the car owner should pay annually  to their municipality for a permit to park their car to cover the cost of land (not the cost of infrastructure, or any other costs of roads and mobility, just the cost of land). This is a bit more than $1/day (more precisely $1.095/day). In more expensive neighborhoods, this would be higher, in less expensive neighborhoods, lower.

For Minneapolis, I have previously estimated about 220,000 on-street spaces. At $400/space per year, this would raise $88,000,000 per year, a not inconsiderable share of the city’s $1.3B annual budget. Instead it is mostly given away free.

Consider the implications if property taxes were reduced by up to $88M in total, and parking permits sold at $400/year (payable monthly with the water and trash bill). People would realize the cost of on-street parking, and there would be less of it, and less vehicle ownership at the margins, and fewer trips by car. Space freed up could be re-allocated.

Alternatively, $400 per year is the value of public subsidy from publicly-owned land to private car owners who get `free’ on-street parking. In short from the car-less to the car owners.

Alternative Uses of Road Space

The economic idea of opportunity cost is important here. Opportunity cost is value of the next best alternative. The next best alternative to road space might be renting it out. So for instance an urban US freeway that destroyed blocks of extant development when it was built has an opportunity cost associated with the value of that real estate.

So the question arises as to what other uses  could be made of the road; for if there were no other uses, you might as well store cars for free. Here are several other uses that could be  considered to replacing a parking lane:

  • Park or parklet,
  • Bike lane,
  • Bus lane,
  • Paid parking, via meters,
  • Shared car parking (rented to the car sharing company),
  • Shared bike parking (rented to the station-based or dockless bike sharing company),
  • Taxi or ride-hailing stand,
  • Bus stop,
  • Shared scooter parking (rented to dockless scooter sharing company),
  • Food truck or ice cream vendor,
  • Road for moving motor vehicles (a parking lane could be another moving lane),
  • Sold off for development.

The last item deserves some discussion. Consider that our road with two parking lanes (one on each side) is maybe 10 or 12m wide (~32 to 40ft). This is wider than some houses are long. The city could in principle retain the sidewalks and sell off the roadbed for townhouses or single family homes. Given the houses are already serviced by alleys, and so long as not all roads were sold off, some roads could be. An illustration of this is the Milwaukee Avenue in Seward in Minneapolis, as shown in the figure. You will see there is no paved street in front of the houses. This could be tightened up further or realigned should there be demand.

Milwaukee Avenue, Seward. Source: http://maha2014.dreamhosters.com/history
Milwaukee Avenue, Seward. Source: http://maha2014.dreamhosters.com/history

This is not appropriate for every street. However, (1) there are places this can be done, where roads are in excess and housing scarce, and (2) this illustrates that land currently used as asphalt to store and move cars has value, and that houses have value even in the absence of streets for cars in the front.

There are always excuses — utilities may need to be relocated, fire trucks would need to go slower down narrower sidewalks. But these excuses can be overcome, there are numerous examples of narrow paths that function as roads.

Driving Rent 

Note: 1 are = 100 m² and 1 hectare  (ha) = 10,000 m²

Typically each car is in use 1 – 1.5 hours per day, and parked for the remainder. In the previous section, we considered parking, the `remainder,’ in this section we look at the time in motion.

When in use, the car is occupying not simply its area (the 10m² = 2m x 5m), but also is preventing the use of other space around it. On a freeway with a capacity of 1800 vehicles per hour traveling at a freeflow speed of 100 km/h, (i.e. just before the speed and flow drop due to congestion sets in) there is a critical density of 18 vehicles/km.

18 vehicles per km is 55.5 meters per vehicle. Lane width is 3.65 meters, so the area occupied is 202 m². Let’s round to 200 m². Each moment  a car is in use, it is using 200 m², on which it should pay rent. So for an hour a day, this is 720,000 m² s or 72 ha s.  (The meter-squared by second (or hectare second) is a new unit of measurement (a time-volume) that needs a catchier name).

It is the density that is the relevant number here, since vehicles are occupying space that we are charging rent for in this thought experiment. Though they are moving, and so the space they are occupying moves with them, there is always some space being occupied for the duration of their travel. Each of those vehicles per hour is occupying a moving window of space.

Roads are a Time Share

When roads are less congested, cars are consuming more space per vehicle. So uncongested urban are much more expensive per traveler than congested rural roads.  When traffic breaks down, they are consuming less space, but presumably are occupying that space for more time, since they are going slower. Induced demand [link] and travel time budgets [link] negate that to a significant extent.

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Illustration of space occupied by cars. Note that most cars do not have 2 occupants. This particular layout is, surprisingly, in somewhat congested conditions. Cars often take up more space at higher speeds. Screen still from a 2002 Saturn car company TV commercial. Image source:  The San Francisco ad agency Goodby, Silverstein & Partners.  Article: Raine, George ‘Goodby, Silverstein agency celebrates 25 years’ SF Chronicle.

George Raine https://www.sfgate.com/business/article/Goodby-Silverstein-agency-celebrates-25-years-3285120.php#photo-2434077

In this example, the hourly rent on 200 m² is what we are interested in. Though cars move, over the course of 1 hour of travel in these conditions, they are claiming that much space. The specific space they are claiming moves with the vehicles, but this all balances out as other cars claim the space they vacated.

Empty roads still have to be paid for, and paid for by actual road users. Even when a road is not being used, it is available to be used. Travelers have the option of traveling. Pavements cannot be easily be rolled up and allocated to other purposes on the fly, particularly purposes like buildings. (Roads can occasionally be closed for special events, but this is rare during business hours.)

 

Example

Consider a car trip that uses 3 roads:

  • Road section 1 (suburban residential): l=5 km, w=3.65, v=30 km/h, q=1000 veh/h, k=33.33 veh/km, AADT=10,000 vehicles/day/lane, p= $1000/m².
  • Road section 2 (motorway): l=10 km, w=3.65, v= 100 km/h, q=2000 veh/h, k= 20 veh/km, AADT = 20,000 vehicles/day/lane, p= $5000/m².
  • Road section 3 (downtown): l= 1 km, w=3.65,  v=40 km/h, q=1600, k =40 veh/km , AADT=16,000 vehicles/day/lane, p= $10000/m².

where: l = length (km), w= lane width (m), v=velocity (km/h), q=flow (veh/h), k=density (veh/km), AADT = Average Annual Daily Traffic, p= land value ($/m²), i=interest rate = 0.04, r= land rent ($/year/m²), d = days/year

Consider each road section to be a homogenous pipeline. (With heterogenous traffic, this is obviously far more complicated, and we would make use of the q, k, and v variables to compute an area-time.)

The annual rent (R) for  each road section is the R=p*i*l*w

  • Road 1: R=$1,000/m² y * 0.04 * 5,000 m * 3.65 m  = $730,000/y
  • Road 2: R=$5,000/m² y * 0.04 * 10,000 m * 3.65 m = $7,300,000/y
  • Road 3: R=$10,000/m² y * 0.04 * 1,000 m * 3.65 m = $1,460,000/y

This annual rent is paid by the road agency to the land owner for the use of land as a road. The road agency then wants to recover this cost from its customers, the travelers.

The question of how to allocate always has some subjectiveness to it. Another way of thinking about it is based on elasticity of demand. Peak hour work trips are perhaps the least elastic (least sensitive to price), and so from an economic efficiency perspective should bear the greater cost.

In this example, we take a simpler tack.

The allocation is R/AADT to get cost per year per daily tripmaker, and divide by 365 to get cost per trip, and by section length to get cost per km. In this example:

  • Road 1: $730,000/10000 = $73/y = $0.20/trip = $0.04/km
  • Road 2: $7,300,000/20000 = $365/y = $1/trip = $0.10/km
  • Road 3: $1,460,000/16000 = $91.25/y = $0.25/trip=$0.25/km

The total is thus $529.25/year or  $1.45/trip to cover land rent. `Your mileage may vary,’ as the saying goes.

Implications

The implications of this are several.

  • At an additional $1.45/trip, travel by car (and congestion) will diminish.
  • Road rent is essentially additive with annualized infrastructure costs, which generally does not consider the cost of land (rather, land is often implicitly considered `free’ or a sunk cost).
  • If travel by car diminishes sufficiently, road space can be clawed back and redeployed for other public purposes.
  • Narrower lanes impose less road rent. But not necessarily proportionately so, as the throughput on narrower lanes (with human drivers) may be lower as drivers are less keen to be immediately adjacent to nearby high-speed vehicles.
  • Slower moving vehicles take up less space, but take that space for longer.
  • While pedestrians and bicyclists use space as well, they use much less space. (See discussion of flux.) Sidewalks (footpaths) are often considered part of the adjacent private property, and are thus already paid for with property tax.
  • Land used for roads instead of development is not on the books for property taxes.
  • The revenue raised can be used for many transport purposes or redistributed back to taxpayers through some other means.
  • We expect the additional road rent reduces the effective land rent that landowners can charge. If people have to pay more for travel, they will pay less for real estate.
  • Rural areas have much lower, perhaps negligible, road rent. Though the number of users drops significantly (so there are fewer travelers who must pay the burden of road rent), the cost of land drops even more significantly.
  • Were there no (fewer) roads, land would also have very little (less) value, since it would be difficult to access and egress.
  • If roads were fully built on, views would be terrible and the existing buildings would diminish in value. But none of that is to say we have the correct amount of roads now. Clearly urban roads are undercharged in a real estate sense.

Ontario to experiment with high-occupancy toll lanes on highways | Globe and Mail

| David Levinson

Oliver Moore at the Globe and Mail writes: Ontario to experiment with high-occupancy toll lanes on highways:

…

Potential hurdles lie ahead for Ontario. Research into various HOT lane projects in the United States suggests that they can have a hard time covering their costs. This matters more if the goal is revenue generation instead of traffic management, though, and Mr. Del Duca’s remarks did not make it clear which of these would be considered more important when setting the price.

There is also the argument that these are “Lexus lanes,” an unfair way for wealthier people to buy their way out of traffic. Others counter that everyone benefits by having some traffic diverted off the rest of the highway. And Prof. Sullivan’s research showed that the lanes he studied were used by drivers across the income spectrum.

“Not everybody has the same value of time, and even some people have different values of time at different times,” said David Levinson, a transportation analyst and professor at the University of Minnesota. “If you’re in a hurry, if you have to pick up your kid at daycare … or go to the airport, you’ll pay a premium to save travel time.”

Our hatred of taxes, demands for services conflict | Wilmington News Journal

| David Levinson

Wilmington News Journal writes an Opinion: Our hatred of taxes, demands for services conflict.

As Delaware Transportation Secretary Jennifer Cohan notes, no community leader will deny the state has a funding problem for its roadways. However, as those same community leaders will acknowledge, there is practically no way we are going to solve that problem. Americans in general, and Delawareans in particular, do not like paying taxes. They never did. In recent years the hostility to taxes are grown. The anti-tax movement remains strong and any proposed tax on gasoline makes it even stronger.

The result is, as Secretary Cohan told legislative budget writers last week, $600 million worth of highway projects will be on hold for years. That sounds reasonable, until the missing roadwork affects them. Then it gets personal. The demand for services will go up. However, there still will not be tax increases.

David Levinson, a professor of transportation studies at the University of Minnesota, explains it this way: “Roads are governed by elected officials, who believe they are re-elected when they keep taxes down and are sometimes punished when they raise taxes.” Voters do not trust transportation departments, Professor Levinson says, and they are not always wrong.

Congress is in the same shape as the Delaware General Assembly. It is supposed to fix the federal highway trust fund. However, it seems highly reluctant to do so if it adds anything to the taxpayers’ gasoline bill. Economists believe a way can be found so that the private cost of driving a car comes close to the actual public cost. Despite what we pay at the pump or for tolls or fees, the cost of using the roads and polluting the air is much higher. Economists, both right and left, argue this should be evened out.

Economists, however, do not run for re-election.

The largest source of revenue for the road projects are the tolls on I-95 and Del. 1. This makes sense and follows the same no-tax logic of gasoline levies. The Del. 1 toll is higher on the weekend. The drivers paying that extra money are usually driving for pleasure, not work. The extra cash goes down more easily.

The I-95 tolls is better yet from this point of view. It is a border tax, if you will. The bulk of it is paid by people driving through Delaware. They are highly unlikely to protest a high toll by voting against Delaware incumbents. Our trouble is that we do not have more borders that strangers want to cross.

Every driver has welcomed the current lower price of gasoline. Tax increase suggestions from infrastructure advocates have been shouted down, both by the diehard anti-tax groups and the average motorist who is enjoying the relief. Therefore, the impasse continues. Cars will become even more efficient on gasoline and thus lower the amount of tax coming in. Postponed maintenance will grow more costly and wear and tear on the roads will get worse.

Somewhere along the line, something will have to give. Even re-election wary politicians will be forced to agree.

Delaware of course has some of the highest share of revenue from tolls in the US due to its strategic position of owning a short turnpike between Maryland, Pennsylvania, and New Jersey, of being able to tax foreigners living abroad. Yet even they face the same issue as other states as to how to raise revenue.

Better job accessibility drives MnPASS subscriptions

| David Levinson

CTS Catalyst reports on our recent research: Better job accessibility drives MnPASS subscriptions

interstate

Photo: MnDOT

In recent years, many metropolitan-area highway systems have created high-occupancy toll (HOT) lanes. Typically, the use of these lanes is restricted during peak periods to carpools and those paying a toll for access, which commonly requires enrollment in an electronic tolling program and the use of an electronic transponder.

To better understand why drivers enroll in Minnesota’s MnPASS electronic tolling system, University of Minnesota researchers investigated the factors that drive subscriptions. Their findings indicate that households are more likely to have MnPASS subscriptions in areas where the MnPASS system provides a greater increase in accessibility to jobs.

“While there has been a great deal of research into what causes travelers to select a toll lane during a single trip, there is very little information available regarding the first decision a potential HOT lane user must make—the decision to enroll in an electronic tolling program and become an eligible HOT lane user,” says Andrew Owen, director of the U’s Accessibility Observatory.

The MnPASS system was created in 2005 with the opening of HOT lanes on I-394 west of downtown Minneapolis; in 2009, the system was expanded to include HOT lanes on I-35W south of downtown Minneapolis. During peak periods, the lanes are restricted to vehicles carrying two or more occupants and to travelers paying a toll that varies from $0.25 to $8.00 based on HOT lane utilization at the time. To use the HOT lanes, vehicles must enroll in the program online, by mail, or in person and pay $1.50 a month to carry a MnPASS transponder provided by the Minnesota Department of Transportation (MnDOT).

“Though enrolling in a HOT lane program is usually low-cost or free, it always requires some user expense in the form of time spent processing enrollment forms and managing accounts,” says Owen. “In addition, it involves some risk because there is typically a charge for lost or damaged transponders. Because of these costs and risks, it’s reasonable to expect people who would receive little or no benefit from the ability to use HOT lanes won’t enroll in the program, while a person who would receive a very large benefit would be very likely to enroll.”

To test this theory, researchers calculated the job accessibility benefit of the MnPASS system by determining the areas where using MnPASS HOT lanes would lead to the greatest increase of jobs reachable with a commute of 30 minutes or less. They found that the areas with the highest concentrations of MnPASS-holding households—the western and southern suburbs of the metro area—were also the areas where the MnPASS system provided the greatest accessibility benefit.

“These findings will serve as a useful tool for transportation planners as they work to determine where to implement HOT lanes in the future,” says Owen. “By evaluating the incremental job accessibility benefits created by a planned HOT lane, planners can more effectively model participation in toll lane programs and more accurately weigh the costs and benefits of creating new HOT lanes.”

Related Links

Incremental Accessibility Benefits and Choice of Subscriptions for High-Occupancy Toll Lanes

MnPASS Accounts per Household
| David Levinson

Recently published:

MnPASS Accounts per Household
MnPASS Accounts per Household

This paper presents the results of an investigation into the factors contributing to toll lane subscription choice by using data from the MnPASS high-occupancy toll lane system operated by the Minnesota Department of Transportation. The paper estimates a binomial logit model that predicts, on the basis of aggregate characteristics of the surrounding area, the likelihood of a household having a subscription to MnPASS systems. Variables in this model include demographic factors as well as an estimate of the incremental accessibility benefit provided by the MnPASS system. This benefit is estimated with the use of detailed accessibility calculations and represents the degree to which a location’s accessibility to jobs is improved if HOT lanes are available. The model achieves a rho<sup>2</sup> value of .634, and analysis of the results suggests that incremental accessibility benefits play a statistically and practically significant role in determining how likely households are to hold a toll lane subscription.

Another HOT Post

| David Levinson

Peter Samuels at TollRoadNews writes this about Randall Pozdena (ECONorthwest) take on our HOT Study (previously discussed at TollRoadNews). Average value of time saved irrelevant to toll express lanes – Randall Pozdena ECONorthwest :

“2013-08-30: It’s not the average value of time saved (VoTS) that’s relevant to users of toll express lanes running alongside free lanes. It’s the higher time saved values of a small proportion of trips that choose the express lanes that determines how much the minority using express lanes will pay – the VOTS of the top decile or two of the distribution of total trips in the corridor.

Randall Pozdena, managing director and senior economist at ECONorthwest in Portland OR makes this point in comment on our reporting of a University of Minnesota study of motorist behavior on the 394 and 35W toll express lanes in the Minneapolis area by Michael Janson and David Levinson. We’d reported the researchers’ surprise at the very high values of time saved they’d observed in the Minneapolis toll lanes  – that drivers in express lanes regularly pay $1 to $2 per minute saved, or $60 to $120/hour.

That compares to full tollroad average driver payments of $15 to $30/hour.

The main thrust of our report was on the Janson-levinson discovery that toll rates can have a definite proxy effect – high rates being seen as a proxy indication of high congestion shifting the demand curve to the right.

But the other newsworthy findings of the study seemed to be the very high VOTS measured and the Janson-Levinson explanation that motorists may have an exaggerated sense of the time they save. They are behaving with imperfect knowledge, and systematically biased perception of what time saving they’re buying.

Pozdena sees it quite differently.

He says people using toll express lanes are acting rationally and while their knowledge is imperfect he sees no systematic misperception.

‘In a toll express lane setting, implicit values of time are very likely to be that high ($1 to $2/minute saved.)  The reason is that the ‘conventional’ value of time is actually an average, but in the real world, there is a log-normal distribution around that average that reflects not only the distribution of income, but also the urgency of the trip at the instant.  Thus, the users who self-select to pay to join the toll express lane are drawn selectively from the UPPER TAIL of the VoT distribution, and would not be expected to display average values of time.’

He says ECONorthwest has developed a model for toll optimization model that is based on calculating the shape of the distribution of values of time.

‘We take the regional model average VoT and form a distribution around that mean in a key step in the data flow called ‘VoT Transform.’  

He adds that at ECONorthwest they ‘routinely find our model predicting that the MARGINAL value of time of those who are skimmed off to the HOT lane is several multiples of the AVERAGE value of time, and the average of those above this cutoff would be even higher.  Thus, I don’t think that one can conclude that HOT lane users think they are getting ‘greater time savings’ than they really are.  They are just the folks with long-tail values of time.’

Pozdena says the proxy effect is not a problem if the pricing system is working as it should and prices according to density of vehicles. It is conveying good information to motorists about conditions they can expect.”

Obviously there is a long-tail (one cannot have a value of time below zero, but one can have a value of time of $200/h). Further, people using the toll lanes must have a higher value of time than those who do not use the lanes, at that time. The question is the composition of rational and fully-informed travelers vs. misperception (for which, contra Pozdena, we do have evidence) vs. emotionality vs. concern about reliability vs. principal agent problems (someone else’s money) vs. any of the other factors that influence route choice and lane choice. These are all components in the choice of different individuals, and we don’t know enough to accurately ascribe the choice to each component.

I shriek the wail of every scientists: more research is needed.

Pricing with and without Reservations

| David Levinson

The Twin Cities freeway system, like many places, is designed so everyone who wants to use a freeway can do so on-demand by showing up and getting on the road (or queueing at a ramp meter waiting for the opportunity). The Twin Cities also has a MnPass system on some of its freeways, which it plans to expand.

MnPass System of Dynamic Pricing
MnPass System of Dynamic Pricing

The MnPass High Occupancy/Toll (HOT) lanes guarantee free-flow travel times, but have tolls which vary systematically over time-of-day (rising during the peak period), or in modern installations, dynamically. In the case of dynamic tolls (like MnPass), they are intended to ensure the toll is high enough to prevent congestion (ensure the level of traffic is far enough below capacity that bottlenecks are not activated, and if temporary queues are formed they are quickly discharged.) However with the dynamic toll,  travelers don’t know what it is until they are about to decide between using the priced lane or not. (It is capped at $8.00, but the price has variability).

Almost everywhere else, we guarantee the price on a road ($0) with variable travel time.

We thus have either uncertainty on price with certainty on time, or certainty on price and uncertainty on time. We should be able to have certainty about both of these, assuming we allow the price to be non-zero.

First-come, first-serve is not the only way to allocate space. We don’t allocate table space that way during prime time at nice restaurants. We don’t generally allocate airline seats that way. We don’t have to allocate roads that way.

We could, for instance, have reservation pricing (which has been proposed for intersections in a real-time way). At its most basic level, for instance, every day the commuter pre-purchases a ticket to use a particular road segment (e.g. between exit 400 and exit 401) during a particular time slot (say between 7:45 and 8:00). The ticket cost is known in advance before departure, like a plane ticket. The road agency would only sell as many tickets as the road would accommodate (without congestion) at that period. The ticket would be validated electronically through some form of Electronic Toll Collection.

But, roads are not like airplanes, the traveler might arrive at 7:44 or 8:01, does the road agency force the car onto the shoulders? More likely they just charge a penalty which increases with deviation from the purchased window. So if the charge were $2, there might be a $0.10/minute surcharge added for each minute early or late the traveler was.

If the system were deployed universally, congestion would be a rarer occurrence (seeing only non-recurring congestion, due to crashes and other incidents, not the daily recurring congestion because of excess demand for the available capacity). Further the system would know whether the traveler or the agency was the caused the earliness or lateness. If there were non-recurring congestion, it might waive the penalty. If on the other hand the traveler left too early or too late to reasonably make their slot under planned for circumstances, the surcharge would stand.

The End of Traffic and the Future of Access: A Roadmap to the New Transport Landscape. By David M. Levinson and Kevin J. Krizek.
The End of Traffic and the Future of Access: A Roadmap to the New Transport Landscape. By David M. Levinson and Kevin J. Krizek.

But travelers don’t want to map out their route every day. OK, the agency can probably just sell a ticket allowing travelers to be “on the roads” (as opposed to being on a specific road), and let individual travelers sort out the best path. The losses from not micro-managing spatially are relatively small, compared to the gains from spreading traffic out by time of day. See the literature on Macroscopic Fundamental Diagrams about this.

In this case, the traveler pre-purchases a ticket to use any metropolitan area road between 7:00 and 7:30 am, but the number of passes is limited by system capacity. If purchase is made far enough in advance there is a lower price then if the ticket is bought real time. But no-one wants to plan their schedule that far in advance, or log-in daily spending even 5 minutes to buy tickets for a 20 minute trip.

Here the road agency managing the system can be a little bit more clever. They could sell various types of season passes (just like transit agencies). A traveler might buy an unlimited use pass for a premium, but there would be a limited number sold to residents of each zip code (if spatially fixed, passes would not be transferrable, the electronic transponder would be linked to a license plate) (or any other local geography that makes sense, the key is there is still finite space on the roads, and too many pass-holders from a wealthy suburb won’t save time just because there is excess capacity elsewhere). Or they could buy a more limited use pass at a lower price. And of course, travelers would buy these as recurring subscriptions, billed to a credit or debit card.

People without passes could take their chances with same-day tickets which might be more expensive if traffic is on the edge of congestion, or cheap if traffic is low that day.

If set up properly, these passes replace existing revenue sources for the agency.

How should the agency allocate these passes? Clearly it should not just give them away. But setting a fixed  price and selling them does not real allow discovery of demand patterns. Here Dutch or Vickrey auctions might be appropriate. For instance, the passes would be available at a posted price (‘buy-it-now’), but the agency would also accept lower bids. Suppose there were 100 passes, there would be a bidding period, and at the end of the period, the top 100 bids would win and the price would be set at the willingness to pay of the 100th bidder. There are many variations on auctions, which each have advantages for buyers or sellers in terms of maximizing revenue or price discovery or fairness.

Road Fees Don’t Hurt the Poor as Much as You Might Think

| David Levinson

Eric Jaffe at The Atlantic Cities says: Road Fees Don’t Hurt the Poor as Much as You Might Think – :

“Altshuler bases his position on a couple surveys conducted in metro areas that have adopted HOT lanes in the recent past. One was done in San Diego circa 2001. At that time, about 80 percent of low-income respondents agreed with the concept that people should be able to use an express lane on Interstate 15 for a fee — a greater percentage of agreement than people from high-income brackets (70 percent). Additionally, two thirds of people who didn’t even use the lanes still supported them.

A similar survey was done in 2006 in Minnesota. That work showed a 60 percent approval rate for HOT lanes on Interstate 394. A stronger analysis of this corridor, done by Tyler Patterson and David Levinson [PDF], found that income levels did predict use of the express lane (with higher-income drivers using them more often), but that lower-income drivers could also benefit from the shift of traffic out of the free lanes (as well as always having the express option in a time crunch).

(And a far more recent survey, released in April, showed that two-thirds of people making less than $50,000 a year said they’d use express toll lanes — the same percentage as people making more than that.)”

My comprehensive review of the topic is: Levinson, David (2010) Equity Effects of Road Pricing: A Review. Transport Reviews 30(1) 33-57.

The NCHRP had a report on this as well: Equity of Evolving Transportation Finance Mechanisms.

A key point is that HOT lanes also enable freeway BRT where it might otherwise be unaffordable to construct. The express lanes are uncongested and can be used by buses to maintain speed. An example is the I-35W corridor (Orange Line) south of downtown Minneapolis, which is not complete (Lake Street Station is still missing, e.g.), but has a BRT station at 46th.

The case for (and against) public subsidy for roads | streets.mn

| David Levinson

David King and I compose a sequel to our recent post on public transit, arguing: The case for (and against) public subsidy for roads – cross-posted from streets.mn:

“In recent weeks we have thought about public subsidy for transit and university subsidy for parking. But what about roads? Are roads worthy of public subsidy?”

The case for (and against) public subsidy for roads

by  on May 6, 2013 in Economics
This post is co-authored with David King (a displaced Minneapolitan who lives in New York, and who blogs at Getting from here to there)

In recent weeks we have thought about public subsidy for transit and university subsidy forparking.

A Political Economy of Access: Infrastructure, Networks, Cities, and Institutions by David M. Levinson and David A. King
A Political Economy of Access: Infrastructure, Networks, Cities, and Institutions by David M. Levinson and David A. King

But what about roads? Are roads worthy of public subsidy?

Let’s think about our framework of excludability vs. rivalry. The Transportation Economicswikibook says:

Roads exist largely to serve two purposes: movement and access (specifically, access to property). Different types of roads have characteristics of different types of goods based on their functional classification. In other words, there is a correspondence between the functional classification of a road and the type of good it represents. What types of roads are which type of goods?

 

Limited access highways (freeways) and some arterials with signalized intersections and few access points, could be considered private goods, since it is possible to identify and exclude users with appropriate toll technologies. These roads are also rivalrous since, in the absence of pricing or other measures to limit demand, an additional user can affect the use of the road by others.

It is very clear that users could pay for private goods directly. The most obvious way is a toll, a bit less obvious is a gas tax. Nefarious politicians in a few states have come to realize that a wholesale tax on gas is more hidden than a retail gas tax, even if the incidence is essentially the same. The gas tax collected on users of freeways at the state and federal levels would more than pay for freeways (even if some is diverted to transit and other uses).

Local roads lie on the other end of the spectrum in terms of functional classification, since they exist primarily to provide property access. Local streets can be excludable if access to them is restricted. Access restrictions may take many forms, ranging from the simple posting of signs indicating that access is restricted to residents to actual physical restrictions, such as gates. The latter type of restriction is typically associated with gated communities or other forms of private residential development. Local streets are also generally non-rivalrous in that their low levels of traffic tend to preclude problems with congestion. This combination of characteristics (excludability and non-rivalry) indicates that some local streets may be considered club goods. The oldest such example in the United States is that of Benton Place in St. Louis, Missouri, where adjoining property owners were required to join a private association which was responsible for road maintenance, with assessments being levied on each association member.

These kinds of local roads are essentially club goods. The ideal club might be the homeowners association, the downside is diseconomies of local management of roads and potential interruptions in the local road network (e.g. more cul de sacs and fewer gridded blocks). Division of labor is a good thing, but requires scale. So the club is usually the local municipality rather than the homeowners association. The revenue that is collected for this tends to be a property tax, paid for by everyone. Tolls are impractical for local streets because the cost of collection outweighs the benefits. A local option gas tax may also be impractical because the purchase area of gasoline exceeds the size of the municipality (e.g. our most used gas station might be in St. Paul, even if we live in Minneapolis). Any jurisdiction that tried to raise too much from this fee would see more out-of-municipality purchases, and the gas station (or the landowner of the gas station, if they differ) would bear much of the incidence of the charge.

An additional challenge associated with fuel taxes for roads is that some local roads, when privatized or used as a club, restrict auto traffic. In the Seward neighborhood Milwaukee Avenue is essentially a club good for bikes and pedestrians. In such cases property taxes are much easier and effective for financing the roads. St. Louis, MO, has long featured private local streets in all types of communities.

 

Local streets are typically provided by local governments with no restrictions on access. In the absence of access restrictions local streets may be both non-rivalrous and non-excludable, leading them to take on more of the character of a public good. Note the term “public good” in this case is defined by the economic characteristics of the good, and not simply by the fact that it is supplied by the public sector.

 

Some local streets are not excludable because of their functional design connecting places (one of the drawbacks of a connected network is that it is used to connect people who are not local). So design of the network greatly affects how it is best managed and funded.

 

Between limited-access highways and local streets are a middle level of road, collectors, that link local streets with limited-access highways. These “linking collectors” serve both access and mobility functions, since they may also provide access to some adjacent properties. These roads may be considered “congesting” or common goods.

The characterization of roads in terms of functional classification may also inform decisions about which level of government should be responsible for providing a given road (assuming the decision is made to provide the road publicly). Local units of government seem best suited to providing local streets, since they are closest to the problem. Roads that provide for a higher level of movement, such as limited-access highways, ought to be provided by higher-level jurisdictions, such as states. Of course, there are tradeoffs involved in each of these decisions. Smaller jurisdictions may not be able to fully realize scale economies, while larger jurisdictions may encounter problems with span of control. Between these extremes there is some optimal mix of expenditures between different levels of government that minimizes capital and operating costs.

 

The larger jurisdiction (the state) could set a higher fuel tax to redistribute back locally bysome formula, but there still remains different preferences in different municipalities for different levels of service, which require some locally different levels of funding. How is that to be collected if not a property tax?

The property tax can be thought of as a charge for having the option to access roads and receive public services such as police and fire. There are other types for local tax that can be used; a variety of land value capture mechanisms, from the land value tax or split rate tax, to transportation utility fees change the basis of collection, but even TUFs are still not strictly proportional to use. If a mileage-based usage fee were already widely deployed, it could be varied by municipality to collect more revenue, but that ideal revenues collection scheme is not worthwhile to implement if the only user were local governments, and would require standardization and enforcement to enact.

Regardless of whether one favors or opposes subsidy for roads, distributional considerations of how the subsidy monies are generated are important. We discussed fuel taxes, tolls and property taxes, but many cities and states turn to sales taxes to pay for roads (and transit. For instance, the Minnesota Legislature is considering an increase in sales taxes dedicated to transit. Sales taxes are a shift away from direct user fees and impose the burden of subsidy broadly. Sales taxes also tend to be regressive in that households who end up paying the largest share of their income in sales taxes receive less than proportionate value in return. So subsidy is an issue of distributional fairness depending on how the money is raised as well as how it is spent. At the very least money used for subsidy should not rely on regressive tax policy.

Rationales for subsidizing roads:

  1. Universality: Everyone uses roads, everyone should pay.

    Midwest Energy News quotes succinctly: “There isn’t a person in the United States who doesn’t get some use out of the roads,” says Levinson, who also writes the Transportationist blog. Even people who don’t drive still benefit from things like fire protection, ambulance services, and mail delivery — all of which depend on roads. “I suppose you could be Ted Kaczynski, but even he had to use the U.S. Postal Service to mail his bombs.”

    Even if you don’t drive, or bike, you still use roads. We had roads before cars and bicycles, and will continue to have them even when we have flying cars in the future. Their nature will of course vary, but at least some of the costs are communal. We collectively want the option to be accessed by ambulance should the need arise, or fire or other emergency services. We all make use of ground delivery for things like the mail or packages. We all partake of public utilities running along public rights-of-way. Even bus riders use roads. We also like to have things delivered. When we order a pizza we use the roads, but we have substituted our travel to the restaurant for the delivery person’s. When we order things online, FedEx, UPS and other carriers use the roads to deliver our stuff. It is impossible to “opt out” of using the road network.

  2. Democracy: Most people drive, therefore it is a subsidy from everyone to almost everyone else, which is more democratic than a subsidy from everyone to the very few.
  3. Administrative efficiency: Paying for roads out of general funds, or with imperfect gas taxes, is a lot easier to administer than trying to enforce specific payments for specific roads at specific times of day. Tolls are costly.
  4. Cost structure: Uncongested roads are on the left-side of the U-shaped cost curve, and charging for them leads to suboptimal levels of use.
  5. Non-excludability: There is not a good non-governmental finance mechanism for signalized arterials, roads which are rivalrous but not excludable. One could establish a congestion charging zone, but those are very expensive, and have yet to be tried outside a few center cities.
  6. Agglomeration benefits: Accessibility leads to positive spillovers for the urban economy and increase total development.
  7. Network spillovers: A better connected network makes all other roads more valuable. Much like the temporal Mohring effect in transit, there is a similar spatial for roads effect, each additional road reduces travel costs between places, increasing demand on other roads (and raising overall usefulness of the transportation network still more). Like the Mohring effect, this too reaches diminishing returns, but it is important when networks are sparse.
  8. Mutually assured subsidy: Transit is subsidized, therefore roads should be subsidized.
  9. Off-mode effects: More roads reduce congestion on other modes (transit, rail, air). Subsidizing roads can help support car-free roads, since bikes and pedestrians currently don’t directly pay for their infrastructure. However, relying on drivers to pay for roads used primarily by non-drivers may lead to principal-agent problems.

Rationales against subsidizing roads:

  1. Overproduction: Subsidies induce overproduction of roads. The lack of pricing signals implies that supply conditions are out-of-whack with demand. In addition, the heavy use of subsidy leads to building roads in the wrong places. We cannot afford to maintain what we have already built, we should not build more. Many states (such as Michigan) are de-paving roads to reduce rural road maintenance costs. Even Minnesota is considering de-paving. North Carolina allocates roads subsidy by county, so lightly populated rural counties are paving every road they can find. Neither system is optimal.
  2. Overconsumption: Subsidies induce overuse. This can lead to congestion.
  3. Negative externalities: Roads, and in particular cars, generate negative externalities which we cannot properly price. At least we shouldn’t subsidize their production.
  4. Off-mode effects: Reducing demand for transit (by subsidizing roads) worsens the strong positive feedback system that drives transit, lowering congestion on transit is seldom the critical problem, encouraging demand is more likely to be important.
  5. Mutually assured subsidy: A key point is that just because we subsidize roads does not mean we should subsidize transit, and vice versa. The economics of the technologies differ significantly. One bad subsidy does not deserve another. Just because transit is subsidized is not a reason to subsidize roads. It may be an argument to remove the subsidies that exist. Mutually assured subsidy is the “fairness” logic of a 4 year old complaining about a sibling.
  6. Obsolescence: Following the Great Gretzky, “Skate to where the puck will be.” Roads will be made obsolete by upcoming technologies, we should cut our losses now.

So what is the net?

  1. In the short run, states should raise their gas tax to replace the general (property tax) revenue from a baseline set by lowest common denominator jurisdiction within their domain with user charges. That is, figure out which jurisdiction spends the least per capita on roads, and raise the gas tax to replace the property tax by at least that amount of money for each jurisdiction. In all cases states should be extremely wary of using sales taxes to pay for roads. (States will also need to cover the declining federal gas tax, but that is separate.)
  2. Over time, states should move toward a vehicle mileage fee varying by weight (for trucks and other heavy vehicles), location and time of day to replace the motor fuel tax. This should be phased in with EVs (and Hybrids) which don’t pay (much) motor fuel taxes, and trucks which would be charged for weight and distance, going first. Off-peak discounts would encourage peak-spreading. Rates would vary by area to account for different costs of running networks.
  3. Road networks should be organized and operated like public utilities, managing to generate revenue from users to pay for cost of operations. Restrictions on usage should be allowed in this model, where auto and truck traffic can be limited to specific times of day or excluded altogether. Road design that allows access for emergency services can be regulated.