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Transport Policy xx (xxxx) 14

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History of thought and prospects for road pricing*

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Serge Pahaut *, Catharina Sikow b

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Universite Libre de Bruxelles, 50, Boulevard du Triomphe, B-1040 Brussels, Belgium

b
European Commission, Directorate General for Energy and Transport, B-1040 Brussels, Belgium

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Policy implications of the research program presented in this issue of Transport Policy are discussed according to their theoretical, historical
and political origins. Problems related to government taxation are analysed in the light of the early literature on transport externalities pricing that
began with Pigou [Pigou, A.C., 1920. The Economics of Welfare. MacMillan, London. (References are usually made to the 1932, 4th ed.)]. We
then discuss decision-making processes in transport pricing implementation involving redistribution issues, acceptability, users satisfaction and
equity. The article also briefly reviews the general agenda of EU transport policy
q 2006 Published by Elsevier Ltd.

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JEL classification: B130; D620; D630; R480

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We discuss here some political perspectives related to the

case studies presented in this special issue of Transport Policy.
These studies were part of a research program1 whose objective
was to define optimal transition paths from a situation with
inefficient, and generally too low, pricing of transportation, to a
situation with socially optimal pricing in which users pay the
marginal social cost of their trips.
The study of (urban transport pricing) UTP has almost
become an academic discipline. It has also inspired a large
number of EU-funded research programs, such as (Mobility
Impacts, Reactions and Opinions) MIRO, (Trans Modal
Integrated Urban Transport Pricing for Optimum Modal Split)
TransPrice, (Acceptability of Fiscal and Financial Measures
and Organisational Requirements for Demand Management)

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We would like to thank Andre de Palma, Stef Proost and Robin Lindsey for
fruitful comments and discussions.
* Corresponding author.
E-mail addresses: spahaut@ulb.ac.be (S. Pahaut), catharina.sikow@dg7.
cec.be (C. Sikow).
1
MC-ICAM: Implementation of Marginal Cost Pricing in Transport
Integrated Conceptual and Applied Model Analysis), funded by the European
Union (Commission, DG TREN, 5th Framework Programme). MC-ICAM
program is part of, and builds on, the results of a wider cluster of research
projects on transport pricing, financed by the European Commission under the
4, 5 and 6th Framework Research Programmes.

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AFFORD, (PRIcing Measures Acceptance) PRIMA, (Pricing

Acceptability in the Transport Sector) PATS, (Co-ordinating
Urban Pricing Integrated Demonstrations) CUPID, (Modelling
TRansport, ENergy and ENvironment) TRENEN-II, (REal
COst Reduction of Door-to-Door Intermodal Transport)
RECORDIT. This program was designed to incorporate
or cover:

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1. Introduction

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Keywords: European Union; Negative externalities; Road pricing; Transport policy; Implementation; Acceptability; Decision-making

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Abstract

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a,

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0967-070X/$ - see front matter q 2006 Published by Elsevier Ltd.

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1. all major modes (urban, interurban road, rail, air, water) and
both freight and passenger transport;
2. all relevant levels of decision-making (local/regional,
national, EU); and
3. intramodal implementation issues, intermodal issues (where
conditions in one mode can affect the implementation in
another), and also intersectoral issues relevant to the
implementation.

Our purpose is to present some observations about policy

design and management. The case studies presented in this
issue taught us how much the decision-making process itself
deserves careful consideration. The research program presented here was indeed the result of a shift in focus from the
mere technical derivation of optimal pricing rules to the
consideration of practical implementation problems of pricing
policies.
We will not discuss here how to fine tune the derivation of
second-best prices from the point of view of economic theory,
or how to solve technical problems related to modelling. It is
our conviction that policymakers and analysts should take care

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The fundamental question of transport pricing by government was formulated during the debate between Pigou and
Knight.4 This debate is of interest as it not only produced some
definitions and tools, but also opened the path to a fundamental
discussion that is still with us today: should congestion be
regulated through government policy (taxes and regulation),
through transactions among private stakeholders, or not at all?
The underlying idea is that economic efficiency, which
means optimal allocation of scarce resources, cannot be
achieved if there is unconditional access for everybody. In
the case of public roads market pricing of transportation
resources (vehicles, fuel, insurance, etc.) does not result in
efficient use of public roads if users (travellers) create
congestion or other negative externalities. The solution
advocated by Pigou, a specific price introduced by public
authorities through tolls, should be understood in the way we
look at the rationale behind every tax: as a means to increase
the well-being of the population. Pigou built on the inaugural
work by Sidgwick and Marshall and introduced what we now
call externalities: indirect effect of a consumption activity or
a production activity on the consumption set of a consumer,
the utility function of a consumer or the production function

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1.1. The PigouKnight debate on congestion management

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of a producer. External economies are mentioned in Marshall

(1890, p. 266).5
In his Economics of Welfare (1920), Pigou argued that the
existence of externalities was sufficient justification for
government intervention. Pigouvian taxes and subsidies
introduce prices to internalise the externalities of a given
activity, both positive (in the case, say, of education) or
negative (in the case, say, of pollution emission).
In his famous 1924 paper, Some Fallacies in the
Interpretation of Social Cost, Knight argued against Pigou
that no government intervention was needed. He even
dismissed the external economies of the Marshallian tradition,
as he wrote (p. 597) External economies in one business unit
are internal economies in some other, within the industry. He
developed a symmetrical solution (pp. 5867): If the roads are
assumed to be subject to private appropriation and exploitation,
precisely the ideal situation which would be established by the
imaginary tax will be brought about through the operation of
ordinary economic motives. For a brief summary of the
survival of the idea of technological externalities in the Pigou
Knight discussion, cf. NP, article external economies. Some
remarks usually associated to the 1924 paper by Knight were
actually formulated by his teacher, Young, in a 1913 review
(Young, 1913) of Pigous Wealth and Welfare.
The divergence between Pigou and Knight is not a mere
question of political preference concerning the means of
congestion regulation. Pigou himself was not advocating a
moralistic approach to economics. He firmly maintained that
economic science should not itself be an art, or directly
enunciate precepts of government.6 He explained that
economics is a positive science of what is and tends to be,
not a normative science of what ought to be. But he also knew
very well, as he dared to say with Alfred North Whitehead, that
in our most theoretical moods we may be nearest to our most
practical applications.7
This use of taxes and subsidies was for Pigou8 a
principle.susceptible of general application. He added in a
prophetic way that the application of the principle is
incomplete, because the revenue from these taxes.must be
devoted.exclusively to the execution of new and specific road
improvements, to the effect that in the main, the motorist
does not pay for the damage he does to the ordinary roads, but
obtains in return for his payment an additional service useful to
him rather than to the general public. Pigou implicitly
advocated here the use of earmarking.
The general implications of this discussion still confront us.
The distinction between public and private management

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to identify key political, economic and social barriers to the

pricing of transport, and how to confront the technical
constraints related to these barriers.2 As we shall see later,
the promotion of economic efficiency (as part of the broader
goal of sustainable economic growth) is the driving force
behind marginal social cost pricing; but its practical
implementation also involves the effective pursuit of other
goals such as social equity and local growth, in order to ensure
balanced consideration of wider societal goals. A wide
exchange of opinions among all concerned stakeholders is
essential here.
In order to cope with the various situations described in the
case studies, paths of transportation pricing may differ with
respect to the transient prices they adopt before final prices are
settled, the schedule according to which prices are changed,
and how revenues are used.3
This paper should be considered as an exploration of the
global political landscape of transportation pricing. We will
start by discussing some aspects of the inaugural PigouKnight
debate on congestion management as this is at the heart of the
transport pricing debate. We then summarise the present state
of European Union policy in the domain of urban transport, and
draw some general conclusions.

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For a presentation of this barriers-constraints dynamic approach, see the

contribution of Rouwendal and Verhoef (submitted) in this issue.
3
cf. the pragmatic motto of Montaigne: Par divers moyens on arrive a`
pareille fin (1580, I, 1).
4
cf. the classical references of this controversy: Pigou (1920) and Knight
(1924). cf. the New Palgrave (quoted below as NP: cf. Eatwell et al. (1987),
articles on Pigou, Knight, Young, Allyn, Coase, Coase theorem,
externalities, rising supply prices, external economies, transaction costs.

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The irrelevance of pecuniary externalities was demonstrated by Young and

Knight, and only technological externalities have survived. See NP, article
externalities, by J.-J. Laffont.
6
We refer the interested reader to the first pages of his Economics of Welfare
(1920, Part I, ch. I).
7
We refer the interested reader to the first pages of his Economics of Welfare
(1920, Part I, ch. I). For a discussion about this very remarkable reciprocity of
theory and praxis, we refer the reader to the Magnum Opus of Isabelle Stengers,
Penser avec Whitehead (2002).
8
cf. Pigou, 1920, Part II, ch. IX.

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2. Current orientations of EU policy

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2.1. Transport pricing policy

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Space constraints preclude a comprehensive summary and

history of transport pricing policy in the European Union.
Suffice it to say that the approach of the White Paper adopted
by the European Commission (EU, 2001) on transport policy is
far more ambitious than it looks.10 Urban transport policy per
se is not targeted in the White Paper because, in the ECs view,
the subsidiarity principle dictates that urban transport matters
should be dealt with by local politicians and decision-makers.11
However, the implementation of reforms on heavy goods
vehicle pricing and other European transport policy initiatives
such as sea motorways12, rail/water integration, shifts of freight
traffic from road to rail, development of liberalised railway
management, etc. will have important and still unclear impacts
on urban life and urban transport policy. It should be kept in
mind that transport policy is related to the overarching concern
of sustainable development. An overall strategic objective of
EU transport policy is to achieve a decoupling of economic
growth and transport growth. This decoupling is part of a large
policy scheme, involving integration of social and environmental costs of transport and the publication of annual reports
on sustainable development (the Gothenburg agenda).
Transport pricing is also seen as a key to establish a level
playing field and fair competition system between, and within,
the different transport modes. It is therefore an important

cf. NP, article transaction costs.

For a description of the development of this policy, see Pahaut and Quinet
(2005).
11
A different interpretation of the subsidiarity principle is often taken in the
context of environmental policy. In the CAFE (Clean Air For Europe) program,
policy measures (including transport) will be proposed to ensure adequate air
quality in all cities in the EU.
12
Sea links providing a way around bottlenecks, such as in the Alps or in the
Pyrenees.
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instrument to strengthen the Single Market and the integration

of national economies. More recently, transport pricing is
increasingly seen as an important source of revenues for the
development of the trans-European transport networks, and
particularly for the 30 transnational projects declared of
European interest.13
If we are to understand the somewhat partial approach of the
EU transport pricing policy, we have to keep in mind the
current political state of affairs and the decision-making
procedures of the EU, which make collective decisions difficult
to reach, to say the least. As the White Paper of 2001 flatly
states14: Several Member States contest the very principle of a
general Community-wide ban to keep heavy goods vehicles off
the roads on weekends. Member States have also taken
diverging paths on taxation in response to the recent surges in
oil prices. These comments reflect the equivocal nature of the
subsidiarity principle.
It is in this context that the Commission announced a series
of measures ranging from pricing to revitalising alternative
modes of transport to road and targeted investment in the transEuropean network, while bearing in mind the historical
imbalance in favour of road for the last 50 years. The
ambitious objective of the Commission paper is to rebalance
modal demand and prevent the modal share of road transport
from growing further. Transport pricing is seen as one of the
most powerful measures in achieving this goal.
A careful selection of complementary policy instruments
will be necessary to achieve this goal. Cross-financing and
revenue hypothecation, for example, will require political
decisions consistent with the subsidiarity principle. The
proposal to develop corridors of European interest 15
(transport corridors relevant to European integration) will
benefit from a transfer of resources from the road sector to
alternative modes. A first step in this direction was reached in
the recent transport Council, which agreed on the possibility to
add, under certain conditions, a 12% mark-up on top of
allocated infrastructure costs for heavy goods vehicles to be
earmarked to non-road modes in the same corridor.
Intercity truck tolls were recently introduced in the form of a
heavy goods vehicle (HGV) kilometre-charging scheme on
German and Austrian motorways. And in several countries
passenger vehicle tolls are common on intercity motorways.
But few urban roads are tolled despite the considerably higher
external costs or urban driving.16 Bold and innovative policies
will also be required to introduce tolls on urban roads. It can be
hoped that the toll rings in the major Norwegian cities and
Londons congestion charging scheme have paved the way

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of transport is perhaps less important than the very

fundamental question that we have to face now: which
institutions are required, if any, to regulate the multiple
interactions and transactions generated by transport? This
question was not settled during the PigouKnight debate. Forty
years later Coase (1960) presented his now famous Theorem: if
transaction costs among private persons are nil and there are
no income effects, contracts among the parties involved may
solve the externality problems without any government
intervention. In most circumstances, however, multilateral
transactions are very costly, and regulations may be more
efficient.9
As we can seen from this brief summary of a long, complex
discussion, the mix of public intervention and private
transactions was an open question from the very outset of the
discussion in the 1920s. The suitable composition of this mix
remains an open problem for European transport policythe
subject of the following section.

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Decision 884/2004/EC
EU (2001), see the introduction on Policy Guidelines.
15
Decision 884/2004/EC declared 30 priority projects to be of European
interest (listed in its Annex III). These projects, and particularly their crossborder components, will be prioritized when allocating EU subsidies.
16
See the RECORDIT program, which calculated the marginal external costs
of a 40-ton lorry on three long distance transport corridors. The difference
between external costs in urban and interurban varies typically from 5 to
60 Euro cents/km.

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2.2. Acceptability

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Transport policy reform is bound to relate social, economic,

fiscal and political agenda that are notoriously difficult to
manage. Indeed, this is the central political question. The
discussion of equity in matters such as transport policy cannot
be an isolated subject.18 In the context of the European Union,
in addition to distribution of income between citizens or
households, equity has also another dimension, which is often
called regional cohesion in the EU jargon. The implications of
a policy upon certain regionsconsidering oppositions among
poor/rich; peripheral/central; big/small country; old/new
member statesare of interest for the policymaking process.
There is some concern that those who will be negatively
impacted by pricing will not benefit from the increased
revenues; e.g. some existing legislation may not let urban
authorities decide how revenues from congestion charging can
be used. This would need to be addressed for urban pricing
to be more widely present on the policy agenda in the EU.
Acceptability of pricing will depend not only on relevant

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17

cf. CEC, 2001.

A discussion of equity and social choice is beyond the scope of this article.
Readers are referred to the seminal formulation by Gevers (1986), and Trannoy
and Fleurbaey (2003).
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In conclusion it is our view that the orientation of European

transport policy is relatively well defined and theoretically
grounded. However, the policy will only come into practice if
national and local authorities cooperate. It is impossible to tell
now if, and how, this integration will develop. We have shown
that the present transformation of transport calls not only for
technical management, but also for political decisions. The
multiplicity and diversity of interest groups, users, taxpayers,
local authorities, etc. requires political arbitration. It will be up
to decision-makers at all levels of government to fulfil these
expectations.

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4. Disclaimer

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The views expressed here are not to be considered as the

views of the Commission.
5. Uncited reference

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de Palma and Quinet (2005).

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References

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CEC, 1995. Green Paper: Towards Fair and Efficient Pricing in Transport
Policy-Options for Internalizing the External Cost of Transport in the
European Union.
CEC, 2001. White Paper: European Transport Policy for 2010: Time to Decide.
Coase, R., 1960. The problem of social cost. Journal of Law and Economics
3, 1.
de Palma, A, Quinet, E., 2005. La tarification des transports, Enjeux et defis.
Economica, Paris.
Eatwell, J., Milgate, M., Newman, P., 1987. The New Palgrave: A Dictionary
of Economics. Macmillan, London.
EU, 2001. White Paper on European Transport Policy for 2010: Time to
Decide. European Commission, DG TREN, Brussels.
Gevers, L., 1986. Walrasian social choice: some simple axiomatic approaches.
In: Heller, W.P. (Ed.), Social Choice and Public Decision Making Essays in
Honor of K.J. Arrow, vol. 1. Cambridge University Press, Cambridge,
pp. 91114.
Knight, F., 1924. Some fallacies in the interpretation of social cost, Quarterly
Journal of Economics, 38. Reprinted in The Ethics of Competition and
Other Essays. Allen and Unwin, London.
Marshall, A., 1890. Principles of Economics. Macmillan, London (References
are to the 3rd edition of 1920).
Montaigne, M., 1580. Essais, Bordeaux.
Pahaut, S., Quinet, E., 2005. Doctrines dans lUnion europeenne. In: de
Palma, A., Quinet, E. (Eds.), La Tarification des Transport. Pourquoi? Pour
Qui? Les Defis daujourdhui et de Demain. Economica, Paris, pp. 6989.
Pigou, A.C., 1920. The Economics of Welfare. MacMillan, London
(References are usually made to the 1932, 4th ed.).
Rouwendal, J., Verhoef, E., Submitted for publication. Basic economics of
roads pricing: From theory to applications.
Stengers, I., 2002. Penser Avec Whitehead. Gallimard, Paris.
Trannoy, A., Fleurbaey, M., 2003. The impossibility of a paretian dominant.
In: Social Choice and Welfare, 21, 2 (issue in honour of Louis Gevers).
Young, A.A., 1913. Pigous wealth and welfare. Quarterly Journal of
Economics 27, 672686.

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3. Concluding remarks

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macroeconomic relations, but also on investments that confer

benefits to users of transportation systems.

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for a more widespread use of pricing to allocate urban road

capacity as a complement to access restrictions and clean
zones.
Road pricing has still not reached the policy agenda at the
worldwide level. The European Commission is taking strong
positions on this point since the publication of the 1995 Green
Paper on fair and efficient pricing: .while transport may be
heavily taxed, it is above all badly and unequally taxed. Users
are all treated alike, irrespective of the infrastructure damage,
bottleneck and pollution they cause. This failure to spread the
burden fairly between infrastructure operators, taxpayers and
users causes considerable distortion of competition both
between transport operators and between modes of transport.
(CEC, 1995).
The White Paper of 2001 considered more precise
objectives (CEC, 2001): The thrust of Community action
should be to replace gradually existing transport system taxes
with more effective instruments for integrating infrastructure
costs and external costs [in the price of transport]. These
instruments are, firstly, charging for infrastructure use, which is
a particularly effective mean of managing congestion and
reducing other environmental impacts, and, secondly, fuel tax,
which lends itself well to controlling carbon dioxide
emissions.17 For two reasons the distinction between charging
and taxation as political instruments is of particular interest and
importance. First, because of the need to use different
instruments to tackle different problems. And second because
the Community decision-making rules differ for the two cases:
taxation falls under the unanimity rule whereby any EU
member State can block a proposal, whereas decisions on
charging can be taken by qualified majority.

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