An easier way to introduce road pricing

Many say road pricing is a good idea because it means people only use roads when they need to. That reduces congestion, encourages ride sharing, cycling, walking and buses, and increases road capacity for important journeys. More road capacity would unlock a lot more housing, which is why we’re interested.

Economists think road pricing (varying with time and demand) is much better than a congestion charge or a free-for-all. The problem is that bringing in road pricing would make some people worse off – particularly some poorer people.

Is there a win-win solution? Building on ideas of Prof. Lee Anne Fennell from the University of Chicago, we think there could be.

Win-win solutions are the Holy Grail of politics. If you make everyone better off, only those who really want to see other people lose will be unhappy.

Economists call win-win solutions ‘Pareto superior’. Having invented that phrase, they almost never use it in real life. Most economists and governments look for reforms that are just ‘Kaldor-Hicks’ improvements: they could be win-win solutions, if you went round afterwards and redistributed some of the winnings to the losers. But no-one ever does that redistribution, so all the potential losers fight tooth and nail to prevent the reform. Special interest groups have many ways to block reform, as the late Mancur Olson explained. That’s a big reason why many otherwise good reforms don’t happen.

Almost by definition, when an economist thinks something works badly, it’s because there are win-win ways to improve it. The devil, of course, is in the details.

Why don’t people suggest true win-win refoms? Sometimes they have an agenda (subconscious or not) to help one group over another. Often, we suspect, the answer is because it’s very fiddly. Economists don’t like fiddly details, and lawyers who are supposed to deal with fiddly details often don’t like economics.

We think that means many good reforms die for lack of thinking through the political realities and the art of the possible.

How do we apply this to road pricing? Why not let each person set their own level of compensation for which they’d be willing to move to a given system of road pricing with lower (or zero) road and fuel taxes? That is – the price that they would pay the government to be allowed to switch if they think it would save them money, or the price that they would want from the government if they think the switch would cost them money.

Then the government can decide when and which people to switch over, as time goes by. Some people might demand high prices to switch, but the government hasn’t guaranteed that it will always pay the price people have asked. The government can always wait until only a small minority hasn’t been switched over, and then just pay each remaining person what the government believes to be fair based on objective principles (that it could set out in advance). It’s like a reverse auction. And if everyone’s price is too high, the government doesn’t have to do anything.

That way, most people will know they are very likely to be better off after the reform, because they know the vast majority of people will only be switched if they receive the price they want. They also have good reason to set a fair price for themselves so that they don't have a price imposed on them at the end.

That sort of idea would never have been possible without modern technology. But now we have it, why don’t we try it – in a particular city, for example?