TDM Impacts on Market Efficiency and Equity
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Victoria Transport Policy Institute
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Updated
22 July 2008
An efficient market results in economic optimality: consumption patterns that provide the greatest overall benefits to society. This chapter discusses the principles of an efficient market and how they relate to various TDM strategies.
Justifications for Market Distortions
References And Resources For More Information
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Preface A skilled dancer or athlete moves gracefully with
minimal wasted effort: actions are anticipated, weight is shifted, muscles
tension and relax, directing energy exactly where it is needed. Similarly, a
skilled speaker conveys information without wasting words or losing the
audience’s interest. These are examples of efficiency, the ability to derive
maximum benefits from available resources. Economists and planners also appreciate efficiency.
We strive to coordinate the use of resources such as money, land and people’s
time in order to maximize benefits to society. Economists have a variety of
useful tools that can help solve problems and increase human happiness. In myriad ways, transportation activities effect
the consumption of resources, including dollars, land, energy, time, and
human lives. Policy and planning practices that increase transportation
system efficiency can provide huge benefits. This chapter examines general
principles that can help guide transportation policies and planning practices
to optimize efficiency, and the role that TDM strategies can play in
achieving these objectives. |
Markets are situations in which people exchange goods and services. If you have money and want produce, and a farmer has produce and wants money, a trade can make you both be better. Consumers’ willingness to pay for a particular type of produce (a tastier or healthier variety, or raised organically) may induce some farmers to offer products that better meet people’s needs. In this way, markets can efficiently allocate scarce resources, maximizing consumer value and productivity. In recent decades there has been increased enthusiasm for market solutions to various problems, including transportation problems.
But, love of markets must not be blind. To be efficient and equitable, markets must reflect certain principles including consumer options, efficient pricing and neutral public policies (Nash and Matthews, 2005). The consumption patterns that occur in a distorted market cannot be considered optimal.
Many TDM strategies are planning and pricing reforms that reflect market principles. Although they are generally evaluated in terms of their ability to achieve a particular objective such as congestion reduction and energy savings, they can also be evaluated based on the degree to which they reflect market principles and increase economic efficiency.
This chapter describes market principles and examines how well they are reflected in current transportation and land use markets. It explores various market distortions that reduce efficiency and equity, and the role that TDM strategies can play in correcting these distortions and increasing benefits to society. This information can help Evaluate TDM strategies and programs, particularly Pricing strategies and Land Use Policy Reforms.
Optimality refers to the level of consumption that provides the greatest overall benefits from available resources. An efficient transportation market results in optimal travel patterns, that is, the amount and type of mobility that provides the greatest overall benefits to society. Motor vehicle travel that exceeds this optimal level can be considered economically excessive.
Optimality focuses on marginal impacts, that is, the costs and benefits of an additional unit of consumption. It reflects the concept of diminishing returns, which recognizes that the incremental benefits provided by a good tend to diminish with increased consumption. For example, most people enjoy eating a big piece of cake or pie, and they may even enjoy a second portion at the same sitting, but a third usually provides little benefit, and a fourth piece is downright unpleasant. Similarly, although a certain amount of mobility may provide significant benefits, once the most valued trips are taken the incremental benefits of additional travel tend to decline, and additional mobility provides ever declining benefits.
Consumers make many decisions that involve tradeoffs with mobility and location. For example, a household may need to choose between a larger-lot house that requires more travel, and a smaller house in a more central location. Some households may prefer the larger property (perhaps because they own horses) while another prefers the smaller but more accessible home (perhaps they are involved in more community activities). The ability of consumers to make such tradesoffs is the basis of economic efficiency. It means that resources (land, buildings, vehicles, etc.) are put to their best use. It would be economically inefficient (i.e., resources would be wasted) if a household that values rural living is forced to accept an urban home while a household that values urban life is forced to live in a rural location. The efficiency of the market is based on its ability to let individuals choose the bundle of goods that best reflect their needs and preferences.
However, not all goods are traded in efficient markets. Many transportation goods and services are provided by governments. For example, pedestrians use sidewalks, cyclists use paths, motorists use roads, transit passengers use publicly-provided transit services, air travelers use public airports, and ships use public ports. Similarly, housing relies on various utilities and public services which are often provided or regulated by governments. The design, location and pricing of these public services can have significant effects on consumer decisions. For example, if walking and cycling conditions are inferior, and public transit service is inadequate, people will use these modes less and drive more than if they have better travel options. Similarly, people who travel in areas with higher fuel taxes, parking fees and road tolls tend to drive significantly less than travelers in areas with lower automobile user charges.
Many specific factors affect travel decisions, as listed below. Even relatively small changes can have significant impacts. For example, employees who are offered subsidized parking but no comparable benefit for other travel modes typically commute by automobile 20% more than employees who pay for their parking or are offered parking cash out (the option of choosing cash instead of a parking subsidy). Similarly, people who would otherwise choose to walk, bicycle or ride transit often shift to driving if they perceive that those modes are dangerous or stigmatized. A combination of factors often influence a particular travel decision, so a set of small changes (marginal increases in speed, comfort, reliability and prestige) may cause significant changes, although it can be difficult to isolate the effect of each factor.
Factors Affecting
Travel Decisions
Certain public policies can leverage large total impacts. For example, a million dollars in federal funding can influence ten million in local investments, which influences one hundred million dollars in consumer expenditures, which influences a billion dollars in total costs. Policies that favor one mode can influence the mobility options available in a community, the location and style of development, and the magnitude of transportation costs borne in a community, as illustrated in Table 1. Of course, this is a simplified example, since federal funding practices are just one factor affecting transport and land use patterns, but it illustrates potential leverage effects of a particular planning decisions.
Table 1 Leverage Effects On Travel Behavior
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|
Automobile Oriented |
Nonmotorized Travel Oriented |
|
Federal Government |
$1 million roadway grant |
$1 million walk/bike grant |
|
State/Regional Government |
$5 million expenditure on urban fringe highway expansion. |
$5 million expenditure on sidewalks and paths. |
|
Businesses |
$5 million investments to expand urban fringe businesses and parking facilities. |
$5 million investments to upgrade stores in pedestrian-friendly areas, and provide bicycle parking. |
|
Consumer Behavior |
$100 million spent by consumers on additional driving to reach urban fringe businesses. |
$100 million saved by consumers who own fewer cars and drive less due to improved local services. |
|
Total Impacts |
$1 billion in total additional costs, including additional accidents and environmental damages. |
$1 billion in total cost savings due to avoided accidents and environmental damages. |
Relatively small planning and investment decisions can leverage larger changes in business and consumer decisions.
When evaluating economic impacts it is important to account for the difference between economic transfers (resources are shifted, so one person gains while another loses by an equal amount), resource benefits and costs (there is an increase or reduction in the total economic resources available), and efficiency benefits (resources are used where they are valued most). Economic transfers may provide equity benefits (i.e., they may be justified on equity grounds), but they provide no overall increase in benefits to society. Increased economic productivity and efficient provide an overall increase in benefits to society.
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Something For
Nothing? Many
consumers enjoy getting something for nothing, or at least a particularly
good deal when making a purchase. Perhaps it is the modern manifestation of
our primal hunting instinct. A discount or price may motivate consumers to
purchase goods they would otherwise ignore, simply for the feeling of
accomplishment and reward. As a result, many businesses set an excessive
“regular” price for their products and then offer a discount that brings
prices down to a competitive level, or they offer a nearly worthless “free”
gift or prize to attract customers. Often,
what seems like “something for nothing” is really an illusion: what you save
in one pocket you pay from another. What seems like true economic savings is
really an economic transfer, with costs borne elsewhere in the economy.
Transportation is full of such hidden costs: what appears to be an
opportunity to save money actually makes consumers worse off overall. For
example, motorists are generally accustomed to unpriced roads and parking,
and once consumers are accustomed to getting something for free they tend to
assume that is right and fair, and resist paying for it. But these facilities
are never really free, we pay for them indirectly through higher taxes (for
public roads and parking), higher prices on retail goods (for parking
provided by businesses) and lower wages (for parking provided by employers).
When roads and parking are unpriced consumers have little incentive to ration
their use, for example, by walking, cycling, ridesharing or using public
transit when possible to reduce traffic and parking congestion. As a result,
congestion is unavoidable and total costs increase. Paying directly rather
than indirectly for roads and parking tends to be more efficient and fair
overall, that is, it reflects market principles. |
For example, Road Pricing may be justified on equity grounds (i.e. it means that consumers “get what they pay for and pay for what they get,” which increases horizontal equity). If it reduces traffic volumes to an optimal level, it can minimize congestion delays, increasing overall productivity. By allowing consumers to prioritize trips (the can take higher value automobile trips and have an incentive to avoid lower-value peak-period automobile trips, based on their willingness to pay), it increases economic efficiency.
Although some consumers have very strong land use and transportation preferences, they often have a wide range of options at the margin. For example, it might be difficult to persuade a horse lover to live in an urban apartment, but they may be indifferent between a more accessible, one-acre lot near town, and a less accessible, five-acre lot twenty miles from town. A motoring enthusiast may be unwilling to give up car ownership, but might still prefer to commute by train two or three days a week rather than drive every day. Tax rates, utility costs, transportation costs and the quality of public services may affect such decisions. Similarly, a household may make a choice between owning two cars, or owning one car and relying more on walking, cycling and public transit. Factors such as walking and cycling conditions, transit service quality, and parking costs may all affect such decisions.
Similarly, transport costs affect other consumption decisions. For example, shipping, labor, land, water and energy costs all affect whether the cucumbers and green peppers sold in stores originate in local greenhouses or are imported from distant farms. Only by taking all costs into account will consumers have an incentive to choose the truly efficient option. If consumers are shielded from some costs, for example, if California irrigation water is subsidized, or roadway land costs are not incorporated in shipping costs, shippers will lack an adequate incentive to choose the most efficient modes (for example, when choosing between rail and truck for long-haul transport), and consumers will lack adequate incentive to choose local products that are less costly to produce overall.
It would be wrong to assume that a reduction in housing parcel size or in automobile travel necessary reduces consumer welfare, provided that it results in part from positive incentives (e.g., cost savings to those who use less land or reduce their vehicle mileage) and consumers have viable options. In such conditions, the consumers who place a higher value on space and mobility will continue with their current land use and transportation patterns, but those who place relatively less value on these goods have a new opportunity to capture benefits.
Over the course of a typical week most people have many possible trips that they value at different levels. For example, you might place a very high value on trips for medical services and commuting work, and a lower value on a special trip to a video store or restaurant. In some cases you may place a very high value on the trip itself, but you can use alternative modes, so the incremental value you place on driving (rather than walking, cycling or taking the bus) may be modest. There may be many potential car trips that you would take if it is convenient and cheap, but will forego if traffic is congested or you would need to pay a toll or parking fee.
From society’s perspective it is inefficient if consumers take trips that they value at $2.00 if it has total costs of $3.00 (including vehicle, roadway, parking, crash risk and environmental damage costs). Such trips make society worse off overall. Similarly, it would be inefficient if enough consumers are willing to pay a price premium for a higher quality roadway or transit service that covers all additional costs, but such services are not provided due to market barriers or regulatory restrictions. This represents a lost opportunity for additional consumer benefits.
There is a vivid vocabulary to describe overpricing. Consumers who pay excessive prices are said to be gouged, fleeced, ripped off or swindled. There are no similar terms for underpricing, although it can be as harmful to the economy, and ultimately to consumers, as overpricing. Although underpricing of a common consumer good may appear beneficial (and indeed benefits many individuals in the short term), mispricing reduces overall economic efficiency. External costs are not eliminated. They show up as higher prices for commercial goods (for parking subsidies), increased local taxes (to pay for road services), increased injury and illness (from pollution and accidents), and lower residential property values (from urban traffic). Underpricing helps create Automobile Dependency that reduces Transport Options.
Because driving imposes multiple costs, the inefficiencies of mispricing multiply. Thus, underpriced parking results not only in inefficiency in the market for parking, but also leads to inefficient levels of automobile congestion, crashes, pollution, sprawl and user costs. Conversely, the benefits of more optimal pricing for parking multiply, since replacing free parking with paid parking provides additional benefits by reducing vehicle traffic, and therefore congestion, accidents and environmental impacts.
The principle of Optimality emphasizes the importance of sufficiency and balance, as opposed to the assumption that additional growth and resource consumption are always desirable (Sustainable Transport). It recognizes that even the most beneficial goods and activities must be rationed to control and prioritize their consumption. It means that debates over whether automobiles are “good” or “bad,” are misguided: a more productive question is whether a certain amount of automobile travel is optimal in a particular situation, or whether the community might be better of overall with somewhat more or somewhat less vehicle traffic.
The principle of Optimality is important for transportation planning. Although individual consumers may have certain strong preferences, as a group consumers can be equally happy with many combinations of goods, including many transportation and land use patterns. Although it would be difficult to convince all households to choose apartment living or give up car ownership, a relatively modest incentive will often persuade some households to choose more Accessible housing or reduce their automobile use, even if doing so involves giving up some benefits from low density living and personal mobility. Not every incentive will affect every consumer or every trip, they are not expected to. But changes of a few percent are often achieved by relatively modest changes in prices and service quality.
There is virtually no limit to the mobility consumers could demand. If travel were extremely cheap, fast and convenient, consumers would circle the world just to try a different restaurant or store (economists would say that the demand curve for mobility has a long tail, meaning that if prices decline sufficiently, the quantity consumed can be very large). Yet, more than most other consumer good, motorized transportation imposes external costs, so what an individual consumer consider optimal, based on their perceived costs, tends to be far greater than what society considers optimal, considering all costs (Transportation Costs & Benefits).
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Costs
and Prices Cost refers to resources used
to produce a good or service, which may include money, time, materials, land
or even risk and discomfort. Costs and benefits have a mirror-image
relationship: cost can be defined as the reduction in potential benefits that
those resources could otherwise provide (such as being able to spend travel
time savings on other, more enjoyable activities), while benefits can be
defined as a reduction in costs. Costs can be categorized in several ways: · Some costs are fixed (not
related to consumption, such as vehicle registration fees and residential
parking), while others are variable (directly increases with
consumption, such as fuel and road tolls). · Some costs are internal
(borne directly by the user of a good, such as transit fares and vehicle
operating costs), while others are external (borne by others, or by
users indirectly and not related to their consumption, such as pollution
emissions and general taxes used to fund transportation services). · Some costs are market
(commonly traded with money in a competitive market, such as vehicles and
fuel), while others are nonmarket (not commonly traded in a market,
such as crash risk and air quality). Price refers to perceived,
internal, variable costs, that is, the direct, incremental costs that
individual consumers trade off in exchange for using a good or service. The
price of travel includes the fare, vehicle expenses, travel time, risk and
discomfort an individual bears, but not external costs they impose on others
(such as congestion delay, crash risk or pollution costs borne by others), or
costs a consumer bears indirectly, such as general taxes used to fund
roadways that an individual pays regardless of their travel habits. |
Market distortions contradict the principle of optimality (Litman, 2006). An optimal market gives consumers options and incentives that maximizes efficiency and overall benefits to society. The best way to determine optimal consumption levels is insure that consumers have viable options to choose from, and prices that reflect marginal costs, unless a subsidy is specifically justified. This is why Road Pricing, Parking Pricing and Market Reforms that make prices more accurately reflect the costs of each trip tend to increase economic efficiency: they test willingness to pay and discourage wasteful use of resources. They apply the disciple of the market, giving consumers an incentive to reduce lower value vehicle travel (lower value either because the trip itself is relatively less important, or because there are lower cost alternatives) while giving priority to higher value trips. For example, such pricing strategies may give commuters who currently drive on congested highways every day an incentive to use transit or rideshare twice a week, while enjoying an uncongested automobile commute the other three days. This tends to be efficient because it allows consumers themselves decide which automobile trips are lower value and can be foregone, and which are higher value.
Such reforms can be difficult to implement. Consumers often resist paying for a good they are accustomed to receive for free (such as unpriced road space and subsidized parking). There are seldom demonstrators chanting “Raise Our Prices” or “Impose a New Tax,” even in cases where consumers could benefit overall from such changes.
At one time, policies that favor automobile ownership and use may have made economic sense, in order to stimulate development and take advantaged of economies of scale in roadway systems and automobile industries (Economic Development). At that time you would benefit if your neighbors purchased more automobiles and drove them more miles because this reduced the unit costs of car and paved roads. Now that roadway networks and automobile industries are mature there is no longer a justification for investment and pricing policies that encourage driving in most regions, but they are well entrenched, as described later in this chapter.
Because of these many market distortions that favor Automobile Dependency, the optimal level of automobile use is probably significantly lower than what occurs in most North American communities (Lee, 1992). Newman and Kenworthy (1999) find that that beyond an optimal level (about 7,500 kilometers of per capita annual motor vehicle travel overall, although this varies depending on geographic and economic factors), the economic costs of increased vehicle travel outweigh the marginal benefits. Litman (2007) estimates that North American automobile use would probably decline by one-third or more in an optimal transportation market.
This is not to suggest that driving is bad or that it provides no benefits. But it does indicate that in a more efficient market consumers would choose to drive less than they do now and be better off as a result. As an analogy, food is essential for life and therefore provides tremendous benefits. However, this does not mean that more eating is necessarily better, that current diets are optimal, or that society should subsidize all food. At the margin (relative to current consumption) many people would benefit from eating less. If taxes subsidize food, we eat more but have less of things that are taxed, such as jobs, housing and clothes. Food subsidies may be justified for undernourished people, but since over-eating can be as unhealthy as under-eating it is both economically and medically harmful to subsidize all food for everybody.
Similarly, that mobility provides benefits does not necessarily mean that more driving is better, that current levels of driving are optimal, or that driving should be subsidized. Subsidies to automobile travel take resources away from other economic sectors, and increase problems associated with congestion, crash risk and pollution. They also tend to reduce travel optionss and result in inefficient land use patterns that reduce access, and are particularly harmful to people who are transportation disadvantaged.
Conventional planning practices sometimes fail to reflect optimality. For example, most parking standards assume that more parking supply is always better, with generous minimum requirements. Traffic engineers generally consider insufficient convenient parking at a site to represent a design failure, but an oversupply of parking is not considered a problem of similar magnitude.
Transportation Demand Management consists of practical methods for achieving more optimal transportation. To the degree that current automobile travel is excessive and inefficient, TDM is the solution. TDM strategies correct specific market distortions that result in excessive Automobile Dependency, and reduce specific problems that result.
This section describes principles that markets must reflect to maximize efficiency, innovation and consumer benefits.
An efficient market must provide consumers with a variety of options from which they can choose the combination of quantity, quality and price that best suits their needs. Consumers must also have accurate information about their options. Only with viable options can consumer decisions reflect their true preferences. For example, sometimes you may be willing to spend a lot of money for a complete meal at a quality restaurant, but at other times you may prefer to save money by eating at a less expensive restaurant, by ordering just a single dish, or by purchasing food at a store and cooking yourself. Only you, as a consumer, can decide which option best meets your needs in a particular situation.
The value of some types of consumer transportation options is widely recognized. For example, many people argue that competition in vehicle manufacturing, fuel production and distribution, and airline services tends to increase efficiency and service quality in these markets. However, there is less recognition of the importance of the importance of competition between modes. For example, transit service improvements can benefit both motorists and non-motorists if it allows some motorists to shift and therefore reduces congestion and dependency on petroleum producing monopolies (Transit Evaluation). Improving other modes, such as walking, cycling and ridesharing, can have similar benefits, both to people who change modes, and so benefit directly from having diverse options to choose from, and those who benefit indirectly trough reduced congestion and increased market competition.
An efficient transportation market offers a variety of different travel modes and levels of service quality (Evaluating Transportation Options). These may include good Walking and Cycling conditions, Ridesharing services, a variety of Transit Services (which may include express and luxury bus, conventional rail and bus, jitney and shuttles, demand response transit, and shared taxi), intercity rail and buses, Carsharing services, delivery services, and Telework.
Similarly, an economically efficient land use market offers households a range of housing types (apartments, condominiums, townhouses, small-lot single family, and large lot single-family), prices and locations within a community, allowing them to tradeoff attributes such as building type, lot size, floor space, price, access and convenience, and neighborhood amenities. If consumers move to automobile-oriented suburbs for the sake of social amenities such as better public schools, but would be equally happy living in more multi-modal urban neighborhoods if the schools were of equal quality, this reflects a lack of housing options which leverages increased automobile use.
This is not to say that governments must provide transport services regardless of economic viability, or must intervene in real estate markets. But it does indicate that policies which reduce travel and housing options tend to harm consumers, while policies and programs which increase consumers’ transport and housing options tend to increase consumer welfare.
Certain types of transportation improvements tend to conflict. For example, roadways designed to maximize traffic volumes and speeds tend to create barriers to walking and cycling, and generous parking requirements tend to result in low-density development patterns that are unsuited to Walking and Transit transportation. As a result, planning practices that favor automobile travel and increase Automobile Dependency tend to reduce the diversity of transportation options. Improvements to affordable transportation options, such as walking, cycling, ridesharing and public transit, tend to be particularly beneficial for people who have low incomes or limited mobility, since their options are already constrained.
Although consumers have many options when it comes to purchasing a motor vehicle or automotive services, they usually have few options for non-automotive travel, and the alternatives that exist are often poorly integrated. There is seldom a range of service options (transit users seldom have the option of paying extra for a premium quality service, or obtaining a discount by giving up amenities). Ridesharing, jitney and demand response services are not well developed. Walking and cycling conditions are poor in many areas (Evaluating Nonmotorized Transport).
Similarly, although renters and homebuyers often have many options in automobile-dependent suburban house, there are often few options if they want a home in an accessible location with balanced transportation (i.e., in a neighborhood with convenient access to shops and services, good walking and cycling conditions, good transit service, and good connections to other communities), and desirable neighborhood amenities such as good public schools and a high level of public services.
Conventional transportation planning practices tend to focus primarily on automobile transportation, and undervalue other modes. More Comprehensive Transportation Planning is needed to create a more diverse and balanced transportation system. Smart Growth Market Reforms and Location Efficient Development can help improve housing options in accessible locations, allowing households to choose a wider range of homes in multi-modal neighborhoods.
Many TDM strategies increase transport and land use options, as indicated in Table 2. Some TDM strategies remove unnecessary regulations that restrict transportation and land use options (e.g., Regulatory Reform, Parking Management, and Institutional Reform). Others allow non-motorists to receive subsidies comparable to those currently only provided to motorists (e.g., Parking Cash Out and Least Cost Planning). Many TDM strategies increase the number or quality of alternative modes. Some strategies increase the options available to motorists (e.g., HOT Lanes and Distance-Based Pricing). Similarly, some TDM strategies increase land use options (e.g., Location Efficient Development and Transit Oriented Development) Virtually all TDM strategies increase transportation and land use options indirectly by reducing automobile dependency and increasing demand for transportation alternatives.
A few TDM strategies impose restrictions on driving but these tend to be minor overall. In most applications Vehicle Use Restrictions and Carfree Planning only affects a small portion of total driving, and include exemptions for vehicles used by people with disabilities or for commercial purposes.
Table 2 TDM Impacts on Consumer Options
|
Tend to Increase Options |
May Reduce Options |
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Bicycle and Pedestrian Encouragement Campus Transportation Management |
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Competition means that many firms compete for business, and that there are no major restrictions that prevent new firms from entering a market. It tends to make a market efficient by encouraging productivity and innovation. Most economists and policy makers recognize the potential efficiency gains from increased competition within modes, for example, within vehicle manufacturing, fuel production, and airline markets. Competition between modes can also provide benefits. For example, airlines will tend to offer better service and lower prices if they compete for customers with automobile, rail and bus transportation.
Transportation market competition requires minimal restrictions on firms entering transportation markets or introducing innovative transportation services. Although there may be justifications for regulating some transportation services, these can usually be addressed with performance requirements rather than prohibitions on completion.
There is little competition in many transport markets. Roads, ports and airports are natural monopolies, meaning that it is often infeasible for competition to develop. Although there is considerable competition for higher-priced transportation (air, limousine, taxi, car rentals) and housing markets, there is much less competition in lower-priced markets. Most public transit agencies have legal monopolies. Motor carrier and taxi services are regulated. Zoning codes impose many restrictions that reduce competition and innovation in more affordable markets.
Several TDM strategies encourage competition and innovation in transportation and land use markets, as indicated in Table 3. Public transit agencies can innovate and expand their range of services to include Shuttle Services, Ridesharing Services, Carsharing, and Delivery Services. Similarly, innovations such as Location Efficient Development and Transit Oriented Development can lead to greater competition and innovation in land use and housing markets. Most TDM strategies encourage market competition indirectly by reducing the functional monopoly of automobile dependency.
Table 3 TDM Strategies that Tend to Encourage Market Competition
|
Increases Transport Market
Competition |
|
Economic efficiency requires that prices (perceived variable internal costs) equals marginal costs (the resources used to produce a good), unless there is a specific reason for a subsidy (van Essen, 2004; Metschies, 2001 and 2005). Prices provide market signals to insure that resources are devoted to their most valuable possible use. Prices that are either too high or too low reduce market productivity, equity and overall consumer benefits. Inefficient pricing contributes to many current transportation problems.
For example, it would be inefficient for a consumer to take a trip that they value at $2.00 if it has total costs of $5.00 (including vehicle, roadway, parking, crash risk and environmental damage costs). Such trips make society worse off overall. It is also inefficient to force consumers to pay for resources (such as residential parking) that they would not use and do not want. Similarly, it would be inefficient if enough consumers are willing to pay a price premium for a higher quality roadway or transit service that covers all additional costs, but such services are not provided due to market barriers or regulatory restrictions. This represents a lost opportunity for additional consumer benefits. As described by Adam Smith (1776), one of the founders of economic theory,
“When the carriages which pass over a highway or a
bridge, and the lighters which sail upon a navigable canal, pay toll in
proportion to their weight or their tonnage, they pay for the maintenance of
those public works exactly in proportion to the wear and tear which they
occasion of them. It seems scarce possible to invent a more equitable way of
maintaining such works. This tax or toll too, though it is advanced by the
carrier, is finally paid by the consumer, to whom it must always be charged in
the price of the goods. As the expense of carriage, however, is very much
reduced by means of such public works, the goods, notwithstanding the toll come
cheaper to the consumer than the; could otherwise have done; their price not
being so much raised by the toll as it is lowered by the cheapness of the
carriage. The person who finally pays this tax, therefore, gains by the
application more than he loses by the payment of it. His payment is exactly in
proportion to his gain. It is in reality no more than a part of that gain which
he is obliged to give up in order to get the rest. It seems impossible to
imagine a more equitable method of raising a tax.” (Smith, 1776, chp. 5)
Table 4 Selected Principles of Road-Sector
Policy According to Adam Smith (Metschies, 2001)
|
Principle |
Discussion |
|
Principle of expanding financial needs |
The annual (public) expenditures for the road sector must increase in parallel with GNP and with traffic volume. |
|
Principle of self-sustaining infrastructure |
Most expenditures for public works and road infrastructure need not encumber the national budget, but instead can be defrayed by generating their own special revenues |
|
User-pays principle for road maintenance |
Road users pay in accordance with the magnitude of the road damage they themselves cause. |
|
Social principle of crosssubsidization for the poor |
Higher taxation of luxury-article transport by and for the rich, as compared to that of commodities, is an easy way to benefit the poor. |
|
Principle of public enterprise efficiency in new construction of roads |
New roads can only be built where road users want them and are able to pay for them. The financing of new roads and bridges out of money sources other than selffinancing is to be rejected |
|
Principle of privatized road |
Efficient road maintenance can only be expected of those who have a vested interest in it. The legislative framework for public management of road funds is still usually lacking. There are, however, opposing arguments against financing road maintenance out of public funds. |
|
Principle of earmarking of revenue |
Earmarking of road tolls is vitally important, because the miscellaneous financial requirements of governments tend, unfortunately, toward the infinite. |
|
The principle of progressive vehicle taxation |
The taxation of trucks / lorries according to weight, i.e., corresponding to the extent of road damage they cause, is only right and proper as long as it serves the sole purpose of road maintenance. However, such weight-specific taxation, if used for other public financing purposes, encumbers the poor more than the wealthy. |
|
The principle of democratic regional development |