, Volume 30, Issue 4, pp 411–433 | Cite as

Towards marginal cost pricing: A comparison of alternative pricing systems

  • Simon P. Shepherd


European urban areas are marred by the problems of congestion and environmental degradation due to the prevailing levels of car use. Strong arguments have thus been put forward in support of a policy based on marginal cost pricing (European Commission 1996). Such policy measures – which would force private consumers to pay for a public service that was previously provided "for free" – are, however, notoriously unpopular with the general public and hence also with their elected representatives – the politicians. There is thus an obvious tension between economic theory, which suggests that marginal cost pricing is the welfare maximising solution to urban transport problems, and practical experience, which suggests that such pricing measures are unwanted by the affected population and hence hard to implement through democratic processes. The AFFORD Project for the European Commission has aimed to investigate this paradox and its possible solutions, through a combination of economic analysis, predictive modelling, attitudinal surveys, and an assessment of fiscal and financial measures within a number of case study cities in Europe. In this paper the methodology and results obtained for the Edinburgh case study are reported in detail. The study analyses alternative road pricing instruments and compares their performance against the theoretical first best situation. It discusses the effect of coverage, location, charging mechanism and interaction with other instruments. The paper shows that limited coverage in one mode may lead to a deviation from the user pays principle in other modes, that location is as important as charge levels and that assumptions about the use of revenues are critical in determining the effect on equity and acceptability. Finally the results show that a relatively simple smart card system can come close to providing the economic first best solution, but that this result should be viewed in the context of the model assumptions.

marginal cost pricing optimisation road pricing urban transport 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Bates J, Brewer M, Hanson P, McDonald D and Simmonds DC (1991) Building a strategic model for Edinburgh. Proceedings of Seminar D, PTRC 19th Summer Annual Meeting. London: PTRC.Google Scholar
  2. Bell MGH (1998) Using system dynamics techniques to investigate travel demand management measures. EPSRC studentship. Newcastle upon Tyne, TORG.Google Scholar
  3. Bovy P (2000) Innovation concepts in demand management in the Netherlands. Proc. Smart innovation in traffic engineering: regional conference held in Amsterdam Holland. Washington, USA: Institute of Transportation Engineers.Google Scholar
  4. Dasgupta M et al. (1994) Impact of transport policies in five cities. PR 107. Crowthorne, TRL.Google Scholar
  5. Dawson JAL and Brown FN (1985) Electronic road pricing in Hong Kong 1: a fair way to go? Traffic Engineering and Control 26(12).Google Scholar
  6. Edinburgh City Council (2000) New Transport Initiative: Technical Report on Phase 1. Edinburgh City Council, Edinburgh, UK.Google Scholar
  7. European Commision (1996) Towards fair and efficient pricing in transport. Bulletin of the European Union, Supplement 2/96.Google Scholar
  8. European Commission (1998) 'The Common Transport Policy, Sustainable Mobility: perspectives for the future', office for official publications of the European Communities, 1998. COM(98)716.Google Scholar
  9. European Conference of Ministers of Transport (2001). Implementing sustainable urban transport policies. Report to Council of Ministers. Paris: ECMT.Google Scholar
  10. Fridström L, Minken H, Moilanen P, Shepherd S and Vold A (2000) Economic and Equity Effects of Marginal Cost Pricing in Transport. AFFORD Deliverable 2A. VATT Research Reports No. 71, Helsinki.Google Scholar
  11. Greater London Authority (2001) The Mayor's Transport Strategy. London: GOL.Google Scholar
  12. Holland EP & Watson PL (1978) Traffic restraint in Singapore. 1. Measuring the effects of the Area License Scheme; and 2. Some design factors in traffic pricing schemes. Traffic Engineering and Control 19(1).Google Scholar
  13. Larsen O & Ramjerdi F (1991) Road Pricing as a Means of Financing Investment in Transport Infrastructure – The Case of Oslo. Oslo: Institute of Transport Economics.Google Scholar
  14. May AD & Milne DS (2000) Effects of alternative road pricing systems on network performance. Transportation Research 34A(6)Google Scholar
  15. May AD, Shepherd SP & Timms PM (2000) Optimum transport strategies for European cities. Transportation 27.Google Scholar
  16. Milne D, Niskanen E & Verhoef E (2000) Operationalisation of Marginal Cost Pricing within Urban Transport. AFFORD Deliverable 1. VATT Research Reports No. 63. Helsinki.Google Scholar
  17. Ministry of Transport, 1964. Road pricing – the technical and economic possibilities. London: HMSO.Google Scholar
  18. Minken H (1998) Work Package 20 Report: FATIMA Objective Functions, DG7 Urban Transport Research, 4th Framework Programme. Brussels: EC.Google Scholar
  19. MVA Consultancy, Institute for Transport Studies and Oscar Faber TPA (1994) A common appraisal framework for the evaluation of transport projects. London: HMSO.Google Scholar
  20. Richards M, Gilliam C & Larkinson J (1996) The London Congestion Charging Research Programme: 6. The findings. Traffic Engineering and Control 37(7/8).Google Scholar
  21. Schade B & Schade W (2001) Evaluating economic feasibility of environmentally sustainable scenarios by a backcasting approach with ESCOT. Presented at 9th WCTR, Seoul.Google Scholar
  22. Sheffi Y (1985) Urban Transportation Networks: Equilibrium Analysis with Mathematical Programming Methods. Englewood Cliffs, NJ: Prentice-Hall, Inc.Google Scholar
  23. Shepherd SP, May AD, Milne DS & Sumalee A (2001) Practical algorithms for finding optimal road pricing locations and charges. Proc. of European Transport Conference, September 2001, Cambridge, UK.Google Scholar
  24. Simmonds DC et al. (2001) A new look at multi-modal modelling. Proc. 28th European Transport Conference. London: PTRC.Google Scholar
  25. Snow A & Warren RS. (1996) The marginal welfare cost of public funds: theory and estimates. Journal of Public Economics 61: 289–305.Google Scholar
  26. Tinch (1995) Valuation of Environmental Externalities. Prepared for the UK Department of Transport. London: HMSO.Google Scholar
  27. TRENEN II STRAN (1999) Final report for publication, ST 96 SC 116. Project funded by the European Commission under the Transport RTD Programme of the 4th framework programme. July 1999.Google Scholar
  28. Verhoef ET (2000) “Second-best congestion pricing in general networks: algorithms for finding second-best optimal toll levels and toll points”, Discussion paper TI 2000-084/3, Tinbergen Institute, Amsterdam-Rotterdam.Google Scholar

Copyright information

© Kluwer Academic Publishers 2003

Authors and Affiliations

  • Simon P. Shepherd
    • 1
  1. 1.Institute for Transport StudiesUniversity of LeedsLeedsUK (E-mail

Personalised recommendations