Understanding Road Pricing: Theory, Advantages And Disadvantages

Concept of road pricing and Pigouian tax

Road pricing implies the practice to charge certain amount on road use in the form of toll taxes, fees depending on distance, congestion charges and charges to restrict use of some specific sources. The chief focus of these charges is to generate revenue, which in turn can help the government to invest in road reconstruction or to control increasing transportation demand for managing peak hour travel along with traffic congestion (Brent and Gross 2018). Through charging road pricing, the government can also control negative externalities that could affect a society, economy and environmental condition adversely. To understand the concept of road pricing, this section intends to focus on the related theory, introduced by Pigou, along with some relevant advantages and disadvantages that other academicians and regulators have stated.

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Initially, Pigou provided the concept of road pricing considering externalities and charging for optimal congestion based on a congested road. The basic concept of this theory is to apply a price related mechanism that already has been imposed in other parts of the market economy (Caggiani, Camporeale and Ottomanelli 2017). During the time of higher congestion, the amount of charging price needs to be high while the opposite situations can also occur during less congested time for declining excessive uses of roads on some particular areas. Hence, it is essential to choose and charge appropriate price level through a simple way within a complicated socio-economic and technical situations. The entire concept follows the theories of negative externalities and Pigouvian tax with the help of which the government could determine the amount of road pricing (Runhaar 2017). Pigou and his followers adopted the concept of marginal-cost pricing considering the demand and supply curves, based on a standard situation for maintaining traffic on a congested road.

However, the road pricing strategy of Pigou took enough time to apply in city due to some economical and social reasons. Hence, the following sections conduct a brief analysis on the road pricing long with its applications.

According to researchers, road pricing is the policy, imposed directly on the drivers, who use road for reducing the road congestion, which in turn have generated significant amount of revenue. Hence, according to the practitioners of transportation, the concept of road pricing is considered as potential one that can further help citizens of city or country to obtain comparatively better transportation service (Zhu, Jiang and Lo 2018). This strategy has some positive implications on drivers and society though it is also observed that practical implementation of this theory is very limited due to several constraints. The first constrain is related with political issue while other problem deals with public opinion. Road pricing can be considered as a serious but sensitive issue and for this; a committed as well as strong political base is required for undertaking such revolutionary policies. As the strategy possesses huge possibility to experience either success or failure, risk aversion policy makers may not intend to implement this specified strategy practically (Tikoudis, Verhoef and van Ommeren 2018). Moreover, public opinion also plays a vital to role regarding imposition of such strategy, as this can adversely affect living standard of many people, belonging to different income group. According some people, this process falls under the process of “double taxation” and consequently free riders would refuse this idea of road pricing. In this context, researchers, public officials and policy makers could provide proper vision to public for implementing and promoting the road pricing strategy.

Applications of road pricing

The concept of road pricing follows two chief objectives related to revenue generation and management of congestion. Some other objectives related to this policy are reduction of carbon emission from transport, maximisation of social welfare and promote public transport through reducing the uses of private vehicles. The policy also focuses on management of land. In rural areas, the government could follow its revenue-generating objective for roads that do not possess significant demand or do not enjoy other possible alternatives. This objective is also followed for some congested roads in urban areas. The government invested this revenue for completing any roadway project. Congestion management also plays a significant role road pricing strategy, as it can reduce the number of vehicles during peak hour for managing traffic and encouraging people to use public vehicles. This system further can incentivize passengers and drivers to obtain comparatively better trip and this can improve the entire transportation system significantly. Revenues, obtaining from this service, are spent on various purposes so that congestion in road can be reduced effectively.

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Congestion pricing: Through this process, the government reduces the volume of vehicles on roads during peak-period. In this context, the government charges certain amount of money from the road users (Serrano-Hernández et al. 2017.). Road is a public goods and users pay for using it and for creating negative externalities, which increases social costs. Social cost increases when marginal social cost exceeds marginal private cost. Social cost can be reduced by charging congestion pricing.

Road tolls: With the help of this form, the government generates revenue for future funding of road improvements that falls under the package of transportation funding (Basar and Cetin 2017). This is considered as fee of service that the government provides to its citizens. This time of fees are implemented at a particular point, for instance, at a bridge or a tunnel. In this situation, tollbooths use the system of Electronic Road Pricing (ERP).

Road pricing or congestion pricing have various advantages, as this system can reduce stress and delays of drivers and passengers through providing quality services in terms of time management and allowing more passengers to travel during the peak time. This system helps state and local governments to develop transportation system without levying or increasing any tax (Ison 2017). Uninterrupted vehicle service can influence business organisations to transact goods and other factors of inputs from one place to another within a short period of time and at a faster rate, which in turn can help a business organisation to experience robust growth. Moreover, due to higher congestion price or tolls, the number of vehicles can be reduced even at the time of peak and this consequence further can reduce the amount carbon emission within environment (Coria et al. 2015).

Objectives of road pricing policy

The road pricing strategy also has some limitations as it generates administration cots, inequality and evasion. For collecting tolls and other charges on vehicles, the government needs to pay some costs for its employees and for making centres to collect tolls at various places (Bigazzi and Mohamed 2017). Moreover, this system generates inequality among people, as it possesses regressive nature for which people with lower income plays comparatively higher percentage of their income. This system also forces people to obtain illegal way to avoid excess burden of money that the government imposes on passengers for using some specific roads.


Thus, the entire section has discussed about road pricing strategy by providing a special emphasis on the pricing strategy given by Pigou. According his analysis, marginal social cost can reduce further if the government imposes marginal social cost and by equating marginal benefit with marginal cost, the government can obtain the amount of price that it could charge on people for using certain roads. After analysing this concept, the paper has analysed on various applications related to road pricing along with its main objectives that entirely focuses on revenue generation and traffic management. Moreover, the report has also discussed on various advantages and disadvantages as well.


Basar, G. and Cetin, M., 2017. Auction-based tolling systems in a connected and automated vehicles environment: Public opinion and implications for toll revenue and capacity utilization. Transportation Research Part C: Emerging Technologies, 81, pp.268-285.

Bigazzi, A.Y. and Mohamed, A., 2017. Motivation and implementation of traffic management strategies to reduce motor vehicle emissions in Canadian cities. Canadian Journal of Civil Engineering, 45(4), pp.241-247.

Brent, D.A. and Gross, A., 2018. Dynamic road pricing and the value of time and reliability. Journal of Regional Science, 58(2), pp.330-349.

Caggiani, L., Camporeale, R. and Ottomanelli, M., 2017. Planning and design of equitable free-floating bike-sharing systems implementing a road pricing strategy. Journal of Advanced Transportation, 2017.

Coria, J., Bonilla, J., Grundström, M. and Pleijel, H., 2015. Air pollution dynamics and the need for temporally differentiated road pricing. Transportation Research Part A: Policy and Practice, 75, pp.178-195.

Ison, S., 2017. Road user charging: issues and policies. Routledge.

Runhaar, H., 2017. Efficient pricing in transport. European Journal of Transport and Infrastructure Research, 1(1), pp.29-44.

Serrano-Hernández, A., Álvarez, P., Lerga, I., Reyes-Rubiano, L. and Faulin, J., 2017. Pricing and Internalizing Noise Externalities in Road Freight Transportation. Transportation Research Procedia, 27, pp.325-332.

Tikoudis, I., Verhoef, E.T. and van Ommeren, J.N., 2018. Second-best urban tolls in a monocentric city with housing market regulations. Transportation Research Part B: Methodological, 117, pp.342-359.

Zhu, S., Jiang, G. and Lo, H.K., 2018. Capturing value of reliability through road pricing in congested traffic under uncertainty. Transportation Research Part C: Emerging Technologies, 94, pp.236-249.