Market Principles

TDM Impacts on Market Efficiency and Equity


TDM Encyclopedia

Victoria Transport Policy Institute


Updated 15 May 2014

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.



Introduction.. 1

Optimality. 2

Market Principles. 9

Consumer Options. 9

Competition.. 12

Efficient Pricing. 13

Economic Neutrality. 18

Efficient Land Use Policies. 22

Justifications for Market Distortions. 24

Summary. 29

Related Chapters. 31

References And Resources For More Information.. 31



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 better off. Consumers’ willingness to pay for a particular type of food (such as organically raised vegetables) 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 amount and type of consumption that provides the greatest overall benefits from available resources. An efficient transportation market results in optimal mobility, that is, the amount and type of travel 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 takes into account 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


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.


$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.


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.



Implications for Transportation and Land Use Planning

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).


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 options 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.



Market Principles

This section describes principles that markets must reflect to maximize efficiency, innovation and consumer benefits.


Consumer Options

General Principle

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.


Implications for Transportation and Land Use Markets

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. Complete Streets policies recognize the importance of accommodating diverse users and uses in roadway design.


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.


Current Transportation and Land Use Market Conditions

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.


Implications for TDM

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

Address Security Concerns

Alternative Work Schedules

Bicycle Improvements

Bike/Transit Integration

Bicycle and Pedestrian Encouragement

Campus Transportation Management

Car-Free Planning

Carsharing/Vehicle Rentals

Compressed Work Week


Guaranteed Ride Home

Location Efficient Development

New Urbanism

Nonmotorized Improvements

Park & Ride

Parking Management

Pedestrian Improvements


Shuttles Buses

Smart Growth

Special Event Management

Street Reclaiming


Tourist Transport Management

Traffic Calming

Transit Improvements

Transit Oriented Development (TOD)

Car-Free Planning

Parking Management

Parking Pricing

Road Pricing

Carbon Taxes

Smart Growth

Vehicle Use Restrictions







General Principle

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.


Implications for Transportation and Land Use Markets

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.


Current Transportation and Land Use Market Conditions

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.


Implications for TDM

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

Increases Land Use Market Competition

Institutional Reforms

Least Cost Planning

Pedestrian Improvements


Shuttles Buses

Regulatory Reform

Transit Improvements

Location Efficient Development

New Urbanism

Smart Growth

Transit Oriented Development (TOD)



Efficient Pricing

General Principle

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 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

In such centralized states as France, the best-kept roads are the national highways needed by the government, while no one takes care of the many little country roads, no matter how economical they may be. Apparently, this also holds true in China and the rest of Asia.

The principle of minimal intervention in country road maintenance

Decentralized maintenance of country roads is always the better choice, even if road-tax revenues are too minimal to have much impact.

The principle of urban administrative autonomy


The demands of economic efficiency require that city streets be paid for by their immediate local beneficiaries – not by drawing on general budget funds. While decentralization does increase the danger of corruption, the consequences remain both tolerable and corrigible.

This table summarizes Adam Smith’s recommendations for efficient roadway finance in the Eighteenth Century.



Implications for Transportation and Land Use Markets

Efficient transportation pricing requires that motorists pay directly for roads, parking, crash risk and environmental impacts (Booz Allen Hamilton, 2005; Litman, 2007). Similarly, efficient pricing requires that utility prices reflect location-related costs. This would tend to increase the costs of lower-density, urban-fringe development.



Current Transportation and Land Use Market Conditions

Transportation tends to be underpriced, in various ways described below (also see Transportation Costs & Benefits).


External Costs

Motor vehicle travel imposes many costs that are not borne directly by users, including congestion imposed on other road users; roads and traffic services funded through general taxes; unpriced parking; roadway land value; uncompensated crash damages; air, water and noise pollution; and external costs associated with resource consumption. A number of studies have estimated these costs for various types of vehicles and travel conditions (Lee, 1995; Delucchi, 1996; FHWA, 1997; Litman, 2006).


There is sometimes confusion as to how to treat costs imposed by a motorist on other motorists, such as traffic congestion and external crash costs. These are internal at the individual level, but internal to motorists as a group. Equity and efficiency require that these be internalized as much as possible at the individual level, to minimize cross-subsidies between motorists (i.e., it is unfair and economically inefficient that a higher-risk driver imposes crash risk on other motorists, or that their insurance costs are subsidized by lower-risk drivers), and to provide accurate price signals (i.e., to provide motorists with an incentive to reduce the congestion and crash risk they impose).


Internal-Fixed Costs

A significant portion of vehicle costs are internal but fixed (i.e., not proportional to vehicle mileage). These include residential parking, vehicle insurance and registration fees. These costs tend to be less efficient and fair than if they were more marginal. These fixed charges cause households that own fewer than average vehicles or drive less than average to cross-subsidize the parking, insurance and road costs of households that own more vehicles and drive more than average.


Figure 1 illustrates the various costs for an average automobile.


Figure 1          Costs of Automobile Use (Transportation Costs)

This figure illustrates the estimated magnitude of various motor vehicle costs.



About a third of automobile costs are external, and a quarter are internal but fixed, as illustrated in Figure 2. As a result, motorists only perceive about half of the total costs imposed by their automobile use when making individual trip decisions. Put another way, motorists only receive a small part of the savings that result when they drive less. Socially optimal transport prices would significantly increase the variable cost of using a motor vehicle, and so gives motorists the savings that result when they reduce their mileage. This results in more efficient and equitable consumer incentives.


Figure 2          Average Distribution of Automobile Costs (Transportation Costs)

Less than half of the total costs of automobile use are internal-variable.



Other Transportation Modes

Automobiles are not the only form of transport that is underpriced. Water and air travel rely on publicly subsidized ports and airports, and public transit operating costs are subsidized. Virtually no motorized mode compensates for all accident or pollution costs, and few pay full rents or property taxes on their facilities. These subsidies result in more transport (both personal and freight) than would occur under less distorted markets. (See Social Benefits of Public Transit for a discussion of possible justifications for underpricing some transit services.)


Although motorists benefit directly from automobile underpricing, they could benefit more from more generic subsidies. For example, a poor college student might appreciate receiving an expensive car as a gift from a rich relative, but might appreciate receiving the cash equivalent even more. Although a car provides benefits in terms of mobility and prestige, a student might prefer to have the money to spend on food, housing, and books, and rely on cycling and bus for transportation. Similarly, motorists may appreciate receiving subsidized parking, but would actually benefit more from the monetary equivalent to spend as they wish.


Implications for TDM

Many TDM strategies correct mispricing by internalizing currently external costs, converting fixed vehicle costs into variable costs, allow consumers more pricing options (for example, by allowing consumers to avoid paying for parking that they don’t want). These changes tend to increase market efficiency and benefit consumers. Many reforms frequently advocated by economists to make transportation pricing more efficient and equitable (e.g., road cost recovery, congestion pricing, parking pricing) are considered TDM strategies. Some TDM programs require subsidies, but these are often justified as being cheaper than current subsidies for roads and parking, or they are justified on equity grounds (i.e., improved transit service to provide basic mobility for non-drivers).


Table 5            More Efficient Transportation Pricing

Internalize Externalities

Fixed Costs to Variable

Improves Pricing Options

Distance-Based Fees

Fuel Tax Increases

Carbon Taxes

Parking Pricing

Road Pricing

Comprehensive Market Reforms


Pay-As-You-Drive Insurance

Parking Cash Out

Institutional Reforms

Location-Efficient Development

Parking Management


These TDM strategies tend to reflect Market Principles and increase transport system efficiency.



Economic Neutrality

General Principle

Economic neutrality requires that public policies treat comparable goods equally, unless there is a specific justification for special treatment. It means that subsidies, taxes or regulations should be applied consistently. Although policies that favor one consumer group or travel mode may sometimes be justified for equity sake (e.g., discounts for lower-income people), to stimulate economic development (e.g., airport subsidies), or to address special needs (e.g., priority for emergency vehicles), broad distortions that favor one good or group over others are economically inefficient and inequitable.


The Case For Economic Neutrality in Transport Planning

Imagine that a teacher favored boys over girls, or tall students over short students. This is not only  unfair, it is also inefficient, because some smart short girls may be discouraged from preparing for higher education, leaving less qualified but taller boys to fill those slots. As a result, the pool of physicians, lawyers and engineers would be less than optimal.


Similarly, it is both unfair and inefficient for decision-makers to arbitrarily favor one mode over others, for example, automobile transport over walking and cycling or public transit, because this would favor some people (those who drive a lot) over others (those who drive little or prefer alternative modes), and because it can result in resources being allocated in ways that are not optimal. Perhaps, out of their personal prejudice, local officials are willing to devote $1,000 worth of public resources (money, municipal employee time, or land devoted to roads and parking facilities) to accommodate an automobile commute trip, but only $100 to accommodate commuting other modes. The result would be a bias in the quality of services available to non-drivers, and to the degree that travelers respond to such favoritism, economically-excessive amounts of automobile travel, and less walking, cycling and public transit travel than is optimal.


There are many possible causes of bias in transportation decision-making. For example, a particular mode may receive extra support because it tends to be used more by influential people (busy professionals, such city councilors and agency administrators). A particular problem may receive extra attention because it is easier to measure (traffic congestion is easier to measure than delay to pedestrians and cyclists). A particular type of transport improvement may be easier to finance because, through accidents of history, it has dedicated funding unavailable to other options. For example, it may be easier to finance road and parking facilities than sidewalk and path improvements or mobility management programs, even if they are more cost effective overall.


Because transport planning decisions are often mutually exclusive (road widening improves vehicle travel but often degrades walking and cycling conditions, and a location that optimizes automobile access is often difficult to reach by other modes), even modest bias can have large total effects. For example, zoning codes that mandate generous parking supply not only create more automobile-oriented, dispersed land use development, it also tends to prevent parking pricing (a basic rule of economics is that increased supply reduces prices), reducing the feasibility of access by other modes.


Below are types of bias common in Conventional Transport Planning. In practice, most of these biases tend to favor mobility over accessibility and automobile travel over other modes.

  • Range of options considered. Investments in alternative modes and motility management strategies are often overlooked.
  • Planning integration. Improvements to accessibility and alternative modes often require planning that is coordinated between different sectors (such as transportation and land use planning) and jurisdictions.
  • Project financing. Dedicated funding often favors a particular mode.
  • Modeling practices. Conventional transport modeling tends to favor motorized travel over other modes and accessibility options, because it overlooks certain impacts, including generated traffic, service quality factors such as convenience and comfort (as opposed to travel speed and price), and impacts on non-motorized travel.
  • Range of impacts considered. Conventional project evaluation tends to overlook many costs that result from increased vehicle travel, and benefits from improved alternatives, such as downstream congestion, vehicle ownership costs, parking costs, accidents, energy consumption, environmental impacts, public fitness and health, and the quality of accessibility for non-drivers.



Implications for Transportation and Land Use Markets

Because governments provide most transportation facilities (roads, sidewalks, ports and airports), control land use (zoning codes, development policies and property taxes), and regulate travel activities and apply taxes, there are many ways public policies can favor some transport activities over others. Even a modest degree of favoritism can “leverage” a significant shift in consumer travel behavior. For example, if employee parking is income tax exempt (an exemption worth about $300 per year for an average employee), employees tend to demand, and employers tend to provide free parking as an employee benefit (a benefit worth about $1,000 a year for an average employee), which typically increases automobile commuting by 15-25%. Over the long run, individual policies can have synergistic effects that result in automobile-dependent transportation systems and land use patterns.


Current Transportation and Land Use Market Conditions

In a variety of ways described below, current transport planning and investment practices tend to favor automobile use over demand management alternatives (Evaluating Nonmotorized Transport).


Tax Policies

Many federal, state and local government tax policies are biased in favor of motor vehicle use. Fuel is exempt from general taxes in many jurisdictions, land devoted to public roads and parking facilities is exempt from rent and taxes, and petroleum producers are given significant tax exemptions and subsidies. Business and income tax policies tend to encourage companies to subsidize automobile parking as an employee benefit. Mileage reimbursement and tax exemption rates are usually higher than marginal vehicle operating costs, so employees perceive financial incentives to maximize their business driving. These practices favor automobile travel (which is relatively space and fuel intensive) over other modes, and favor transportation over other consumer goods.


Transportation Planning Practices

Current transportation planning practices tend to favor road automobile-oriented investments and designs over alternatives. Transportation planning practices often evaluate transportation primarily in terms of vehicle movement, which skews decisions toward automobile improvements at the expense of other forms of access (see Measuring Transport). For example, increased road and parking capacity is often called an “improvement,” although wider roads and larger parking facilities, and increased vehicle traffic volumes and speeds tend to reduce the mobility of pedestrians and cyclists and degrade the local environment. Transportation professionals often focus only on level of service (LOS) for motor vehicles, without having comparable measures for other travel modes.


Biased Transport Planning Language (Measuring Transport)

Many transport planning terms unintentionally favor motor vehicle travel over other forms of access. For example, increased road and parking capacity is often called an “improvement,” although wider roads and larger parking facilities, and the increased traffic volumes and speeds that result, tend to degrade pedestrian and cycling mobility. Calling such changes “improvements” indicates a bias in favor of one mode over others. Objective language uses neutral terms, such as “added capacity,” “additional lanes,” “modifications,” or “changes.”


The terms “traffic” and “trip” often refer only to motor vehicle travel. Short trips, non-motorized trips, travel by children, and non-commute trips are often undercounted or ignored in transport surveys, models, and analysis (Evaluating Nonmotorized Transport). Although automobile and transit trips often begin and end with a pedestrian or cycling link, they are often classified simply as “auto” or “transit” trips.


The term “efficient” is frequently used to mean increased vehicle traffic speeds. This assumes that faster vehicle traffic always increases overall efficiency. This is not necessarily true. High vehicle speeds can reduce total traffic capacity, increase resource consumption, increase costs, reduce transportation options, create less accessible land use patterns, and increase automobile dependency, reducing overall system efficiency.


Transportation professionals often rate the overall quality of the roadway network based on Level of Service (LOS) ratings that evaluate conditions for automobile traffic, but apply no comparable rating for other travel modes. It is important to indicate which users are considered when level of service values are reported.


Biased                          Neutral Terms

Traffic                           Motor vehicle traffic, pedestrian, bike traffic, etc.

Trips                              Motor vehicle trips, person trips, bike trips, etc.

Improve                       Change, modify, expand, widen

Enhance                       Change, increase traffic speeds

Deteriorate                Change, reduce traffic speeds

Upgrade                      Change, expand, widen, replace

Efficient                       Faster, increased vehicle capacity

Level of service         Level of service for…



Biased: Level of service at this intersection is rated “D.” The proposed improvement will cost $100,000. This upgrade will make our transportation system more efficient by enhancing capacity, preventing deterioration of traffic conditions.


Neutral: Level of service at this intersection is rated “D” for motorists and “E” for pedestrians. A right turn channel would cost $100,000. This road widening project will increase motor vehicle traffic speeds and capacity but may reduce safety and convenience to pedestrian travel.



Evaluation of Travel “Demand”

In economics, “demand” refers to the relationship between price and consumption. It is a function. In transportation planning, “demand” usually refers to a point value at zero price, that is, free roads and parking. This essentially asks, “Do motorists want additional capacity if it is free?” Current practices create a self-fulfilling prophecy: roads and parking capacity is increased to satisfy unpriced demand, and demand grows to fill the free roads and parking.


Consideration of Generated Traffic

Transportation planning often ignores the full effects of generated traffic, the additional vehicle travel that results when additional capacity is added to congested road systems (The Rebound Effect). This overstates the congestion reduction benefits of increasing roadway capacity and ignores additional external costs that can result. Transportation investment models that fail to consider generated traffic impacts tend to overvalued roadway capacity expansion and undervalue TDM solutions.


Distorted Funding Practices

Current transportation funding practices favor expenditures on highways over alternative modes, and capital projects over operations and maintenance. Although some U.S. federal transportation accounts are now flexible (available for transit and TDM projects as well as highways), most transportation funds in the U.S. are dedicated to roads, particularly at the state level (many states have constitutional amendments that limit fuel tax expenditures to roadways). Federal highway funding “results in excessive demands for expensive facilities, because to the states, which are nominally responsible for expenditure decisions, federal funds are costless, and state officials are accountable to their voters only for state funds” (Roth, 1996, p. 12). State funds dedicated to roadway programs cause similar distortions at the local level. This “leverages” highway projects when alternatives may be more cost effective overall, and tends to favor capital expenditures (which tends to increase system capacity) at the expense of maintenance and operations (which tends to increase system efficiency) (Lee, 2000). The availability of matching funds from outside a jurisdiction discourages the use of tolls to finance highways and other pricing strategies that are more economically efficient and equitable, but require local money.


Limited Consideration of Impacts

Transportation agencies tend to focus on a limited set of impacts when evaluating options, such as congestion reduction and direct financial expenses to transportation agencies and user. Other benefits and costs are often overlooked. As discussed in the chapter on TDM Evaluation, a more comprehensive analysis tends to give greater justification for TDM solutions than conventional analyses that focus on congestion reduction and ignores additional benefits from demand management.


Implications for TDM

TDM programs can help correct biased public policies and institutional practices that favor roadway investments and automobile travel over alternatives. Table 6 lists TDM strategies that tend to reduce bias in transportation planning and investment practices.


Table 6            TDM Effects on Transportation System Distortions

Tends to Correct Transport Planning Bias

Comprehensive Transportation Market Reforms

Regulatory Reform

Institutional Reforms

Multi-Modal Level-of-Service Indicators

Least Cost Planning

Access Management

Data Collection and Participant Surveys

TDM Programs

Transportation Management Associations (TMA)



Efficient Land Use Policies

General Principle

Efficient land use policies do not favor lower-density, automobile-oriented development over higher-density, multi-modal land use.


Implications for Transportation and Land Use Markets

Land use patterns have significant impacts on transportation options and behavior, so land use market distortions can exacerbate transportation inefficiencies (see Land Use Impacts on Transportation). Policies that favor dispersed, automobile-oriented land use patterns tend to reduce transportation options and increase motor vehicle travel.


Current Transportation and Land Use Market Conditions

Various factors described below tend to favor automobile-dependent, urban periphery development over higher density infill.


Underpricing Location-Related Costs

In most communities, utility rates, taxes and development charges do not accurately reflect location-related costs. The costs of providing most public services tends to increase as destinations become more dispersed (Vickrey, 1994, pp. 350-383; Burchell, et al, 1998), but utility fees and taxes seldom reflect these incremental costs. As a result, residents of older, higher-density urban neighborhoods tend to subsidize residents of newer, suburban housing (Guharhakurta, 1998).


Excessive Parking and Roadway Requirements

Most zoning codes and development standards require generous road and parking capacity. These standards tend to be excessive compared with what is economically optimal (Shoup, 1999). These generous requirements reduce parking prices and encourage lower-density, urban fringe development where land is cheaper (Willson, 1995; Shoup, 1999). Applying a rigid standard regardless of location reduces the feasibility of infill development, encourages more automobile-oriented land use patterns, and reduces housing affordability (Jia and Wachs 1998). The result is a self-fulfilling prophecy: more automobile oriented land use, reduced travel alternatives, leading to increased automobile use (Moore and Throsnes 1994).


Roadway Right-of-Way

By convention, land use for public roads and parking facilities is exempt from rent and taxes. Although road user fees are intended to cover highway construction and maintenance costs, these are not structured to provide the equivalent of rents or property taxes on roadway land. Economic neutrality implies that land used for roads should be priced and taxed at the same rate for competing uses.


Failure to charge for roadway land underprices road transport relative to rail (which pays rent and taxes on right-of-way), and underprices transport relative to other goods, reducing economic efficiency. It results in over-investment in public roads (Roth, 1996; Poole, 1997). Exempting roadway land from property taxes imposes a financial burden on municipal governments. The American Planning Association’s Policy on Transportation Planning (October 1990) states, “Equal tax treatment requires that transportation facilities and services not be exempted from general property and sales taxes that contribute revenues to the general-purpose operation of government.”


Brownfield Development Barriers

Many potential infill sites are considered “brownfields,” that is, they may contain hazardous contaminants in their soil that make them difficult to develop ( In many cases the barriers to private development are far greater than the true risk of harm, leading to more sprawl than would otherwise occur (Hara Associates 2003).


Residential Lending Practices

Residential mortgage lenders usually treat automobile ownership as a financial asset rather than a liability. As a result, lower-income households are encouraged to purchase homes in automobile-dependent suburban location rather than in multi-modal urban locations, even if their combined housing and transport costs are lower in the multi-modal location (see discussion in Location-Efficient Mortgages).


Implications for TDM

Table 7 lists TDM strategies that tend to correct biased policies and practices that result in automobile-oriented land use patterns. These TDM strategies increase consumer options and reduce land use market cross subsidies.


Table 7            TDM Effects on Land Use Distortions

Tends to Correct Land Use Planning Bias

Institutional Reforms

Least Cost Planning

Location Efficient Development

New Urbanism

Smart Growth

Smart Growth Market Reforms

Transit Oriented Development (TOD)



Justifications for Market Distortions

This section considers to what degree transportation market distortions may be justified.


It would not be easy or even appropriate to immediately eliminate all of the transportation market distortions described above. An optimal market is something to work toward, but is difficult to achieve. Market distortions may be partly justified for reasons described below.


Transition Costs

Markets have inertia, reflected as the difference between short- and long-run costs. For example, if you expect fuel prices to be low and make vehicle purchase and home location options based on this assumption, you will be worse off in the short-run, until you can adjust your vehicle and housing purchases. All sorts of market decisions can be suboptimal if market factors (options, prices, regulations) change unexpectedly. These are transition costs. Transition costs can be minimized if policy and price changes are predictable and gradual. This allows consumers to take these factors into account when making long-term decisions. For example, rather than raising taxes suddenly, it is more efficient and fair to raise taxes based on a multi-year schedule.


Consumer and Political Resistance

Implementing efficient pricing and other market reforms can be difficult, because the costs are direct and concentrated, while the benefits tend to be indirect and diffuse. Rational consumers externalize costs and internalize benefits. For example, trucking and automobile associations lobby strongly against fuel and road price increases. The very idea that motor vehicle interests would lobby to correct underpricing is humorous. As a result of these popular and political preferences, there is far more pressure to underprice transportation than to increase prices to economically efficient levels. This suggests that market reforms require public education, concerning the benefits that can result from increased economic efficiency, and appropriate political conditions, such as popular support for innovative solutions to transportation problems.


Transaction Costs

Cost-based user fees have higher transaction costs than lump-sum payments. Both consumers and producers often find it more convenient to fund transportation facilities and services through existing taxes and charges. However, transaction costs are declining due to new management strategies and technologies, such as electronic pricing. It will be increasingly feasible to charge users according to the costs they individually impose.



Motor vehicle underpricing is often justified to make motoring affordable to lower income households. User fees such as road tolls, parking fees and higher fuel taxes are considered regressive. But the equity impacts of such charges actually depend on travel options and how revenues are used. If consumers have good alternatives to driving and revenues benefit lower income households (they replace regressive taxes, fund services that benefit the poor, or provide cash rebates), higher user charges can be neutral or progressive overall. Most of the market distortions described above are overall harmful to disadvantaged people because they reduce travel options for non-drivers and force people who drive less than average to subsidize the costs of those who drive more than average. A more balanced transport system can increase equity. For these reasons, distortions that favor automobile travel are usually not justified to increase equity.


Economic Development (TDM and Economic Development)

During the early years of the automobile era public policies to encourage automobile use may have been justified to take advantage of economies of scale in vehicle and roadway production (you benefited if your neighbors buy cars and drive through lower costs for vehicles and roads). However, there now appear to be diseconomies from increased vehicle use (you benefit overall if your neighbors drive less due to reduced roadway costs, congestion, accident risk and pollution).


Offsetting Transit Subsidies

It could be argued that automobile subsidies are justified to balance public transit subsidies. However, total transit subsidies are small compared with total external costs of automobile use. Although transit subsidies appear large per passenger-mile, they are much smaller per user than automobile subsidies because transit riders tend to travel less per year than motorists. In addition, a significant portion of transit subsidies are justified to provide basic mobility to non-drivers and would therefore only be justified for the small portion of driving by people who are equally disadvantaged (see Social Benefits of Public Transit).



Although these may justify some market distortions, they do not appear to justify the magnitude of transportation market distortions that currently exist. Although it may be impossible to create absolutely perfect markets, appropriate application of TDM strategies can help correct many current transportation and land use market distortions in ways that are cost effective and equitable. The result would be transportation and land use markets that provide greater consumer benefits and economic productivity.



Principles of Efficient Congestion Pricing (Vickrey, 1992)

Here are some of William Vickrey’s thoughts on how to implement efficient congestion pricing for roads and parking.


1. Charges should reflect as closely as possible the marginal social cost of each trip in terms of the impacts on others.

Charges may be set to exceed such costs as a means of obtaining additional revenues for the government at slight excess burden, justified possibly in naive terms as imposing a surcharge tax on this activity comparable to tax surcharges on other activities and purchases. There is no excuse for charges below marginal social cost. If it be urged that such charges in a particular case would be desired on distributional grounds, there will always be more efficient and equitable ways of effecting such redistribution. If efficiency and revenue are both sacrificed, it will seldom if ever be possible to recoup the loss of efficiency elsewhere.


2. Charges should vary smoothly over time.

Only in this way can everyone be given an incentive to shift the time of travel, if only by small amounts, away from the peak. If charges vary discontinuously, excessive incentives are given to rush to get ahead of a jump in the charge, or to lag waiting for a drop in the charge. There is a likelihood of creating mini-peaks just before a scheduled increase or just after a scheduled decrease. Few of those moving at the height of the peak will be willing to make the substantial shift in travel time of an hour or more necessary to obtain a lower charge. It will often be easier and cause less disruption to get 12 drivers to shift the time of their trip by 10 minutes each than to get one person to shift his trip by two hours.


If staggering of working hours were to succeed initially in eliminating peak congestion, in the absence of road pricing it would then fail, as firms seeing that congestion has been abated then drift back to their preferred times and recreate the congestion. Reasonably smooth variation of the prices over time is needed to prevent this from happening.


3. Efficient charges cannot be determined solely by conditions at the time of the individual trip, but must take into account the impact of the trip on other traffic from the time the trip is made until the end of the congestion period.

Example: If queuing conditions are such that flow through a choke point is at capacity from 7am to 10am, a car going through the choke point at 7:10 may encounter a short queue and be delayed by only 5 minutes, but will be responsible for there being one more car delayed in the queue from 7:10 until 10:00, or 2.83 vehicle-hours of delay; conversely, a car going through the choke point at 9:55 may have been delayed by 15 minutes, but will impose only 5 minutes of delay on others. A motorist who starts his trip 30 minutes earlier may reduce his own waiting time from say 15 minutes to five minutes, but unless he gets entirely free of the queue, he will increase total waiting time by 30 vehicle-minutes and the aggregate waiting time of others by 40 vehicle-minutes. If charges were calculated in terms of his own delay, the incentive would be perverse. Efficient congestion charges would eliminate the bulk of the queuing delay without any decrease in peak flow and possibly an increase in shoulder flow. Marginal social cost is measured by the expected time from the passage of the particular car through the choke point until the next time at which the queue drops to zero.


Where hypercongestion exists, such that traffic density is above the point of maximum flow, which is generally the case whenever speeds are below about 60 percent of the low-density speed, impacts may be even more severe. Injecting an additional car into the area decreases the total flow, decreasing the rate at which cars succeed in getting off the congested street network, increasing the density and further decreasing flow in an exponential manner. I have estimated that, under the 1983 conditions in midtown Manhattan, an additional 3-mile trip at 11 a.m. can account for between 100 and 300 additional vehicle-hours of delay over the remainder of the day. By keeping the accumulation of traffic density below the point at which flow begins to decrease, efficient road pricing can actually increase peak hour flows, and in many cases increase total daily flows, while increasing speeds, reducing air pollution, and yielding needed public revenues.


4. Efficiency can be enhanced, for a given level of data collection, by charging on the basis of the trip segment from one observation point to the next, rather than by merely the passage of an observation point.

This can be handled by dividing the congested area into zones of suitable size, large enough so that checkpoints can be installed at every crossing of a zone boundary by a thoroughfare. In processing, each entry of a zone by a vehicle can be matched with its exit and a charge assessed according to the indicated trajectory, rather than separately for merely passing a control point.


5. There is much to be said for charging on an ex post, strict liability basis in terms of the actual impact that a trip can be calculated to have had on the traffic as actually experienced, over the balance of the day, rather than according to some schedule fixed in advance.

A present schedule will be unable to allow for increased congestion caused by weather, sporting events and the like, whereas motorists would have the opportunity to inform themselves of these situations and adjust their trips accordingly. In the case of adventitious events such as fires, accidents and the like, one could perhaps allow a grace period of 15 or 30 minutes from the time the occurrence has been broadcast before increased charges become effective, to avoid unduly charging motorists who would have had no opportunity to alter their plans. The question is whether motorist expectations can be relied upon to make better estimates of impending conditions than can be represented to them in schedules and broadcasts. The problem is that where congestion threatens, traffic conditions seem often to vary very widely from day to day even when there is no broadly recognizable cause for the variation.


6. All vehicles should be charged without exception, including trucks, doctors' cars, press cars, and cars of public officials and diplomats, among others.

Even where these charges are borne by third parties, it is useful to maintain the integrity of the market pricing principle and avoid disputes as to qualification for exemption. Public vehicles such as police cars and fire trucks should also be charged, even if this is only an accounting transfer, in order to give a true picture of the cost of these operations and provide an incentive for performing their functions more efficiently, and possibly induce a better budgeting of public funds with due regard for true costs. One could even argue in principle for the application of surcharges where sirens or other priority signals are used, though many would consider this to be carrying principle too far.


7. Taxicabs present a special problem of ascertaining the charge at the time of incurrence, so that it can be charged to the customer.

Where other vehicles are being billed monthly, on a segment by segment basis, it may nevertheless be possible to adopt for taxicabs a special regime in which they are charge on a modified point basis. The beam emitted by beacons or scanners can be modulated to indicated a level of charge per mile to be added to the meter charge until the next checkpoint is encountered, or until a set mileage increment has been run up, the latter to avoid excessive charges for portions of trips outside the zoned area. While not as accurate as the segment charging method, it should be sufficiently accurate to serve the purpose so that the cost of a more accurate system might not be justified.


8. Curb parking, where permitted at all, should be charged on the basis of clearing the market.

In principle the price should be made to reflect as closely as possible the marginal social cost of the occupancy of a space in terms of the cost to other would-be parkers of added difficulty in finding a space, or of having to resort to other modes. In practice, this could be approximated by a rule saying that if, over a suitable number of weeks, fewer than, say 5% of the spaces are typically vacant during a particular time slot, the charge should be increased, and if vacancies are consistently more than, say 20%, the charge should be reduced, or eventually eliminated. Charges may appropriately be made to vary with the size of the vehicle.


The coin-operated parking meter controlling a single space is an inappropriate device for collecting such charges. Existing meters operate at only a single rate when specified to be on, and adjusting the rate to adapt to changing conditions is expensive. Collecting and auditing the proceeds are expensive, and theft and vandalism are often problems.


9. One simple and inexpensive method of collection would be by means of parking cards.

Parking cards can be sold in convenient denominations through service stations, or along with lottery tickets, or by mail. Cards would be imprinted prior to use with the license number of the vehicle with which they are to be used. One or more of these cards having a total value equal to the anticipated charge would then be punched or mutilated by the user to specify the time at which parking begins, and displayed on the vehicle. The time paid for would be determined by comparing the value of cards displayed to a schedule posted at suitable intervals.


The main problems are the sophistication required of the driver unless the schedule of charges is simplified to the point of failing to obtain the most efficient use of the space, and the longer time it would take the wardens to ascertain whether or not a car is in violation, as compared to merely observing the flag on a mechanical meter. On the other hand, capital, maintenance, collection and auditing costs should be much lower than for the mechanical meter. Charges can be adjusted from time to reflect current circumstances by merely changing the posted schedules. Some difficulty may be encountered in getting habitual users to adjust promptly to comply with a new schedule.


10. Another method would use parking ticket vending machines.

Vending machines would be set up at convenient intervals where a button can be pressed to indicate the class of vehicle, and money inserted until a display indicating the time up to which parking has been paid for reaches a satisfactory value. Especially where the appropriate level of charges would involve an inconvenient number of coins, payment can be by inserting a credit card or a stored value card and using a button until the desired time limit has been reached. Pressing another button then causes a ticket to be issued showing the type of vehicle and expiration time, and possibly the serial number of the card used, which might include the license plate number of the vehicle with which it is to be used. This ticket would then be displayed on the vehicle. The data on the ticket can be indicated in a large-scale coded form that can be checked by the warden from a moderate distance, expediting the checking process.


11. Delivery vehicles and other vehicles making frequent short stops need special treatment, such as by using on-vehicle meters.

Delivery and similar vehicles could be provided with a meter capable of being set to run at varying rates that would be displayed for checking by enforcement agents. The meter would be periodically reset much like a postage meter. Double parking or parking in space subject to restrictions could be charged for at a suitably high rate rather than being erratically penalized or tolerated. It is ridiculous to see trucks double-parked just beyond bus stops when parking illegally in the bus stop would cause much less of an impediment to bus operations. Such charges would provide incentives not only for shifting deliveries to off-peak hours, but for shortening the time traffic is obstructed by employing additional helpers to speed the pick up and delivery operations.


12. Political interference and bureaucratic bungling can spoil the game.

Unfortunately, experience with the pricing of public services is not such as to give confidence that in practice a close approach to an efficient optimum can be achieved. In many instances, efficiency requires a substantial disruption of the patterns of activity of many, although especially in the case of persistent queuing and hypercongested networks the change may not be as great as many fear. Of perhaps greater political impact is the fact that, in many cases, individuals will be asked to pay fairly high market-clearing prices for what they have been getting at no direct money cost, though in many cases at a very high cost in terms of loss of time. It is an unfortunate fact of political life that those who expect to be injured by a change feel the threat very vividly and make a correspondingly great amount of political noise, whereas the potential beneficiaries are often not so vividly aware of the goodies that await them and thus tend to throw relatively less weight into the political balance.




Transportation and land use markets that reflect the principles of options competition, efficient pricing, and economic neutrality tend to allocate resources efficiently and equitably. Current markets violate these principles in numerous ways, and many TDM strategies can help increase economic efficiency and equity, as summarized in Table 8. 


Table 8            Market Principles – Implications for TDM

Market Requirements

Current Transport Markets

Implications for TDM

Options. Consumers need viable transportation and location options, and information about those options.

Consumers often have few viable alternatives to owning and driving an automobile, and living in automobile-dependent communities.

Many TDM strategies improve consumer travel options.

Competition. Producers must face competition to encourage innovation and efficient pricing.

Most roads and public transit services are provided as public monopolies. There is often little competition or incentive for innovation.

Some TDM strategies directly encourage competition and innovation, while others encourage it indirectly by increasing demand for alternative modes.

Cost-based pricing. Prices should reflect costs as much as possible, unless a subsidy is specifically justified.

Transportation in general, and driving in particular, is significantly underpriced. Many costs are either fixed or external.

Many TDM strategies result in more efficient transportation and land use pricing.

Economic neutrality. Public policies (laws, taxes, subsidies, and investment policies) should apply equally to comparable goods and users.

Tax policies, regulations and planning practices tend to favor automobile transport over demand management alternatives.

Some TDM strategies help correct existing biases in transportation planning and investment practices.

Land Use. Land use policies should not favor automobile oriented development.

Zoning laws, development practices and utility pricing tend to encourage lower-density, automobile-dependent land use patterns.

Some TDM strategies correct existing land use planning biases. TDM tends to encourage more efficient land use by discouraging automobile dependency.

Current transportation systems often violate market principles. Many TDM strategies help correct these distortions, increasing efficiency and equity.



Although individually these market distortions may appear modest and justified, their impacts are cumulative, resulting in a significant increase in motor vehicle travel and automobile dependency. Such policies lead to economically excessive levels of automobile dependency. Current levels of automobile use do not necessarily reflect true consumer preferences. In a more neutral and efficient market, consumers would drive significantly less than they do now, and be better off overall as a result. TDM strategies can help achieve more optimal transportation and land use patterns.


Many of these distortions are well established in the economy, to the point that they are as invisible to most consumers as water is to a fish. Free parking, unpriced roads and dedicated road funding are often considered “normal,” and efforts to implement cost-based pricing and neutral planning practices are criticized as unfair and punitive to motorists.


Creating more efficient markets can be difficult. Consumers usually ask, “What’s in it for me?,” focusing on direct, short-term impacts. It may be difficult to generate support for policy reforms simply on the basis of supposed economic efficiency gains. However, there often are opportunities to build support by identifying multiple benefits. For example, road and parking pricing reforms may be difficult to justify based on just one planning objective, such as roadway cost savings, but may gain political support by promoting their full economic, social and environmental benefits.


Because market distortions tend to increase automobile use, current travel patterns should not determine future transport investments. For example, just because 90% of trips are currently made by automobile does not mean that 90% of transport investments should be devoted to automobile-oriented improvements. In a more efficient market, automobile travel would probably decline significantly and use of alternative modes would significantly increase.


Reforms that correct these market distortions appear to be highly justified. Most economists would probably agree that improved consumer options, efficient pricing, greater competition and more neutral public policy could make transportation markets significantly more efficient and equitable. There may be less agreement as to the value of second-best responses, such as transit subsides and vehicle use restrictions, but these are justified to some degree if direct market reforms cannot be implemented.


Virtually all of these market reforms are considered Transportation Demand Management strategies. Market Principles can help guide TDM planning by identifying policies and programs that provide the greatest overall benefits. This analysis suggests it is possible for TDM strategies to achieve a combination economic, social and environmental objectives by correcting unjustified market distortions (Win-Win Transportation Solutions).


Wit and Humor

An optimist thinks that this is the best possible world. A pessimist fears that this is true.



Related Chapters

For more information on the concepts and techniques discussed in this chapter see TDM Planning, Why TDM?, Measuring Transportation, Evaluating TDM, Comprehensive Transportation Planning, Pricing Evaluation, Land Use Policy Reforms, Evaluating Transportation Options and Win-Win Transportation Solutions.



References And Resources For More Information


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This Encyclopedia is produced by the Victoria Transport Policy Institute to help improve understanding of Transportation Demand Management. It is an ongoing project. Please send us your comments and suggestions for improvement.




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