Responding to two blog posts by myself And Kevin Corcoran about skepticism about Pigouvian taxes, Scott Sumner gives an example of a congestion tax in Orange County that has been a great success. Scott writes:
This example shows that not all Pigovian taxes are a failure. Other successes include congestion charging in cities such as Singapore, London and Stockholm.
Scott could have added Fairfax County, Virginia, to his list. I-66 runs from Washington DC through Fairfax County and towards West Virginia. 66 was a limited-access highway: during rush hour, only people who carpooled could use it (and there were huge fines for violators). Still, 66 was always backed up. In 2017, the Department of Transportation lifted the HOV restriction and opted to switch to dynamic tolling during rush hours. The tolls would go up or down depending on volume, with the goal of keeping the average speed on I-66 at 55 (the speed limit). This has been a great success. By implementing dynamic tolling, traffic jams have been virtually eliminated. This dynamic toll is a form of toll and is a Pigouvian tax.
It is a Pigouvian tax that I wholeheartedly celebrate. I traveled a lot in high school. I’ve wasted god knows how many hours in traffic. When dynamic tolling was implemented, I could easily decide if the value of my time was worth the toll.
In our messages, Kevin and I talk about skepticism. I’m skeptical of corrections to market failures, but I’m not categorically against them. There are cases where they can work. As usual, the devil is in the details.
One of the reasons I’m skeptical about Pigouvian taxes is that governments can be slow to adjust taxes (up or down). There are numerous political factors standing in the way of this, special interests are starting to get involved, and the political process in general is slow. A load can therefore be too high or too low for too long, resulting in suboptimal outcomes. One of the great things about congestion taxes, especially like the tolls on I-66, is that they can be easily adjusted. The I-66 toll is fully automated. It goes up and down quite quickly to adjust the traffic level. No votes, lobbying or other costly procedures are required. The adjustment costs are low.
Moreover, the negative (or positive) effects of the congestion tax are realized quite quickly. You can immediately see traffic increase or decrease with the level of the tax. The analytical costs of the tax are low. Conversely, a CO2 tax has effects that manifest themselves very slowly. Negative (or positive) effects of carbon emissions can take years to materialize. The analytical costs of a carbon tax are quite high.
Finally, at least in the case of the I-66, the tax is collected via a transponder that many vehicles have (or an invoice is sent based on the registration linked to the car’s license plate if no transponder is present) . The tax is collected immediately; no measurements or audits are required. The administrative costs of the tax are low.
I am in favor of congestion taxes. After spending many hours sitting in Boston traffic (as I’m sure Scott did too), I wish my home state would do something similar on those freeways. A congestion tax could overcome my skepticism.
The point of my posts about corrections for market failures is not that such actions should never, ever be taken. It’s not that they are doomed to failure. Rather, it is intended to remind economists and readers of our most fundamental lessons: There is no such thing as a free lunch. Market interventions are not free. Yet most economists treat them as if they were. Your standard econ textbook will only provide a bland overview of market failure along the lines of: “Markets work just fine. But as soon as transaction costs become high, the markets fail and the government can/must intervene.” I try to inject the natural skepticism of the economist into these decidedly non-economic schools of thought. We need to compare real world alternatives. Most market intervention experts fail to do this: they only see market failure contract government intervention will make things better. We, as economists and scientists, should be skeptical about that all plans. We have to look at them realistically. We must investigate the details, because that is where the devil lies. That skepticism can be overcome. But it must exist.
Interestingly, this is where public choice analysis comes into play. Without public choice, the benefits of dynamic or automatic tolling are not clear. But public choice teaches us to examine politics without romanticism, that the incentives politicians face are not the same as incentives faced by people who interact directly in the market and are guided by prices. For the standard economist, all else being equal, having a tax determined by a commission or a tax determined by automatic dynamic tolling would be equally preferable. A public choice economist realizes that these two methods are not equally preferable. One would lead to a much worse outcome than the other.
Jon Murphy is an assistant professor of economics at Nicholls State University.