Welfare economics is the branch of economics which applies theory laid down by the rest of the subject, mainly microeconomics. Basic theory is applied to the area of social choice in a bid to assist policy decisions in this area. Hence, the objective of welfare economics is a fruitful one. However, a certain ambiguity remains over the question of whether it has been successful in its aim. In this essay, I will show how welfare economics has succeeded in its original task, and has not failed into academic obscurity that is, it is not for light.
The literature in welfare economics can be divided into two areas: efficiency and distribution. The marriage of these two concepts is welfare economics and is what directs policy choice. Section I will deal with efficiency criteria, Section II with distribution criteria and Section III with the marriage of the two and what results.
W = f(U1,U2,.....Un).
As a proxy for utility, we employ the notion of willingness to pay.[1] The higher the willingness to pay, the greater utility he or she must obtain.
With a proxy of welfare in mind, we now turn our attention to maximising the economic cake. Vilfredo Pareto introduced the efficiency criteria which now form the basis of welfare economics. Pareto defines an improvement in social welfare to have taken place when at least one individuals utility has risen, and nobody elses utility has fallen. This is known as the Pareto criterion and is based on certain assumptions. According to Andrew John[2] these are:
(i) social welfare depends positively on the welfare of individuals
(ii) welfare of individuals depends on the goods and services they consume
(iii) individuals are the best judge of their own welfare, and act in their own self interest.
Although these are accepted, they are open to criticism. Granted they may not hold in certain instances but these cases are the exception rather than the rule. The key criticism of Paretos criterion for social improvement is that it does not allow for losers. (Responses to this will be discussed later.)
Writing after Pareto, the Irish economist Edgeworth furthered this work by constructing his boxes of consumption and production based on a two-person, two-good, two-firm economy. The first order conditions for Pareto optimality, a case where no-one can be made better off without someone losing, are:
(i) marginal rate of substitution (MRS), the rate at which a person would exchange one good for another while keeping utility constant, must be equal for both people in society. If this condition holds, efficiency in exchange is guaranteed and utility is maximised.
(ii) marginal rate of technical substitution (MRTS), the rate at which a firm can exchange the factors of production between two goods, while at the same time keeping quantity constant, must be equal for both firms. If this condition holds, efficiency in production is guaranteed and profits are maximised.
(iii)MRS is equal to marginal rate of transformation, the slope of the production possibility frontier. This ensures that the rate at which firms can reallocate to produce good 1 instead of good 2 is equal to the rate at which consumers want to exchange good 1 for good 2. The outcome is harmonious across all markets.
This analysis leads to the utility possibility frontier (UPF) which maps all combinations of utility which result from this general equilibrium (i.e. the locus of all Pareto optimal points). Consider the point A inside the UPF. This is not a Pareto optimum, since the movement to point D means that both individuals gain and there are no losers.
Diagram 1
As mentioned earlier Pareto gives a non-complete ordering of possible allocations. The point D has the property that there is no feasible Pareto superior point. It is therefore Pareto non-comparable to C. How then do we choose between two points that lie on the UPF?[3]
In an attempt to overcome this, Kaldor[4]developed his ingenious compensation tests. This test deems a project desirable if the gainers can hypothetically compensate the losers. That is, the policy should be implemented if there is a net monetary gain to society. In this case, the point K is more desirable than A. Notably the actual redistribution is not required, it is merely hypothetical.
However, Kaldor introduces another value judgement in order to validate his test. He asserts that there must be equi-marginal utility of money. Thus ten pounds to a millionaire yields the equivalent utility to a less well off person. While this may not necessarily hold, in the main, comparisons will be away from the extremities of the UPF, validating the Kaldor criterion.
Unfortunately for Kaldor, Scitovsky noted a paradox in the test. This arises when UPFs cross, with the present allocation on the first UPF, and the allocation after a potential policy implementation on the other. The paradox, that given the policy is not implemented it is preferred, and given the policy is implemented the former state is preferred! Hence Scitovsky introduced his reversal criterion to overcome this paradox.
The first order conditions for Pareto optimality will only be fulfilled in an entirely perfectly competitive market structure. Due to market failures such as public goods, externalities and monopolies, reality does not result in such a structure. Although this does not nullify the analysis it does have serious implications which are addressed in Section III.
The misery and squalor that surround us, the injurious luxury of some wealthy families..., these are evils too plain to be ignored.[5]
Hence, we attempt to compile a social welfare function (swf), a map of different levels of utility for each individual that gives rise to a given level of social welfare. The swf allows us to reveal the bliss point where it is tangental to the UPF. To find this point, we need to find the form of the swf. Appealing once again to the concrete foundations of microeconomics, we can think of an indifference curve as showing combinations of two goods which leaves the consumer at the same level of utility. A swf is an aggregate of n individual indifference curves and thus shows the combinations of n peoples utility which leaves society at the same level of social welfare.
However, a major difficulty arises when attempting to reveal social preference. Inconsistencies arise and paradoxes occur when using majority voting. In fact Arrow, in his Impossibility Theorem, claims that there is no way of deriving preferences consistent with social preferences.[6]
As an immediate result of this problem, there is debate over the shape of the swf. John Rawls posits that societys welfare only increases when the utility of the poorest person increases. A swf based on this viewpoint is L-shaped. Conversely, Jeremy Bentham believes that an increase in utility is equivalent and desirable regardless of the wealth of the individual. This leads to a straight-line downward sloping swf, a third swf was outlined by Bergson and Samuelson. In this case, extra negative weights are given to cases where the distributions of utility are highly skewed. The shape of this curve is convex to the origin. The very existence of at least three alternatives highlights the political nature of the swf.
However, noted above are certain practical problems relating to both the efficiency and distribution areas. In the former we come across market failures and in the latter we encounter preference revelation difficulties.
The market failures imply a role for the government. However, due to complex market interrelationships, it appears implausible for the government to come up with a set of rules to apply uniformly across the economy to lead to optimum efficiency. Hence the government is limited to individual proposals to change welfare, such as a new public park or a new bypass. Thus their role cannot be to rank all social states but rather to rank certain proposals open to them at a given time to move the economy towards efficiency. This means that the governments role is discretionary. To rank these individual changes the government appeals to welfare economics, changing the actual role of the subject from ranking all social states to ranking a few. Kaldor-Scitiovsky criteria fulfil the task of choosing between proposed projects by estimating if there is a net monetary gain to society. This work is the foundation of Cost Benefit Analysis (CBA), welfare economics most powerful tool. CBA assesses all the costs and all the benefits of a given project in quantitative money terms.
So, with an (imperfect) proxy for the efficiency criteria, how then do we get over the problem of preference revelation? This is done, again imperfectly, by the voting system. The elected government give weights to different projects depending on their effects on distribution. Whereas a labour government may value a distribution friendly project highly, a conservative government may value an efficiency friendly project highly. These weights reflect public opinion (through the voting process) and are cleverly encompass in CBA. Depending on the regime, the Benefits/Costs ratio for a given project will vary as the relative benefits of the distribution or efficiency are calculated. Hence, CBA combines both the efficiency and distribution elements in one tool.
Is the notion of the swf redundant and the search for the bliss point vacuous? Yes would be the answer from certain naive economic killjoys. What these authors fail to realise is how absurd the alternative to the economic approach to social choice theory is. Whereas economics provides firm systematic analysis, the alternative is a rag-bag of ad hoc techniques and value judgements.[7] In fact while economics is able to quantify notions as abstract as social welfare in actual monetary terms, the alternative approach is engulfed in qualitative nonsense. Granted, welfare economics is an incomplete subject. For example massive problems arise in social preference revelation and the imperfect world in which we live does not result in Pareto optimality. As Culyer (1973) puts it
The economic approach to social policy is, in general, more comprehensive than any other, and though it has many half filled boxes, it has no empty ones.
Johannson, P (1991) Introduction to Welfare Economics
Ng, Yew-Kwang (1979) Welfare Economics
OHagan, J (ed. 1991) The Economy of Ireland 6th ed.
Price, C (1977) Welfare Economics in Theory and Practice
Rowley & Peacock (1975) Welfare Economics - a liberal restatement
Varian, H (1992) Microeconomics
The purpose of the reply to the essay Welfare Economics : For light or for fruit is to inject a sense of realism into the study of welfare economics as I understand it. This is not intended as a slight on the author, to whom I address this reply, but it is a personally held criticism of the tired standard approach to the subject. Implicit in my reply is the commonly held assumption that welfare economics should be a policy prescriptive subject and thus its aim is for fruit rather than for light.
The approach to welfare economics to which I refer can be found in any standard textbook on welfare economics and is cogently proposed in Mortons essay. It begins with a discussion regarding the measurement of welfare and then enters into abstract theoretical efficiency conditions for a Pareto Optimum. That aside, the question of distribution is discussed and overall the framework would appear to be plausible. Next market failures are introduced as a necessary step to make the theory acceptable for real world situations. Unfortunately, this step into the real world requires a great mental leap as the apparent consequence of theoretical welfare economics is the applied welfare economics of cost- benefit analysis.
My proposal is straightforward. Theoretically, many aspects of welfare economics are not entirely sound, and furthermore, when the theory is faced with real world dilemmas it collapses. I also believe that the applied branch, cost benefit analysis, is not necessarily a product of welfare economics. Thus, it can be concluded that the most notable achievement of welfare economics is its own redundancy.
Accepting utility as a proxy for welfare the theory of welfare advances taking a two plank approach. On the efficiency side there is the apparent positive economics of Pareto, and on the distribution side there enters the explicitly normative side of welfare in the quest for a social welfare function. I shall consider each of these in turn.
The efficiency side of the theory is especially open to criticism due to its positive approach. Using Paretian analysis, Morton introduces the first order conditions necessary for a social optimum. These conditions, however, are completely and absolutely inapplicable to the real world. The form of competition necessary to achieve this optimum is a theoretical abstraction, perfect competition. In practice, the world suffers from market failures such as monopolies, public goods and externalities that cause a deviation from this perfect competition theory.
Then, given this reality constraint, what does the theory tell us to do? Perhaps we should try to achieve the Paretian first order conditions wherever possible? To answer this Lipsey and Lancaster (1956) attempted to derive similar first order conditions for an optimum when market distortions exist. Their results, in the form of the theory of second best, were conclusive. The resulting conclusions were far too complex to utilise, involving second order cross partials for substitutes and complements. Furthermore, the analysis showed that fulfilling the Paretian first order conditions for some sectors and not for other sectors could in fact lead to a situation where we are worse off in efficiency terms than before. Thus we must analyse the entire economy and take every problem into account to guarantee an improvement. The dilemma is stated succinctly by Ng, We must leap right to the summit to be sure of an improvement. But it is clear that this task is epistemologically, administratively and politically impossible.[8] The summit being referred to is the fulfilment of each and every first and second order condition necessary for an optimum. It is apparent that the entirety of theoretical efficiency analysis is inapplicable. The purpose may have been to produce conditions for the entire economy to achieve an optimum, yet the result is the inadequacy of the theory to adapt to real world scenarios. Perhaps the discussion of market failures, under the theory of welfare, should be changed to the discussion of welfare theory failure when applied to the market.[9]
The other plank of the theoretical welfare economics approach is the distribution issue. Welfare economics aims to rank all possibilities and thus it must not only consider beyond efficiency but also whether a distribution is good or bad. The crucial problem in this side of the analysis arises in the aggregation of the necessary ordinal utility functions. Arrows Impossibility Theorem shows that from individual orderings of social states, a social ordering consistent with some reasonable condition can not be found in general. [10]Without digressing, it simply eliminates the possibility of a social welfare function based on ordinal utility functions. Furthermore the theorem has similar implications for the voting process which is often the mechanism by which our individual preferences may be revealed.[11]
Finally, even if there were an acceptable method of aggregation we must introduce the reality constraint once more by reminding ourselves that utility is not directly observable and that at best, we will end up using a proxy for utility which is a proxy for welfare. This is clearly an inexact theory, but we are attempting to measure such qualitative concepts as happiness and so it is an inevitable problem.
I believe it is clear that the standard textbook teachings are of little use to anyone. The efficiency conditions are redundant and to put it mildly, the distribution issue suffers from aggregation and measurability problems. It appears that the bulk of welfare economics analysis is fruitless. This brings us back to the title of the essay. There can be little doubt that the intention was to use the abstract efficiency theory as a base from which assumptions may be relaxed and reality introduced. This approach has failed. The theory has merely illustrated the complexity of the problem. Perhaps welfare economics has been for light rather than for fruit?
The answer lies in the approach taken by cost benefit analysis. This approach involves considering a proposed change by adding up the discounted costs and benefits, private and social, of the project and ranking it against feasible alternatives. Hence the name cost benefit analysis. It is an extension of common sense to account for such complexities as externalities and discount factors. The essence of the difference between cost benefit analysis and theoretical welfare economics lies in the fact that cost benefit analysis aims to rank a finite number of individual projects, whereas theoretical welfare economics pursues the illusion of ranking each and every project open to society. Clearly if welfare economics was intended to be a policy prescriptive subject, the pragmatism of the cost benefit analysis approach would be a prerequisite of any administratively feasible intervention tool. However, it would appear that the approach is different due to the failure of the theory. This clearly signs the death warrant of theoretical welfare economics, at least in the standard textbook form. The textbook analysis itself is of no practical use and the applied branch of welfare could have been in place without the theory. If the theory fails to be applicable and furthermore if it fails to be an input or a necessary input for practical study, then it is surely redundant.
Ng, Yew-Kwang (1979) Welfare Economics
OHagan, J (ed. 1991) The Economy of Ireland 6th ed.
Price, C (1977) Welfare Economics in Theory and Practice
Rowley & Peacock (1975) Welfare Economics - a liberal restatement.
Varian, Hal R (1987) Intermediate Microeconomics.
This essay is divided into three parts. The first part deals with how externalities arise and how they theoretically affect resource allocation. The second deals with the importance of externalities in actual resource allocation and the third deals briefly with ways of correcting for externalities and for better resource allocation.
Externalities affect resource allocation because the market fails to fully price the external effects generated by some economic activities. This is because market prices tend to reflect the cost sellers charge buyers of a commodity, a price based on the personal utility derived, while ignoring the costs/benefits imposed on third parties. Thus the pricing mechanism fails to reflect the true or social costs of economic activity so private costs may diverge from social costs. Resources will be allocated on the basis of private consumption and/or production decisions and not on social welfare maximising ones and for this reason resources will be allocated inefficiently.
The failure of all relevant effects to make their impact on the pricing system will result in a sub-Pareto optimum allocation of resources as the social marginal cost (MSC) of an activity will not equal its marginal private cost (MPC) which equals its price, The real price of the commodity does not fully determine its allocation so the function of the market to efficiently allocate resources based on their true prices breaks down resulting in a misallocation. The existence of externalities will thus lead to a sub-optimal allocation as either too many resources are used in processes conferring uncompensated social costs or too few are used in processes conferring uncompensated social benefits as the profit maximising output is less than the socially optimal output. This misallocation of resources is best seen by an example.
Let a firm be in perfect competition with a given market price, p, and a profit maximising output of xl and a marginal cost curve as in figure 1. Suppose now that the production of x creates air pollution which imposes a cost on local residents of [[sterling]]1 per unit of x produced. To obtain the MSC of x [[sterling]]1 must be added to the MPC of x. As a consequence of the negative externality the profit maximising output xl, exceeds the socially optimal level x* where the MSC=MPC=P.
If the firm is permitted to pollute, the firm produces too much of x, the reason being that part of the real cost of production, [[sterling]]1 per unit, is not recognised as a cost by the firm (Johansson, 1991). Therefore the existence of uncorrected externalities implies that resource allocation is inefficient as a Pareto improvement is possible. Thus externalities, which tend to be mostly negative, result in an inefficient resource allocation as commodities are not allocated on the basis of their true economic price.
There were three main positive externalities. The first was a time savings of 10.28 minutes from reduced traffic congestion in Naas centre at peak hours accounting for 90.5 per cent of the total benefits from the bypass, making the social feasibility of the project was very dependent on this positive externality. The second was a reduction in road accidents in Naas centre due to the transfer of traffic to the safer motor way, while the third was a fuel saving accounting for 2.6 per cent of the benefits.
There were other positive externalities such as reduced lead and smoke pollution in Naas centre and especially reduced noise pollution which constituted a serious negative externality. There were also negative externalities on the environment associated with the construction of the motorway. The Letich committee (1977) detailed some of these costs on non-road users such as the demolition of property, visual intrusion and the impact of farm severance. There exist substantial problems in pricing these externalities and for this reason they were excluded from the study as no accurate price could be put on them. This pricing problem will have affected the resource allocation, but it is likely that the positive externalities exceeded the negative ones so yielding a net positive externality suggesting that the real cost of the project was lower than its private cost. This would imply that similar projects should be undertaken for congested towns on the national primary routes (Barrett, 1984), thus leading to a more optimal resource allocation.
Resource allocation will not be optimal unless all costs and benefits associated with the project are calculated. This is the major difficulty with cost-benefit analysis as we do not know how to accurately measure externalities. Some economists such as Roth have suggested that it is impossible to price them, so much so that he ignores them in his road pricing study. This is also echoed in the Smeed Report (1964).
By ignoring to price externalities resource allocation will suffer as projects which would be socially profitable when including all externalities may not be so if only private costs are calculated. This point is addressed by Mishans horse and rabbit stew analogy (1990). He says that economists can easily ignore externalities as they are quantitatively difficult to measure, but doing so could result in a sub optimal resource allocation as such analysis would favour mostly commercially viable projects. There is another school of thought which says that social expenditure cannot be justified largely on the grounds of correcting for externalities. Lees makes the point that only 5 per cent of health expenditure can be justified in terms of correcting for externalities as most medical expenditure centres on non-contagious diseases where the benefits are quite private. Peacock and Wiseman make a similar point saying that the positive externalities of education of the individual may be exaggerated. They suspect that the recipient may appropriate most of the benefits in the form of higher wages and salaries (Allan, 1971).
Therefore externalities, although important in causing resource allocation to be sub-optimal, have varying effects. One thing that is sure, however, is that they must be included in cost-benefit analysis even if they are estimated very roughly.
The existence of externalities implies that unless special arrangements are made resource allocation may not be Pareto optimal. One way to Pareto optimality is by modifying the pricing system to reflect the true price of the resource. Through this process of internalisation/shadow pricing resources are allocated on the basis of their true prices. It may not be possible to internalise all externalities (Mishan, 1990) so government intervention in the market may be needed.
An area where externalities may be tolerated even though they affect resource allocation is where the correction of them may have regressive social welfare distribution effects and clash with other government objectives (OHagan, 1991). This arises because the Pareto criterion takes no account of welfare distribution. The other case is where the benefit of internalisation exceeds its cost. But society is always worse off with existence of externalities even when they are corrected than without them. By internalising them we are doing no more that making the best of a bad job. We are certainly not as well off as we should be if they had not appeared on the economic scene.(Mishan, 1990). Thus we are forced to the theory of the second-best.
Externalities effect resource allocation by distorting the pricing mechanism, resulting in an allocation of resources that is not optimal. Therefore the importance of externalities in resource allocation is crucial if it is to be optimal and it is observation that gives cost- benefit analysis some of its justification as it is necessary to measure those created by activities and to intervene to correct them.
Arrow, K (1971) Public Expenditure and Policy Analysis
Barrett, S (1982) Transport Policy in Ireland
Barrett, S & Mooney, D (1984) The Naas Motorway Bypass - A Cost Benefit Analysis in Quarterly Economic Commentary 1/1984
Johansson, P (1991) An Introduction To Modern Welfare Economics
OHagan, J (ed. 1991) The Economy of Ireland
Mishan, E (1990) Cost Benefit Analysis
Mishan, E (1988) Elements of Cost Benefit Analysis. Road Pricing: the Technical and Economic Possibilities [ The Smeed Report], (1964).
The Coase Theorem is false on purely economic analytic grounds. Furthermore, the conventional interpretation of Coases message, and the policy prescriptions which follow from this do not observe the strict qualification which Coase placed on his result. There is, therefore, a divergence of meaning between the orthodox statement of the Coase Theorem and what Coase intends (as revealed in his 1989 retrospectives: Notes on the problem of Social Cost.). This may also be dissonant with what he meant in his original 1960 article.
The initial allocation of legal entitlements does not matter from an efficiency perspective so long as they can be exchanged in a perfectly competitive market.To illustrate, consider Coases famous example whereby locomotives emit sparks which set fire to farmers fields. Suppose the legal intervention is by an initial governmental legislative allocation of spark emission permits, which allows the railway to emit only a restricted amount of sparks. Assume these can be traded with the farmers. While the law apparently controls the extent of the damage, the theorem dissents, stating that it is the market which determines the final efficient allocation of permits between farmers and the railway, and hence the extent of the damage.
This is because the farmers and the railway will face the above aggregate marginal willingness to pay and marginal cost curves for the trade in permits. Starting at, say, an initial allocation Q1, the individuals most preferred level of emission reduction, firms will buy permits until the efficient outcome Q* results. Indeed Q* will result regardless of the initial allocation of legal entitlements.
The rationale for Stiglers (1966) definition of the Coase Theorem is now evident: Under perfect competition, private and social costs will be equal. Coase (1988) argues that zero transaction costs are a suitable proxy for perfect competition and notes that zero transaction costs were assumed in his original (1960) paper. An alternate definition by Cooter, then, is the best indicator of what Coase means: The initial allocation of legal entitlement does not matter from an efficiency perspective so long as the transaction costs of exchange are nil.
Regardless of the inadequacies of the zero transaction costs approximation, the initial allocation of entitlement always has distribution consequences for wealth. As a result, demand for other goods and services will be dependent on the initial allocation of property rights. The shapes of our aggregate marginal willingness to pay and marginal cost curves will then change, being dependent on the demand for other goods and services. Consequently, the efficient outcome Q* is dependent on the initial legal decision. This amounts to outright theoretical falsification of the theorem.
Varian (1987) has noted, however, that in the very special circumstances, where preferences are quasilinear, the strict version of the theorem may hold. Quasilinear preferences suggest the absence of income effects, implying demands for the emission permits are independent of the income distribution. This is seen in the form of a horizontal contract curve yielded in an Edgeworth Box analysis of the situation.
Varian doesnt acknowledge Arrows aforementioned objection, however, which would deny the theorems veracity even in this special case.
A final objection to the theorem is that the notable externalities of our age, such as ozone depletion and nuclear pollution, affect a large number of people, implying large transaction costs. This further consolidates the political irrelevance of the theorem.
It also indicates the removal of Coases present position from the, at times, rash and barely qualified espousal of its result, by his disciples. Consider Stiglers (1966) description of the original statement as a profound article and its result as a remarkable proposition to us older economists who have believed the opposite.
It also suggests a divergence of Coases present position from what he once meant. Circumscribing criteria seem comparatively de-emphasised in the original article, in which he states that the usual courses of action (on externalities) are inappropriate, in that they lead to results which are not necessarily, or even usually desirable.
Coase, R (1988) The Firm, the Market and the Law
Cooter (1987) The Coase Theorem in The New Palgrave
Stigler, G (1966) The Theory of Price
Varian, H 1987 Intermediate Microeconomics
It has always been a major task of economists to set incentives so that resources are allocated in the most efficient way. Nevertheless, the Transportation Sector in general was characterised for a long time by government intervention. Radical changes in transport policies - especially in the UK and later also in other European countries came along at the beginning of the 1980s and were largely supported on a theoretical basis by the new concept of contestable markets[13]. Accordingly the policy of deregulation and privatisation of, for example, express coaches, buses and aviation, has resulted in significant product innovation and rising efficiency.
As road space is a valuable and scarce resource[14] we would argue that it ought to be rationed by a price mechanism. Road users should pay for using the road network to make correct allocative decisions between transport and other activities.
In the past, the technical possibilities of road pricing were very limited[15] but with the advent of electronic road pricing, cars no longer have to stop to be charged.
Both aspects, the more liberal political climate of deregulation and privatisation in the last years and the new technology, are essential prerequisites for the actual discussion of road pricing. On a more practical political basis we could also identify the interest of the state to create a new source of revenues although road pricing does not necessarily imply a higher burden for car users.
After a brief description of electronic road pricing this paper will outline the costs of using a road and give a definition of the price to be charged. Then the effects of road pricing shall be identified and critically evaluated before the basic results will be summarised.
The complete installation of such an electronic system would take some time. In the meantime area licences could be sold for very congested zones, such as city centres. (This solution is used in Singapore for the rush hour traffic with considerable success. The impact of its introduction was an immediate reduction of 24,700 cars during the peak time and a rise of traffic speed by 22%.)[18]
a) road damage costs
b) accident externalities
c) congestion costs
d) environmental costs.
In a market system without transaction costs the other road users would be willing to pay the additional car the amount of their opportunity costs of time and additional fuel for not entering the road. As transaction costs have been obviously immense (if a perfect bargaining process would have been possible at all) so far, only an electronic pricing system can overcome the huge existing transaction costs between the road users.
local: emission of CO, NC, NO2
global: emission of CO2, CFC
water pollution
noise and vibrations
land use effects (destruction of wildlife habitats and the landscape)
A basic problem still remains, however, : road users have to get the information about the changing road prices immediately to optimise their individual transport decisions. (This could only be guaranteed if the motorist would have access to the prices via a board computer.)
* Furthermore, it reveals the true economic costs of the road use (including replacement costs) so that intermodal competition[25] would become fairer. Because road prices would be primarily connected with congestion costs, some distributional and locational effects could arise. Costs of driving in non-urban areas would probably fall whereas urban driving costs would increase so that in the medium run, the quality of the public urban transport system would improve.[26]
* In the case of pricing highways on the continent, road pricing is a good instrument to overcome the free rider problem of foreign carriers using "home country" highways. This is especially interesting against the background that current ways of financing highways are very different. For that reason actual competition between international carriers is not neutral.
* As shown in the previous section, road damage costs of cars are almost zero whereas heavy trucks cause most of the damage. Therefore, a vehicle specific tax depending on the damaging power would be a simple and effective wayof charging efficiently. Road pricing systems could improve this instrument a little by taking the quality of roads that were actually used into account.
* In terms of negative environmental externalities, road pricing is (with the exception of noise) probably not the optimal instument for internalisation. Taxes on fuel or emission fees, for instance, charge vehicle emissions in a moredirect way and they are very simple to design.
Furthermore it must be mentioned that the effect of road pricing depends to a large extent on the authority[27] that receives the revenues and its way of using the money. Economists would argue that the profits made should be reinvested into the transportation system to generate an efficient outcome rather than cross-subsidising other traffic modes or other state activities.
Boris,S., (1988) "Electronic Road Pricing: An Idea Whose Time May Never Come", Transportation Research, 22A(1), pp. 37-44
Braeutigam, R (???) Optimal Policies for Natural Monoplies
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Keating, G (1993) "For whose the road use", in Economic Affairs, June
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