second best pricing of roads

Question 1

reality of traffic conditions

Answer 1

• Traffic conditions on each road will vary over time
• There are multiple roads (routes) in a network
• There may be other factors that generate distortions:
 Pollution
 Markup
 Labour taxes
• We implicitly assumed that we can set an optimal toll on every road, and this can be adjusted over time
• Other distortions are irrelevant or corrected

Question 2

what is 1st best pricing?

Answer 2

• Policy the government would take if they didn’t focus on the impact the toll would have on other markets.
• They would be worried, since their instruments are not perfect, so there are unintended consequences which may occur

Question 3

what is 2nd best pricing

Answer 3

Second-best pricing:
• Account for limitations to the government ability to intervene
• Such as toll on road which will vary over time and toll on every road in a network

Question 4

give an example of 2nd best pricing?

Answer 4

• Pricing a road with an untolled alternative (with congestion)
• Coarse road pricing with time-varying traffic conditions
• Environmental taxes on polluting cars

Question 5

why is 1st best pricing difficult to implement

Answer 5

roads have varying traffic based on time

1st best:
a toll = marginal external cost 
supply conditions vary over time
- •	Weather which causes drivers to slow down
•	An accident

Question 6

whats the ideal toll on roads?

Answer 6

• Implementing a toll that adapts instantaneously to traffic conditions
• There are practical constraints for this

Question 7

whats the purpose of a coarse toll and an example

Answer 7

A course toll is helpful in making individuals who use the road internalize the external cost of congestion

London Congestion Charge: 11.5£ between 7am and 6pm, Mon-Fri. No charge at any other time

Question 8

what is the reality of a tolled road with an untolled alternative

Answer 8

reality:
- there are often free alternatives if there is a priced road
setting a toll will increased congestion on the other roads

example: M6 aroung birmingham, with a no tolled section

Question 9

what is the wardrop principle

Answer 9

assumptions

• identical users
• multiple routes linking an orgin destination pair
• route selection is PURELY based on generalized.P

network Equ = when route used has the lowest GP, than one not used
unless all routes have the same price

Question 10

According to the Wardrop principle, the equilibrium on a road network with alternaltive routes linking an origin-destination pair is such that

Answer 10

The generalized price on a route that is not used is higher than on other routes

Question 11

what is the government main objective with pricing a road wuth an untolled alternative

Answer 11

• maximising social welfare

- setting the optimal toll

Question 12

what is the equilbrium of pricing a road with an untolled alternative

Answer 12

Marginal benefit of a trip is equal to generalized price

where GP of 2 routes in the same

Question 13

should you adopt a 1st best pricing rule with an untolled alt?

Answer 13

no
- unpriced alt, the tolled route should be p < MEC of congestion

• 1st best creates a spillover : drivers go to untolled routes creating more deadweight loss on those roads
• due to uninternalized congestion externalities

Question 14

should you adopt a 2ND best pricing rule with an untolled alt?

Answer 14

yes
since the tolled route has P < MEC congestion

2nd best:
MEC congestion - correction term for traffic diverted to untolled route

Question 15

what is the correction term for 2nd best pricing?

Answer 15

CT = MEC congestion on Untolled * trips removed from tolled route

Question 16

purpose of correction term in 2nd best pricing?

Answer 16

toll would make congestion higher in untolled routes

- so to correct this, the toll must be set lower than MC to bring back those drivers

Question 17

In a two-route network (T and U) where only one (T) can be tolled, the toll on route T should be

Answer 17

Equal to the marginal external cost of congestion on route T, minus a correction for the traffic spillover on U

Question 18

what happens if you set a toll on all roads in a network

Answer 18

• spillover effects wont occur anymore
• we are at 1st best now
• set toll = MEC

Question 19

what would happen if demand for a trip in perfect p.inelastic with a tolled and untolled alt?

Answer 19

• total q of trips are constant

- all trips are removed from tolled route and end up at untolled one

Question 20

what would happen if demand for a trip in perfect p.elastic with a tolled and untolled alt?

Answer 20

• increase the toll all trips are from toll route are priced out
• none goes to the untolled route

Question 21

difference between untolled and tolled routes in terms of 2nd best

Answer 21

• congestion externality in untolled route is present

- we are just tolling the tolled road such that there are no spillerovers on untolled road

Question 22

With a fixed (inelastic) total demand for travel on a two route network (T and U), where only one route (T) can be tolled

Answer 22

The toll on route T should be equal to the difference between the marginal cost of congestion on route T and route U

Question 23

according to small and verheof how much welfare gain does 2nd best achieve

Answer 23

30 to 50%