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Chris Jensen-Butler
Birgitte Sloth Morten Marott Larsen
Bjarne Madsen Otto Anker Nielsen
Editors

Road Pricing,
the Economy
and the Environment

123
Professor Chris Jensen-Butler

Professor Birgitte Sloth Bjarne Madsen

Department of Business and Economics Centre for Regional
University of Southern Denmark and Tourism Research
Campusvej 55 Stenbrudsvej 55
DK-5230 Odense DK-3730 Nex, Bornholm
Denmark Denmark
bsl@sam.sdu.dk bm@crt.dk

Morten Marott Larsen Professor Otto Anker Nielsen

Danish Institute Centre for Trafc and Transport
of Governmental Research Technical University of Denmark
Nyropsgade 37 Building 115, Ground Floor, Ofce 010
DK-1602 Copenhagen V. Bygningstorvet
Denmark DK-2800 Lyngby
ml@akf.dk Denmark
oan@ctt.dtu.dk

ISBN 978-3-540-77149-4 e-ISBN 978-3-540-77150-0

DOI 10.1007/978-3-540-77150-0

Advances in Spatial Science ISSN 1430-9602

Library of Congress Control Number: 2007942884

2008 Springer-Verlag Berlin Heidelberg

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In Memory of Professor Chris Jensen-Butler

A main editor of this book was Professor Chris Jensen-Butler, School of

Economics and Finance at the University of St. Andrews, Scotland. In March 2006
just before finalising the editorial work of the book it was discovered that Chris
had cancer and sadly died on 17 May 2006.
Chris was born on the 5 June 1945 in Derby, England. He was the son of
Florence and Bill Butler. Chris attended the University of Durham, where he
graduated in 1968 with a PhD in Economic Geography.
In 1969, he moved to Denmark and was appointed Lecturer and later
Associate Professor in the Department of Geography, University of Aarhus. In the
late 1980s, he was the driving force behind the creation of the Institute of
Mathematical Planning at the University of Aarhus.
Chris returned to the UK in 1995 and was appointed Professor in the
Department of Geography at the University of St. Andrews in Scotland.
Subsequently, he moved to the Department of Economics and in 1998 was
appointed Head of School. As an avid traveller in the early part of his career, Chris
firmly believed that a rolling stone gathers no moss.
In 2000, Chris returned to Denmark for a brief period to take up a
Professorship at the University of Copenhagen, Department of Geography. He
returned to St. Andrews a year later as Departmental Chairman in the Department
of Economics. In 2004, Chris was appointed Head of School in the newly-
constituted School of Economics and Finance. He continued in this role until his
death, leading the School to excellence in research and teaching.
Throughout his active professional life, Chris had special relationships with
Denmark and Portugal. In addition to his association with researchers in Denmark,
he also had close research collaboration with the Universities of Lisbon and
Aveiro.
Chris participated actively in the Centre for Transport Research on Environ-
mental Impacts and Policy (TRIP). In particular, he was involved in research
projects on the modelling of regional economic impacts of road pricing and on
teleworking and transport.
Editorial work for this book was part of his association with the centre. In
many ways, the book reflects Chris life, his approach to life, the way he worked
and the kind and noble way he interacted with colleagues and friends.
On the one hand, Chris had his own research interests and his contributions to
the book demonstrate important new insights. First, Chris had special interest in the
research and modelling of regional development, particularly the interaction
between the regional economy and transport activities. One of his final contribu-
vi Friends and colleagues

tions to this field of research is Chapter 12 of the book, co-authored with Jacob
Kronback, Steen Leleur and Bjarne Madsen, on a systems approach to modelling
regional economic effects of road pricing. The model system is very general and
represents his ambition to understand and describe the regional and local economy,
where distance plays an important role. Specifically, the article presents a loosely-
coupled two-sector model, for transport and agriculture, where a basic regional
model is combined with regional sector models for the two sectors. Vertically, the
model system includes international, national as well as regional and local levels.
The article presents an application of the regional impacts of road pricing in
Denmark using the model system.
Second, the book includes an article, jointly written with Lasse Mller Jensen
and Arne Hole Riis, studying the relationships between teleworking and transport.
The article demonstrates Chris vivid interest in the role of new technology and its
importance for regional development, especially the potential for interaction with
others. In this case, the potential for home working while remaining professionally
engaged is examined both from the perspective of peripheral areas and with respect
to transport activity. The article is a good example of Chris research in this field.
Chris acknowledged the potential of new technologies, but at the same time he was
critical and did not believe in easy solutions. Although teleworking seems to have
enormous potential, the impacts are in fact shown to be very limited. Even though
teleworking has a role in peripheral areas, the positive impacts seem to be
concentrated in urban areas. Chris was eager to find the true potential of new
technology and not just headlines for a newspaper.
On the other hand, this book also reflects Chris skills as an advisor, a mentor,
a colleague and a friend, inspiring them to improve the results of their research
activities. Not only as a researcher, but also as a native-speaking colleague, he
made a major contribution to this book, giving good advice and corrections to the
manuscript. As a researcher, friend and mentor, Chris will be remembered and
greatly missed.

Friends and colleagues

Table of Contents

In Memory of Professor Chris Jensen-Butler ...................................................v

1. Introduction ..................................................................................................1
Birgitte Sloth

2. Road Pricing in Europe A Review of Research and Practice ................5

Esko Niskanen and Chris Nash
2.1 Introduction.............................................................................................5
2.2 The Current Situation..............................................................................6
2.2.1 Background .................................................................................6
2.2.2 Current Pricing Policies at National Level..................................7
2.2.3 EU Pricing Policy........................................................................8
2.2.4 The Need for Pricing Policy Reform...........................................9
2.3 Key Issues, Concepts and Approaches..................................................10
2.3.1 The Goals of Road Pricing ........................................................10
2.3.2 Theoretical Approaches to Road Pricing...................................11
2.3.3 Practical Approaches and Instruments ......................................12
2.4 Road Pricing in Practice in Urban Transport ........................................14
2.4.1 Current Schemes in Urban Transport Pricing............................14
2.4.2 Barriers on Urban Road Pricing ................................................15
2.4.3 The Next Steps in Urban Road Pricing .....................................18
2.5 Road Pricing in Practice in Interurban Transport..................................19
2.5.1 Current Schemes in Interurban Transport .................................19
2.5.2 Barriers in Interurban Road Pricing ..........................................21
2.5.3 The Next Steps in Interurban Road Pricing...............................22
2.6 Conclusions...........................................................................................22
2.6.1 Lessons from Research..............................................................22
2.6.2 Lessons from Practical Experience: What Next? ......................24

3. Road Pricing: Consequences for Traffic, Congestion and Location......29

Lars-Gran Mattsson
3.1 Introduction...........................................................................................29
3.2 Application of a Zone-Based Road Pricing System to Stockholm........31
3.2.1 Scenarios ...................................................................................31
3.2.2 Modelling Approach .................................................................32
3.2.3 Transport Effects .......................................................................33
3.3 Application of a Distance-Based Road Pricing System to Stockholm ..37
viii Table of Contents

3.3.1 Scenarios ...................................................................................37

3.3.2 Modelling Approach .................................................................38
3.3.3 Transport Effects .......................................................................38
3.4 Application of Optimal Congestion Pricing to a Generic City..............40
3.4.1 Modelling Approach .................................................................40
3.4.2 Scenarios ...................................................................................42
3.4.3 Transport and Location Effects .................................................43
3.5 Discussion and Conclusions..................................................................45

4. Implementation Paths for Marginal Cost-Based Pricing in Urban

Transport: Theoretical Considerations and Case Study Results ...........49
Erik T. Verhoef, C. Robin Lindsey, Esko Niskanen, Andr de Palma,
Paavo Moilanen, Stef Proost and Arild Vold
4.1 Introduction...........................................................................................50
4.2 Implementation Paths: Motivation and Theory.....................................50
4.2.1 Barriers......................................................................................51
4.2.2 Constraints on Pricing ...............................................................53
4.2.3 Correspondence Between Barriers and Constraints ..................54
4.3 Formulating Implementation Paths .......................................................56
4.4 Description of the MC-ICAM Urban Case Studies...............................58
4.4.1 The Paris Case Study.................................................................58
4.4.2 The Brussels Case Study ...........................................................60
4.4.3 The Helsinki Case Study ...........................................................61
4.4.4 The Greater Oslo Case Study ....................................................61
4.4.5 Assessment of the Case Studies ................................................61
4.5 Implementation Paths in the Case Studies ............................................62
4.5.1 Paris...........................................................................................65
4.5.2 Brussels .....................................................................................65
4.5.3 Helsinki .....................................................................................66
4.5.4 Greater Oslo ..............................................................................67
4.5.5 Role of Barriers and Constraints in the Case Study
Implementation Paths................................................................68
4.6 Case Study Findings..............................................................................68
4.6.1 Main Results..............................................................................68
4.6.2 Some Specific Issues.................................................................73
4.7 Concluding Remarks.............................................................................75
4.7.1 Summary ...................................................................................75
4.7.2 Theoretical vs. Practical Approaches to the IPs ........................76
4.7.3 Questions of Priority and Timing..............................................76
4.7.4 Other Limitations of the Case Studies.......................................77

5. The London Congestion Charging Scheme: The Evidence ....................79

John Peirson and Roger Vickerman
5.1 Introduction...........................................................................................79
5.2 Background to the LCCS ......................................................................79
 Table of Contents ix

5.3 The Working of the LCCS ....................................................................82

5.4 Theory of Area Pricing..........................................................................83
5.5 Evidence on LCCS................................................................................84
5.6 Interpretation of the Evidence ...............................................................85
5.7 Extension of LCCS Area.......................................................................87
5.8 Relevance to Other Urban Road Pricing Schemes ................................87
5.9 Conclusions...........................................................................................88

6. The AKTA Road Pricing Experiment in Copenhagen.............................93

Otto Anker Nielsen and Majken Vildrik Srensen
6.1 Introduction...........................................................................................94
6.2 Design of the Experiment......................................................................94
6.2.1 Survey Setup .............................................................................95
6.2.2 Pricing Schemes ........................................................................96
6.3 Practical Issues ......................................................................................97
6.3.1 Problems with the GPS Technology .........................................98
6.3.2 Adding a Third Round...............................................................99
6.4 General Results ...................................................................................100
6.4.1 Socioeconomic Variables for AKTA Participants...................100
6.4.2 Experience and Attitudes Towards Road Pricing....................101
6.4.3 The General Population Survey of Attitudes Towards
Road Pricing............................................................................103
6.5 Behavioural Changes and AKTA: The Main Results .........................105
6.6 Discussion and Conclusions................................................................107
6.6.1 GPS Technology .....................................................................107
6.6.2 The Main Experimental Design ..............................................107
6.6.3 Changes in Behaviour and Evaluation of Different
Pricing Schemes ......................................................................108
6.6.4 Attitudes Towards Road Pricing .............................................108

7. Experience with Measuring Equity and Efficiency:

A Case from Oslo......................................................................................111
Farideh Ramjerdi, Knut stmoe and Harald Minken
7.1 Introduction.........................................................................................111
7.2 Equity Measures..................................................................................113
7.2.1 Properties of Equity Measures ................................................114
7.2.2 Some Inequality Measures ......................................................115
7.3 Evaluation of Alternative Packages of Instruments for Oslo ..............117
7.4 A Sensitivity Analysis of MCF ...........................................................122
7.5 An Evaluation of the Equity Implications of an Optimal
Package ...............................................................................................123
7.6 Some Conclusions...............................................................................129

8. Transport Costs in a Multiregional Equilibrium Job Search Model...133

Morten Marott Larsen, Ninette Pilegaard and Jos van Ommeren
8.1 Introduction.........................................................................................133
x Table of Contents

8.2 The Basic Model .................................................................................136

8.2.1 The Matching Model...............................................................136
8.2.2 Job Destruction........................................................................137
8.2.3 Equilibrium Employment and Unemployment........................137
8.2.4 Job Creation ............................................................................138
8.2.5 Workers...................................................................................138
8.2.6 The Spatial Wage Equation.....................................................138
8.2.7 Reservation Commuting Costs................................................139
8.3 Simulations with the Fundamental Model...........................................140
8.4 Theoretical Extensions ........................................................................141
8.4.1 Road Pricing and Regional Distributional Effects ..................144
8.4.2 The Case of Zealand................................................................154
8.5 Conclusion ..........................................................................................164

9. Evaluation of the Introduction of Road Pricing Using

a Computable General Equilibrium Model ...........................................167
Knud J. Munk
9.1 Introduction.........................................................................................167
9.2 The Theoretical Model........................................................................168
9.3 Application of the Theory of Public Economics to the Taxation
of Transport and Investment in Transport Infrastructure ....................170
9.3.1 Taking into Account that Leisure Travel is Complementary
to Leisure.................................................................................171
9.3.2 Taking into Account that Transport is Associated with
Externalities.............................................................................172
9.3.3 Taking into Account that Leisure Travel is Predominately
Consumed by Households with a Relatively High Income .....172
9.3.4 Reasons for Taxing Transport Higher than Other Goods........173
9.3.5 The Optimal Size of the Transport Infrastructure ...................173
9.3.6 The Effect of the Introduction of Road Pricing on the
Optimal Taxation of Transport and the Optimal Provision
of Transport Infrastructure ......................................................173
9.3.7 The Introduction of Road Pricing will be Associated with
a Double Dividend ..................................................................174
9.4 The Parameterised Model ...................................................................175
9.4.1 Specification of Functional Forms for Free Road Capacity
and Environmental Externalities .............................................175
9.4.2 Specification of Household Preferences..................................176
9.4.3 Real Income and Social Welfare .............................................177
9.5 The Specification of the Parameterised Model ...................................178
9.6 Presentation and Interpretation of Simulation Results ........................180
9.6.1 Consequence Analysis.............................................................180
9.6.2 Project Evaluation ...................................................................183
9.6.3 Optimality Analysis.................................................................184
9.7 Conclusion ..........................................................................................188
 Table of Contents xi

10. Efficiency and Equity Considerations in Road Pricing.........................193

Harald Minken and Farideh Ramjerdi
10.1 Introduction ......................................................................................193
10.2 Aspects of Equity..............................................................................195
10.3 Indicators of Equity ..........................................................................197
10.4 Equity, Efficiency and Modelling.....................................................201
10.5 Optimal Road Pricing Subject to Equity Constraints........................203
10.6 Solving the Optimisation Problem....................................................204
10.7 Conclusions ......................................................................................204

11. Modelling the Economy, Transport and Environment Triangle,

with an Application to Dutch Maglev Projects ......................................207
Jan Oosterhaven and J. Paul Elhorst
11.1 Introduction ......................................................................................207
11.2 The Different Nature of the Three Types of Interaction ...................208
11.3 Modelling Environmental Impacts ...................................................210
11.4 Modelling Transport-Economy Interactions .....................................211
11.5 An Application of Dutch Maglev Proposals .....................................214
11.5.1 Introduction ........................................................................214
11.5.2 Modelling the Interaction Between the Economy and
the Transport System..........................................................217
11.5.3 A Welfare Evaluation of External Effects ..........................221
11.6 Conclusion ........................................................................................223

12. A Systems Approach to Modelling the Regional Economic Effects

of Road Pricing .........................................................................................229
Bjarne Madsen, Chris Jensen-Butler, Jacob Kronbak and Steen Leleur
12.1 Introduction ......................................................................................229
12.2 A Systems Approach to Regional and Sub-Regional Economic
Modelling..........................................................................................232
12.2.1 Data and Accounting Principles .........................................232
12.2.2 Modelling Principles ..........................................................232
12.2.3 Optimal Model Structure....................................................235
12.2.4 A Loosely Coupled Model for Transport and Agriculture .235
12.3 The Linking Procedures....................................................................237
12.3.1 Linking the Models Within the Transport Sector ...............237
12.3.2 Linking the Transport and Regional Economic Models .....240
12.4 LINE: the Full Model, a Graphical Presentation ..............................242
12.4.1 The Dimensions of LINE ...................................................245
12.5 Road Pricing and Modelling its Impacts...........................................247
12.5.1 Road Pricing .......................................................................247
12.6 Results from the Danish Road Pricing Toll Study ............................247
12.6.1 Changes in Transport Costs................................................248
12.6.2 Changes in Commodity Prices and Disposable Incomes....251
12.6.3 Changes in Demand, Production and Income.....................253
12.6.4 Changes in Employment and Income .................................253
xii Table of Contents

12.6.5Recycling the Revenue from Road Pricing:

a Balanced Budget .............................................................256
12.7 Limitations of the Model and Future Development Strategies .........259
12.8 Conclusion ........................................................................................260

13. External Effects and Road Charging......................................................267

Jeppe Rich and Otto Anker Nielsen
13.1 Introduction ......................................................................................267
13.2 External Effects: Background ...........................................................268
13.3 Demand Effect from Road Charging ................................................270
13.3.1 Charging and Demand: Experience from London,
Stockholm and Copenhagen ...............................................270
13.4 Internalisation of External Effects Through Road Charging ............272
13.4.1 Road Safety ........................................................................272
13.4.2 Traffic Noise.......................................................................273
13.4.3 Emission .............................................................................274
13.5 Summary and Conclusions ...............................................................274

14. Assessing the Impacts of Traffic Air Pollution on Human Exposure

and Health.................................................................................................277
Ole Hertel, Steen Solvang Jensen, Martin Hvidberg, Matthias Ketzel,
Ruwim Berkowicz, Finn Palmgren, Peter Whlin, Marianne Glasius,
Steffen Loft, Peter Vinzents, Ole Raaschou-Nielsen, Mette Srensen
and Helle Bak
14.1 Introduction ......................................................................................277
14.2 Air Pollution in Urban Areas ............................................................278
14.2.1 Urban Background and Street Pollution .............................279
14.3 Air Pollution Exposure Assessment..................................................280
14.4 Direct Methods for Exposure Assessment ........................................280
14.5 Indirect Methods for Exposure Assessment......................................281
14.5.1 Monitoring Networks .........................................................281
14.5.2 Application of Models for Exposure Assessment...............282
14.5.3 Modelling Long Range Transport of Pollution...................282
14.5.4 Modelling Pollution in the Urban Background...................284
14.5.5 Modelling Urban Street Pollution.......................................285
14.5.6 Modelling Nitrogen Oxide Chemistry in Street and
Urban Background..............................................................285
14.5.7 Determination of Emissions and Emission Factors ............286
14.6 Particle Pollution ..............................................................................286
14.6.1 Source of Traffic Particles and Modelling..........................287
14.6.2 Other Particle Sources ........................................................289
14.7 Examples of Exposure Assessment in Danish Studies .....................290
14.7.1 Exposure of Bus Drivers and Postmen in Copenhagen ......290
14.7.2 Exposure of Danish Children to Traffic Air Pollution........292
14.7.3 Personal Monitoring of Air Pollution Exposure in
Copenhagen ........................................................................292
 Table of Contents xiii

14.7.4Using GIS in Street Pollution Modelling for Exposure

Assessment .........................................................................293
14.8 Assessment of Health Effects of Air Pollution Exposure .................296
14.9 Perspectives ......................................................................................297

15. Car Use Habits: An Obstacle to the Use of Public Transportation?....301

Berit Mller and John Thgersen
15.1 Introduction ......................................................................................301
15.2 Method..............................................................................................304
15.3 Data...................................................................................................304
15.4 Results ..............................................................................................307
15.5 Summary and Implications ...............................................................308

16. Road Pricing in Denmark User Attitudes and User Reactions..........315

Mai-Britt Herslund
16.1 Introduction ......................................................................................315
16.2 User Studies of the FORTRIN project..............................................316
16.2.1 Pricing Strategy ..................................................................316
16.2.2 Test Population...................................................................317
16.2.3 Focus-Group Meetings .......................................................317
16.2.4 The Study by Questionnaires..............................................319
16.2.5 Trip Logs ............................................................................320
16.2.6 Conclusions of the FORTRIN Study..................................320
16.3 AKTA the Road Pricing Study of Copenhagen .............................321
16.3.1 Design of the Study ............................................................321
16.3.2 Different User Studies ........................................................321
16.3.3 Results from Telephone Interviews ....................................322
16.3.4 Pricing Schemes .................................................................324
16.3.5 Focus Groups......................................................................326
16.3.6 Key Results from Questionnaires .......................................327
16.4 Overall Conclusions of the Two User Studies ..................................329

17. A Cost-Minimisation Principle of Adaptation of Private Car Use in

Response to Road Pricing Schemes.........................................................331
Peter Loukopoulos, Tommy Grling, Cecilia Jakobsson and Satoshi Fujii
17.1 Introduction ......................................................................................331
17.2 Market-Based Travel Demand Management (TDM) Measures .......332
17.3 Classification of Travel Demand Management (TDM) Measures....333
17.3.1 Coerciveness.......................................................................334
17.3.2 Tow-Down vs. Bottom-Up Processes.................................335
17.3.3 Time Scale..........................................................................335
17.3.4 Spatial Scale .......................................................................336
17.3.5 Market-Based vs. Regulatory Mechanisms ........................336
17.3.6 Impacting Latent vs. Manifest Travel Demand ..................337
17.4 Theoretical Framework.....................................................................338
17.5 Implications for the Effectiveness of TDM Measures ......................342
xiv Table of Contents

17.6 Summary and Discussion..................................................................343

18. Car Users Trade-Offs Between Time, Trip Length, Cost and Road
Pricing in Behavioural Models ................................................................351
Otto Anker Nielsen and Goran Vuk
18.1 Introduction ......................................................................................352
18.2 SP Design .........................................................................................352
18.3 Awareness of Travel Distance and Travel Time...............................354
18.4 SP Model Estimation ........................................................................357
18.4.1 Model Formulation (Utility Functions) ..............................357
18.4.2 Income Effect Models ........................................................361
18.4.3 Alternative Model Formulations ........................................362
18.5 The RP Route Choice Model ............................................................362
18.5.1 Utility Function ..................................................................363
18.5.2 Estimation...........................................................................363
18.5.3 Within Person Variation .....................................................364
18.5.4 Between Person Variation ..................................................365
18.5.5 Estimation of the Impact of Road Pricing on Traffic .........367
18.5.6 Income Effect .....................................................................369
18.5.7 Other Explanatory Variables ..............................................370
18.6 Comparison Between SP and RP Models .........................................371
18.7 Summary and Conclusions ...............................................................372

19. The Impacts of e-Work and e-Commerce on Transport, the

Environment and the Economy...............................................................375
Andy Lake
19.1 Being Active Without Moving .........................................................375
19.2 The UK Study ...................................................................................376
19.3 E-Work .............................................................................................377
19.4 E-Business and e-Commerce ............................................................380
19.5 Rebounds ..........................................................................................383
19.6 Environment .....................................................................................385
19.7 Economic Growth, Transport Growth and European Policy ............387
19.8 Future Research Directions...............................................................388
19.9 Conclusion ........................................................................................389

20. A Web-Based Study of the Propensity to Telework Based on Socio-

Economic, Work Organisation and Spatial Factors..............................395
Lasse Mller-Jensen, Chris Jensen-Butler, Bjarne Madsen, Jeremy Millard
and Lars Schmidt
20.1 Introduction ......................................................................................395
20.2 Teleworking: Theoretical and Methodological Issues ......................396
20.2.1 Defining Teleworking ........................................................396
20.2.2 The Extent of Teleworking.................................................397
20.2.3 Teleworking and Savings in Transport Effort ....................397
20.2.4 Modelling the Take-Up of Teleworking.............................398
 Table of Contents xv

20.2.5 Technology Issues ..............................................................399

20.2.6 Long-Term Effects .............................................................399
20.3 The Determinants of Teleworking and Transport Substitution
Effects...............................................................................................400
20.4 The Consequences for Travel of Working at Home .........................400
20.5 Determinants of Teleworking ...........................................................401
20.5.1 Multivariate Relations ........................................................404
20.6 Long-Term Effects of Teleworking ..................................................406
20.7 Conclusion ........................................................................................408

21. The Impact of Telecommuting on Households Travel Behaviour,

Expenditures and Emissions....................................................................411
Andrea F. Glogger, Thomas W. Zngler and Georg Karg
21.1 Introduction ......................................................................................411
21.2 Model................................................................................................414
21.3 Method..............................................................................................416
21.4 Results ..............................................................................................417
21.4.1 Sample Characteristics .......................................................417
21.4.2 Travel Behaviour ................................................................417
21.4.3 Expenditures.......................................................................419
21.4.4 Emissions............................................................................420
21.5 Discussion and Conclusion...............................................................420
1 Introduction

Birgitte Sloth

Department of Business and Economics, University of Southern Denmark

This volume is a collection of research papers that examine the possibility of

reducing the negative impacts from traffic by using new information and
communication technologies. The focus is on passenger transport and most papers
study various aspects of road pricing as an instrument to decrease traffic.
The volume was initiated by the Centre for Transport Research on environ-
mental and health Impacts and Policy (TRIP), which was a virtual research
centre financed by the Danish Environmental Research Programme. In TRIP,
researchers from diverse institutions and fields collaborated on projects to increase
the understanding of the role of transport in society and of the complex interplay
among transport behaviour of individuals, the functioning of transport systems and
effects on the environment and health. As it turned out that many projects in TRIP
dealt with the impact of information and communication technologies and particu-
larly road pricing, we organised a conference in 2003 for TRIP researchers and
other researchers interested in these topics. Most of the papers in this volume were
presented and discussed in some preliminary form at the conference. A few papers
have been added later.
Transportation demand and thereby traffic have been steadily increasing for a
long time. This is a consequence of the general economic growth, which increases
the demand for most commodities and services including transport. The rise in
transportation demand is further sparked by globalisation, with increased inter-
national communication, trading and travelling and agglomeration, where special-
isation of firms and labour implies that firms benefit from being located close to
each other, such that cities and commuting districts become larger.
Traffic explains a large part of our energy consumption and thereby con-
tributes to CO2 emissions. It also has a direct negative impact on the environment
and health in a variety of ways, most notably in the form of air pollution, accidents
and noise. And traffic creates the congestion that seems to be an unavoidable
characteristic of large cities and has negative impacts on public welfare since it
increases travel times and costs. Objectives regarding sustainability and environ-
mental improvements therefore naturally lead to traffic management objectives,
which have proved difficult to fulfil. Traffic occurs because there is a need for
transportation; hence it cannot be eliminated or restricted without cost.
Various instruments can be used to regulate the demand for transport and
thereby to regulate traffic itself: direct and indirect taxes on cars and petrol, prices
and supply of public transport, traffic regulations and parking restrictions,
incentives to facilitate the relocation of households and campaigns to influence the
attitude and awareness of motorists about public transport. Developments within
2 B. Sloth

information and communication technology have improved the possibilities of

using various forms of road pricing, where motorists pay for driving in specific
areas or roads, possibly also depending on the time of day. This has been applied in
some European cities and is under consideration elsewhere.
Different instruments affect the different types of traffic differently and thus
have different environmental effects and different consequences for the travellers.
For example, in contrast to general taxes, road pricing differentiated according to
specific trips has the potential of making the individual traveller pay for the
negative external effects of his specific trip, such that resources are used
efficiently. When the price of a particular trip reflects its cost, the external effect
(externality) is taken into account by the traveller (internalised). Thus, road pricing
is particularly relevant when considering external costs that vary with location or
the time of day such as congestion. If motorists are to pay for the negative external
effects they impose on others, motorists in congested cities in morning rush hours
must pay more than other motorists. For local air pollution, for example,
particulate pollution, and for noise, the costs that motorists impose on others
naturally depend on how many people are exposed to the effect and therefore such
costs are usually higher in dense city areas.
Despite the technological development and the efforts of the EU to get road
pricing implemented, it is still not widely used. In Chapter 2, Chris Nash and Esko
Niskanen provide a comprehensive review of road pricing experiences and argue
that the lack of political acceptability has been a major obstacle to wide
implementation of road pricing. As an example of this, the survey results reported
by Mai-Britt Herslund in Chapter 16 indicate that drivers are particularly adverse
to the targeted use of road pricing, e.g. the additional rush hour charges and the
additional charges in large cities that should be its main advantage.
In Chapter 4, Eric Verhoef and his co-authors discuss further the obstacles and
barriers to the introduction of road pricing, proposing that these obstacles are
gradually removed such that road pricing can be introduced along a graduate path
with different prices and pricing rules at various stages.
In Norway, road pricing has been used for a very long period and has been
politically feasible and even necessary because it has been seen as a means of
financing transport infrastructure and not as an instrument to make the motorist pay
for the costs imposed on others. In Chapter 7, Farideh Ramjerdi, Knut stmoe and
Harald Minken report the Norwegian experience and also recent developments in
the use of road pricing to address transport externalities.
To facilitate decision-making and thereby the possibility of extending the
domain of road pricing, more research-based knowledge about the positive and
negative consequences of road pricing and more ex ante studies are important.
Several papers in this volume contribute to this. Lars Gran Mattsson in Chapter 3
presents different types of ex ante studies of road pricing using Stockholm as a
case. He discusses how such studies can be combined to help decision-making and
also how they can be improved as more evidence becomes available. In Chapter 5,
John Peirson and Roger Vickerman report the first evidence from the road pricing
introduced in Central London in February 2003. They find that road pricing has
been very effective in reducing traffic and discuss if similar effects can be expected
 Introduction 3

in larger areas or smaller cities. In Chapter 6, Otto Anker Nielsen and Majken
Vildrik Srensen report similar large effects found in an experimental introduction
of different versions of road pricing in Copenhagen, which they compare to the
behavioural effects predicted by models and surveys.
To evaluate the effects of increased travel costs, one must study the interaction
between the economy and the transport system and take into account other
imperfections in the economy than the externalities in transport.
In Chapter 8, Morten Marott Larsen, Ninette Pilegaard and Jos van Ommeren
study the interaction of transport markets and a labour market in which there is
unemployment because of search frictions and demonstrate how to quantify the
detrimental effects of road pricing on employment and production costs.
Distortionary taxation, in particular labour taxes, is an important instrument in
redistributive policy. Thus, road pricing will have (re-)distributive effects, both
directly and indirectly through the possibility of using the revenue to influence the
income distribution. Knud J. Munk demonstrates in Chapter 9 that this implies that
there is a possibility of obtaining a so-called double dividend, which should be
taken into account when considering road pricing. In Chapter 10, Harald Minken
and Farideh Ramjerdi emphasize the importance of distributional impacts and
equity consideration for the appraisal of road pricing schemes and suggest a
method to design the road pricing scheme, which simultaneously includes
efficiency and distributional issues.
The introduction of road pricing may also influence regional distribution
through different impacts on costs and competitiveness in different regions. In
Chapter 12, Bjarne Madsen, Chris Jensen-Butler, Jacob Kronbak and Steen Laleur
demonstrate how such effects can be investigated in a model system which
combines a transport model with a regional economic model.
Including the interaction between the economy and the transport system when
evaluating public policies and investments is not only relevant for road pricing, but
also for traditional project evaluation. In Chapter 11, Jan Oosterhaven and J. Paul
Elhorst apply a model structure with sectors, household types, transport modes and
spatial zones to obtain evaluations of proposals for magnetic levitation rails in the
Netherlands, taking into account indirect economic effects including labour
migration and housing migration.
As explained, road pricing is not only effective in reducing congestion, but is
also suited to targeting other local external effects. In Chapter 13, Jeppe Rich and
Otto Anker Nielsen compare road pricing experiences from different cities,
considering not only the impact on travel demand but also on the local external
effects: road safety, noise and air pollution.
In principle, road pricing can be differentiated according to vehicle
characteristics, specific route choices and time of the day, and thereby be targeted
to ensure that travel costs reflect such local external effects. In order to do that,
precise information on the size of external costs is required. The costs of local air
pollution are particularly difficult to assess. To determine the exact associations
between pollution exposure and health effects, it is necessary to be able to assess
human exposure and therefore to be able to model both air pollution concentrations
in different streets at different times and the time spent by individuals at different
4 B. Sloth

locations. In Chapter 14, Ole Hertel and co-authors describe a modelling structure
that facilitates this and has been applied in a number of epidemiological studies to
add to our knowledge of the health effects and thus costs of local air pollution.
Transportation models and the economic models with which they are
combined usually assume that choices of trips, modes and routes are made by
rational, cost-minimising agents, such that the traffic reduction obtained from road
pricing is explained by travellers basing their decisions on total travel costs
including the value of travel time. Values of travel time are often estimated by
stated preference experiments, where subjects are asked for their preferences
regarding different time-cost combinations. In Chapter 18, Otto Anker Nielsen and
Goran Vuk compare the findings from such a study to actual choices made in a
road pricing experiment. They find that the model structures obtained correspond
well, but their findings indicate that the value of travel time increases when road
pricing is introduced, which may reflect that travellers have restrictions and inertia
in their choices. One possible interpretation is that drivers use less rational and
conscious reasoning, e.g. that choosing the car is merely a habit and thus not
directly affected by prices.
Peter Laokopoulos, Tommy Grling, Cecilia Jakobsson and Satoshi Fujii
argue in Chapter 17 that evaluation of the effectiveness of road pricing should be
based on realistic behavioural assumptions allowing for e.g. habit formation. This
is particularly important when comparing road pricing to alternative regulatory
instruments affecting drivers differently, e.g. marketing programmes. The habitual
choice of the private car is also studied in Chapter 15 by Berit Mller and John
Thgersen, who use a survey to demonstrate that car use habits act as an obstacle
to the intentions to commute by public transportation. This indicates that road
pricing may be less effective than expected as compared to instruments that
influence the habits directly.
Information and communication technology influence transport and the
environment, not only through the feasibility of road pricing, but also through
teleworking and e-commerce substituting trips for commuting and shopping. This
may imply that people may substitute trips by other means of communication, such
that road pricing does not just change travellers choice of route, mode or time, but
may also lead to fewer trips. This has the potential of decoupling economic growth
and transport growth, but much more experience and research is required before
any firm conclusions can be reached. In Chapter 19, Andy Lake provides an
overview of recent research on the impacts of telework and e-commerce on
transport and the environment. The volumes last two chapters, Chapter 20 by
Lasse Mller Jensen, Chris Jensen-Butler, Bjarne Madsen, Jeremy Millard and
Lars Schmidt and Chapter 21 by Andrea F. Glogger, Thomas W. Zngler and
Georg Karg, both report survey results that clearly indicate that teleworking does
reduce the use of the private car and the distance travelled and thus may be able to
contribute to traffic reductions for the benefit of the environment.
2 Road Pricing in Europe
A Review of Research and Practice

Esko Niskanen1 and Chris Nash2

1
STA Research, Helsinki, Finland
2
Institute for Transport Studies, University of Leeds, England

Abstract
Despite the considerable benefits of road pricing that economists and other analysts
have shown, and despite the efforts of the EU to get road pricing implemented, it
has not been implemented on a broad scale. It is still widely considered to be a
radical and controversial policy. This chapter provides a comprehensive review of
experiences with road pricing in Europe and elsewhere. We consider pricing issues
in urban road and interurban road transport separately. The policies in the two
areas have typically been different focusing in urban transport on the private car
and in interurban on freight transport. Also existing analyses, both theoretical and
conceptual and those using real-world simulation models, have mostly dealt with
these two topics separately. For both areas we consider the current pricing
schemes, barriers to pricing and likely next steps. A central theme arising from this
chapter is the importance of institutional implementation issues, including political
acceptability. These questions have been given too little attention both in research
and in actual attempts to implement road-pricing measures.

2.1 Introduction

Road pricing as a policy to alleviate congestion, environmental and other problems

related to urban and interurban road transportation has received much attention
during the last decade. However, despite the considerable benefits of road pricing
that economists and other analysts have shown, and despite the efforts of the EU to
get road pricing implemented, it is not implemented on a broad scale. It is still
widely considered to be a radical and controversial policy. This is due to many
factors, including the fact that the public and politicians do not seem to be
convinced of the benefits (either to society or to themselves). On the other hand,
there are long-lasting disputes also among academics, especially around the
application of the concept of marginal cost pricing.
This chapter provides a comprehensive review of experiences of road pricing
in Europe and elsewhere, both in research and practice. The main objective is to
provide an overall picture of the recent developments in road pricing, whilst, at the
same time, highlighting the most important issues and hopefully opening up new
perspectives for research and policy. We consider pricing issues in relation to
6 E. Niskanen and C. Nash

urban road and interurban road transport separately. There are many reasons for a
separate treatment. The policies in the two areas have typically been different,
focusing in urban transport on the private car and in interurban on freight transport
and they have been implemented by different levels of government. Also, existing
analyses both theoretical and conceptual and those using real-world simulation
models have mostly dealt with these two topics separately.
The chapter starts (section 2.2) by briefly characterising the current situation
and expected trends in the road transport industry and by reviewing the current
policies and policy trends, especially at the EU level. Section 2.3 considers key
issues of road pricing at a theoretical level, including the goals of road pricing and
different approaches to road pricing. We proceed by considering the experience of
road pricing in practice, in section 2.4 in urban transport and in section 2.5 in
interurban road transport. In both cases, we review existing pricing schemes,
identify the most important barriers and constraints to the implementation of road
pricing and finally describe the foreseeable and most likely next steps. We
conclude in section 2.6 by summarising the overall lessons from existing research
and practice and present our view on what should happen next.
This chapter is heavily based on the work and experiences in EU-funded
Projects AFFORD, PETS, UNITE, MC-ICAM, CAPRI and IMPRINT-EUROPE.
This means that, although we have aimed to provide a comprehensive review, our
discussion necessarily is focused on the issues and perspectives addressed in these
projects. It therefore seeks to draw general lessons for national and European
policy, rather than providing detailed case studies. Results from these studies are
reported in the relevant project reports as referred to in appropriate parts of this
chapter. In addition, see for example a special issue of Transport Policy (de Palma
et al., 2006), volumes Acceptability of Transport Pricing Strategies (Schade and
Schlag, 2003) and La tarification des transports, Pourquoi? Pour Qui? (de Palma
and Quinet, 2005).

2.2 The Current Situation

2.2.1 Background

A long-standing cause of concern within the EU has been the continued growth of
road (and air) transport, relative to rail, which has had a declining market share.
According to CEC (2001), the market shares in freight transport in 2000 in the EU
were the following: road 44%, short sea shipping 41%, rail 8%, inland waterways
4% and pipeline 3%. The corresponding numbers for passenger transport were: car
79%, air 5%, rail 6%, bus and coach 8.5% and tram and metro 1.5%. The share of
road in freight transport had risen from 35% in 1970 and the share of car in
passenger transport from 74%. The trend in favour of the road mode continues.
The results have been growing problems of road congestion, road accidents
and environmental damage. Such trends are even more pronounced in the
accession countries, where under the former regime road transport was heavily
 Road Pricing in Europe A Review of Research and Practice 7

constrained. In its latest Transport Policy White Paper (CEC, 2001), the
Commission has adopted the aim of modal shift from road to rail, initially aiming
to return the rail share of the market to its 1998 level by 2010. Appropriate pricing
and particularly the introduction of external costs into the charges, is seen as an
important policy tool in achieving this.
However, at the same time other policy developments in the European Union
have tended to favour road transport. Perhaps the most important and visible has
been the deregulation process that the main transport sectors and modes have gone
through since the mid-1980s. Due to both the inter-modal differences and the lack
of a common European approach, the degree of deregulation and opening up of the
markets for competition varies across transport modes. The road transport mode
has undergone extensive liberalisation (along with the air mode), whilst rail
transport is still largely in the hands of national companies and is severely
hampered in competition for international traffic. The most remarkable process of
deregulation in the road freight sector was the liberalisation in 1998 of cabotage
within the European Union for commercial road freight transport as well as for
companies own transport.
Currently there are great differences between modes and between different
countries in the form and level of charges for the use of infrastructure. Comparing
total costs and total charges (or average costs and charges) suggests that simply
pricing to cover total social cost would certainly not typically raise charges for
road transport as compared to those of rail and, thus, would not favour rail and
would not facilitate the required modal shift. However, if the basis of prices is
related to the costs imposed by an increase in traffic on each mode, the marginal
social costs, there are important differences in relation to conclusions based on
average costs. Whilst there may be significant differences between marginal and
average values for all categories of cost, the crucial difference relates to conges-
tion. Whilst all road users experience average congestion costs and thus do not
need to be charged for it, the marginal cost of congestion imposed by extra traffic
may be very much higher than the average. A marginal cost pricing philosophy
puts congestion costs at the heart of road pricing policy.
The overall picture of road pricing, as it is often cited including CEC (2001)
though great variations are possible is: urban transport is underpriced, interurban
car overpriced and interurban freight transport undercharged. A review conducted
as part of the IMPRINT-EUROPE project found the evidence broadly to support
this assertion (Nash and Matthews, 2001), although with wide differences between
countries.

2.2.2 Current Pricing Policies at National Level

During the last 10 years, a lot of effort has been put into attempts to reform pricing
of European transport, with the aim being able to better reflect the user and polluter
pay principles which, it is commonly believed, could promote more efficient use of
the existing infrastructure and also could facilitate and encourage new forms of
partnership with the private sector, also seen by many to be of vital importance.
8 E. Niskanen and C. Nash

However, the experience is that implementation of the suggested pricing principles

and even agreeing on them can be extremely difficult compared to many other
policies such as deregulation.
Currently, in urban and interurban road transport in different European
countries, road users are broadly speaking charged for their use of their vehicles
and the road network by means of a three-part tariff comprising a vehicle purchase
tax, an annual licence fee and a tax on fuel. Only in a few cases is this system
complemented by direct road user charges i.e. road tolls, area licences and
similar systems. Less than 10% of road infrastructure costs are recovered by direct
user charges (CEC, 1998, p. 12). Generally speaking, heavy reliance is placed on
fixed charges as compared to variable road user charges as well as on fuel taxes.
As a result, although the fixed fees often vary by vehicle type, there is a
general lack of integration of external and infrastructure costs into the price of road
transport. In particular, the current charges fail to differentiate adequately in time
and space to allow for differences in congestion, environmental and other impacts.
They fail to reflect adequately, even in the variable element of the charge, the
differential impacts of different vehicle types. In short, the user and polluter pay
principles are not applied; instead, users usually pay similar amounts irrespective
of the infrastructure damage, congestion and pollution they cause.
On the other hand, the overall picture is not uniform, as there are very
different structures of transport-related taxation systems across member states and
other European countries. There is also considerable national and local variation in
the integration of external and infrastructure costs into the price of transport. The
great inter-country variation is a combination of historical reasons and different
economic and social development, but it also reflects the lack of a common
European approach to these issues.

2.2.3 EU Pricing Policy

The EU has a major influence on road pricing policies in Europe. Therefore, it is

important to understand the trends and goals of EU policy.
The current activity on transport pricing started with a Green Paper (CEC,
1995), which argued strongly for the inclusion of external costs in transport prices.
The following White Paper (CEC, 1998) put forward a phased approach towards
marginal cost pricing but still acknowledged total cost coverage (and fixed charges
and subsidies) as an important goal and approach to be considered in certain
situations. The most recent White Paper (CEC, 2001) argued for the need for
efficient pricing, but avoided using the term 'marginal cost pricing'. Though this
may partly be a matter of terminology, clearly the new White Paper adopted a
more reserved approach to the idea of marginal cost pricing.
For urban transport pricing, an important factor in EU policy is the subsidiarity
principle. This means that the responsibility for implementing policies lies at the
lowest appropriate administrative or governmental level. However, the EU has
been active indirectly, by encouraging and supporting cities which are interested in
road pricing. The EUROCITIES network and the PROGRESS project are such
 Road Pricing in Europe A Review of Research and Practice 9

examples. The White Paper (CEC, 2001) explains that this also means helping to
develop and disseminate best practice throughout Europe. There is also a proposal
to modify the regulation on public service obligations in order to open the market
for the provision of urban public transport, either on a deregulated or a competi-
tively tendered basis.
For interurban road transport, the EU has taken a more active role, which
makes sense as the transport and the problems often are international and cross-
border by nature. Moreover, even for domestic traffic, the issue of competitive
conditions between vehicles of different nationalities is important. Hence the EU's
starting point is to distinguish between commercial transport and private vehicles.
The focus is on commercial transport and, in the short term, on interurban freight
in particular. Moreover, as stated above, the EU considers that on average road
freight transport is underpriced, whilst private car transport is not. The EU also
considers that acceptability barriers are lower in freight transport.
Thus the EU's efforts have been dispersed, focusing on individual issues and
cases. Currently there still exists no common European strategy, with comparable
charging practices and inter-operable equipment.

2.2.4 The Need for Pricing Policy Reform

In summary, we quote the White Paper (CEC, 2001) which states:

"[Currently] while transport may be heavily taxed, it is above all badly and
unequally taxed. Users are all treated alike, irrespective of the infrastructure
damage, bottlenecks and pollution they cause. This failure to spread the
burden fairly between infrastructure operators, taxpayers and users causes
considerable distortion of competition both between transport operators and
between modes of transport. For the modes to enjoy a level playing field,
taxation should work according to the same principle regardless of mode and
ensure a fairer distribution of the burden of transport costs." (pp 72-73)

The White Paper emphasises that it is not the overall level of taxes and charges that
needs to change significantly, but rather their structure needs to be altered
radically:
The thrust of Community action should be gradually to replace existing
transport system taxes with more effective instruments for integrating infra-
structure costs and external costs [in the price of transport]. These instru-
ments are, firstly, charging for infrastructure use, which is a particularly
effective means of managing congestion and reducing other environmental
impacts, and, secondly, fuel tax, which leads itself well to controlling carbon
dioxide emissions. The introduction of these two instruments, which will allow
greater differentiation and modulation of taxes and right of use, needs to be
coordinated, with the first being backed up by the second. (p 75)
10 E. Niskanen and C. Nash

Finally, the White Paper promised

a framework directive in 2002 to establish the principles of infrastructure
charging and a pricing structure for all modes of transport. The proposal,
which will leave each Member State wide scope in terms of implementation,
will include a common methodology for setting price levels which will
incorporate external costs ( p 78)

However, this directive has never appeared. This may (at least partly) reflect the
fact there remains substantial opposition to road pricing in different member
countries. Individual member countries rarely make explicit reference to marginal
social cost in the determination of pricing structures and levels; on the contrary, in
some countries explicit policy statements arguing against it are made.

2.3 Key Issues, Concepts and Approaches

2.3.1 The Goals of Road Pricing

When judging the different approaches to road pricing, it is a good idea to start
with the question Why road pricing? This question is important because clearly
not all people or groups are convinced, either of the overall benefits of road pricing
to society or of its favourable impacts on themselves. There are three explicit or
implicit goals of road pricing, typically referred to:
to collect revenue
 to reduce traffic and nuisance (externalities such as congestion, environmental
damage, noise, etc.)
 to promote efficiency.

The interpretation of the first two goals is quite clear. Putting all kinds of possible
measurement problems aside, these goals are concrete and easy for people and
policymakers to understand. In particular, the revenues collected can be earmarked
(hypothecated) or can contribute to general taxation. The goal of traffic reduction
can also be related to the broader goal of promoting modal shift.
However, the third goal, efficiency, is more problematic, and leaves room for
interpretations. A change is said to be economically efficient when it is possible for
the gainers to compensate the losers and still be better off themselves. In a first best
world, where all such changes are made, a move to marginal cost pricing will be
economically efficient. Where constraints prevent this situation from being
achieved throughout the economy, pure marginal cost pricing ceases to be the
ideal, but in general prices remain based on marginal cost and various second-best
rules may be derived to identify the optimal adjustments from marginal cost
pricing. Following the adoption of the term in the projects AFFORD and MC-
 Road Pricing in Europe A Review of Research and Practice 11

ICAM, this approach is now often referred to as marginal cost-based pricing.1 To

economists, this approach to pricing is generally seen as the main goal of pricing
reform, but the problem with using economic efficiency as a major policy goal is
that in many cases it simply is far too general and abstract for the general public
(including the media) and the politicians to be used as a relevant criterion.
Equity concerns are also an important issue, whilst not a primary policy goal
in the context of road pricing. Equity is not always considered when designing
policies in market economies; on the contrary, it is typically emphasised that there
are specific separate policies that will address such issues whether considered as
goals or constraints. However, transportation, and transport pricing in particular,
appears to be in this respect different from pricing in many other industries. The
claims that equity issues should be reflected and included in the prices are repeated
frequently. One reason for why this is the case may be that people have not been
used to seeing road transport as a commodity subject to allocation through the
market in the way that most commodities are.

2.3.2 Theoretical Approaches to Road Pricing

During the last couple of decades, economists and other scientists have presented
different theoretical approaches to road pricing. Over time, these approaches and
frameworks have become standard reference also in practical policy discussions.
Although policymakers typically are very practical, these theoretical approaches
and traditions and adopted ways of thinking necessarily also affect their decision-
making, in the background at least (see for example Faulhaber and Baumol, 1988).
It is useful in any particular policy application to try to reveal these often hidden
attitudes explicitly and transparently and to clarify their influence. This may partly
help us to understand why different cities and countries may have adopted different
approaches and solutions (to seemingly or theoretically similar problems). This is
also important in order to be able to design optimal policy reforms under different
institutional and cultural settings.
Two long-standing issues which are the sources of both academic and policy
disputes can be identified:
1. Should prices be based on short-run or long-run marginal costs?
2. Should the primary goal of pricing be internalisation of external costs
(marginal cost pricing) or full cost recovery?

1
This term aims to reflect and highlight the following two aspects of the pricing system. First, the
implementation of marginal cost pricing must not be considered in isolation but as part of a
package of measures; this is a preferred approach because it is more effective under second-best
conditions and because it is more acceptable (can incorporate compensatory measures). Second,
the actual prices implemented may not strictly taken equal marginal costs but are typically
second-best prices with optimal deviations from (direct) marginal costs to take account of
constraints that prevent the achievement of the full theoretically optimal position.
12 E. Niskanen and C. Nash

Economic theory shows how short-run marginal cost pricing results in optimal use
of existing capacity and is an appropriate and optimal policy for the internalisation
of externalities or external costs (congestion, environmental, etc). Short-run mar-
ginal cost pricing by definition secures short-term efficiency. Where capacity is
optimal, short run and long run marginal cost pricing are equivalent. It is therefore
only where capacity is non-optimal that the issue arises. Furthermore, in standard
models, short-run marginal cost pricing, when combined with the practice of social
cost-benefit analysis to determine investment decisions, also leads to long-run
efficiency. For instance, Vickrey (1969) argued long ago that short-run marginal
cost pricing provides a reliable indicator of the marginal benefits from capacity
expansion.
However, not everybody is convinced and the situation may not be quite as
simple in real life situations. The relevant issues here apply in particular when the
pricing and investment decisions are decentralised or the relevant transport
organisations are state or private enterprises operating on a commercial basis. For
instance, according to one view, short-run marginal cost pricing gives the infra-
structure manager an incentive to restrict investment in order to maintain high
prices and therefore does not provide correct incentives for investment. Therefore,
according to this argument, long-run marginal cost pricing should be used instead,
as it will give an incentive to invest only if the operator can recoup the costs of the
increased capacity in prices.
Another much addressed issue in relation to short-run marginal cost pricing is
to what extent it will be able to generate enough revenue to cover costs. According
to a classical result by Harwitz and Mohring, the degree to which infrastructure
costs are covered under short-run marginal cost pricing depends on returns to scale
in investment and returns to scale in the level of usage. Some empirical evidence
on returns to scale for European roads (also for rail and air travel) is presented in
Quinet (1997).
A different approach to or philosophy of road transport pricing is based on full
cost recovery (by mode, etc.) as the target of road pricing (rather than general
welfare maximisation). This principle is advocated by several authors and com-
mentators and also emphasised in many countries as a basis for policymaking. This
is a particularly relevant issue in regard to public transport and interurban road
transport (and also in other modes like rail), where efficiency prices can be far
from covering total costs. These issues have been addressed in detail in the UNITE
project which also made a survey of approaches prevailing to road transport pricing
in different countries in Europe. The results showed clear differences by country
(Quinet, 2001).

2.3.3 Practical Approaches and Instruments

The pricing instruments relevant for road pricing include: link based tolls, area-
based charges, cordon tolls, electronic kilometre-based charges, vehicle taxation,
fuel taxation and parking pricing. Public transport fares are also relevant. De Palma
 Road Pricing in Europe A Review of Research and Practice 13

et al. (2004) provide an overview of these instruments and their theoretical

properties. The following text is based heavily on their discussion.
Most applications (and studies) are based on point charging where a charge is
levied to pass a point on a road, a form which is similar to conventional toll
systems. A charge on a single road is likely to encourage traffic to divert to avoid
the toll. Most point charging systems therefore involve cordon charging (or toll
rings) where a series of charging points are established at all entries to a given area
(often a city centre). We can distinguish between cordons that charge only inbound
traffic, those that charge outbound traffic and those that charge in both directions.
A variant of cordon charging is area charging (or area licensing) in which the
charge is levied to use a vehicle within a defined area, rather than just to enter it.
This will also include vehicle journeys wholly within the cordon, which are
unaffected by cordon charging and might as a result increase if traffic flows
entering from outside are reduced.
Implementing tolls that vary over time in synchrony with fluctuations in
congestion provides an inducement for people to travel at off-peak times. Various
theoretical studies (see Small, 1992; Arnott et al., 1993; Chu, 1999) have shown
that the efficiency gains from altering trip-timing decisions can dominate the gains
from altering decisions on numbers of trips, route choice and other dimensions of
travel behaviour. Furthermore, the efficiency gains can be expected to increase
with the number of time steps incorporated into the toll schedule.
Both cordon charging and area charging introduce boundary problems.
Through traffic may reroute around the cordon and may increase congestion on the
periphery. Those living just outside the cordon will pay to travel to the centre;
those just inside will not. Drivers making long journeys across the cordon pay the
same as those making short journeys. These discontinuities, which are both
inefficient and inequitable, can be overcome by continuous charging systems,
which charge for all travel within a defined area (such as a city). These can be
based on distance travelled (distance-based charging) or time spent in delay (delay-
based charging). Distance-based charging is particularly relevant for pricing
interurban roads. A delay-based charging system was tested in the 80s in
Cambridge (in the U.K.) involving charges for any 500m length journey which
took longer than three minutes. However, subsequent research has tended to reject
delay-based approaches as likely to lead to safety problems by giving a strong
incentive for speeding and jumping red lights.
It has been estimated in several studies (e.g. Schrank and Lomax, 1999; 2004)
that a large fraction of time lost due to congestion is attributable to unpredictable
fluctuations in capacity or demand on account of traffic accidents, bad weather,
roadworks and strikes. Therefore, real-time or responsive pricing in contrast to
time-dependent pricing according to a predictable schedule is important to
consider. In order to track the externality costs that a driver actually imposes on a
given trip (the current and envisaged systems charge drivers just before they have
to make a decision), it is necessary to set tolls dynamically on the basis of the
travel conditions actually experienced. In an ideal system, this would entail the
collection of information, calculation of the appropriate tolls and dissemination of
the updated information and tolls to drivers via on-board computers and in real-
14 E. Niskanen and C. Nash

time according to current or predicted travel conditions. Though infeasible in the

past, this is becoming practicable through the use of Advanced Traveller
Information Systems (ATIS).
Responsive pricing presents some uncertainty to the driver regarding the
actual price he/she has to pay. Of course this matters though it can be reduced by
information provision. An important question here is: what is more important to a
driver, uncertainty about monetary payment or uncertainty about travel time (time
costs)? There is not much evidence on the value drivers place on reliability as
opposed to journey time itself, though some advances have been made in recent
years (see Small et al., 1995; Bates et al., 2001; Lam and Small, 2001; Brownstone
et al., 2003; Bonsall et al., 2004). On various measurements of reliability, see
Lomax et al.. (2003).

2.4 Road Pricing in Practice in Urban Transport

2.4.1 Current Schemes in Urban Transport Pricing

Urban road charging schemes can cover the road network as a whole or can only
be restricted to an individual road or on a certain stretch of a single road. Examples
of the latter types of applications are in the U.S. and Canada. On the State Route 91
in Riverside County in California and on Highway 407 north of Toronto in Canada,
the price system is time-dependent pricing according to a predictable schedule. On
Interstate 15 north of San Diego in California, the system is real-time or responsive
pricing. The two applications in California assume tolled and non-tolled lanes in
parallel; the system is reported to work well in maintaining free-flow conditions on
the tolled lanes. De Palma et al. (2004) provide detailed descriptions.
This section focuses on true urban road charging systems, covering the urban
road network more broadly than just individual roads. Currently, such systems are
in force in Singapore, Norway, Rome and London. The longest standing urban
road-pricing scheme is that of Singapore which originally introduced an area
licensing scheme in 1975 and replaced it in 1999 by an electronic road pricing
scheme, followed by the Norwegian cities during years 1986-2001 (Bergen, Oslo,
Trondheim, Kristiansand and Stavanger). Rome and London are much more recent
cases; Rome has gradually introduced road tolling and London introduced a broad-
scale system in 2003. See Ramjerdi et al. (2004) on the Norwegian applications.
Ricci and Fagiani (2003) and the references therein provide detailed description of
the other applications.
The aim of road pricing in Singapore is to alleviate huge congestion and
pollution problems. By contrast, the Norwegian cities cannot be said to be amongst
the most congested or polluted in Europe. Here, the original goal was to collect
revenue to carry out specified investments which would directly benefit the drivers
in question (and, as in Oslo, originally for a limited period only). However, more
recently there has been a gradual shift to emphasise other goals. Legislation to
 Road Pricing in Europe A Review of Research and Practice 15

allow the use of toll rings for congestion management has been passed and there is
now a debate whether to switch from revenue generation to congestion charging
with time-of-day toll variation.
The other two European cities with road pricing currently introduced, Rome
and London, are known to suffer from severe congestion and environmental
problems. In Rome, there has for long been attempts to introduce various measures
to restrict access to the historical city centre by private cars, of which the
introduction of pricing is just the latest measure. However, the pricing system here,
which comprises charges for permits to access the central area, is still quite limited.
More recently, and clearly the most important example in Europe, of course, is
now London with its introduction of urban road pricing in central London on 17
February 2003. The London scheme is a simple area-licensing scheme, covering
the area of central London. All road users within the cordon area on weekdays
between 7 am and 6:30 pm are required to obtain a licence at a daily cost of 5
(7.5); certain categories of vehicles and users are exempt and there is a 90%
discount for residents in the area. Also, plans exist to extend the charge area and to
raise the toll to 8 in summer 2005. Checking is done through video cameras and
by automatic number plate recognition technology that recognise whether or not
each passing vehicle has obtained a licence. The principal objective is to alleviate
congestion in the central city area, but also to raise revenue for other elements of
the transport system, including public transport improvements. Initial impressions
are that the charging system has been very successful, achieving a 20% reduction
in traffic in the area with none of the major problems that were predicted.

2.4.2 Barriers on Urban Road Pricing

Why is marginal cost-based road pricing not being implemented more generally in
urban areas, despite arguments in favour of it by many economists and consider-
able welfare benefits demonstrated by various modelling research projects? Why
do the public and politicians or the business community not want it? Why is road
pricing introduced in the cities mentioned above rather than in some other cities?
These and other related issues have been considered in a range of EU-funded
research projects including AFFORD, IMPRINT-EUROPE and MC-ICAM. The
discussion in this section, whilst aiming to summarise some of the results of these
studies, largely builds on Niskanen et al. (2003) and Niskanen and Nash (2004).
Evidently there are strong barriers to implementing pricing policies. Niskanen
et al. (2003) made use of the following classification of potentially relevant
barriers:
 technological and practical barriers
 legal and institutional barriers
 acceptability-related barriers.

According to the above-mentioned and other studies, the principal technological

barrier to road pricing in an urban context is that there is no widely tested
technology to permit fully differentiated pricing. Also, the existing technology may
16 E. Niskanen and C. Nash

be too expensive to justify its implementation on a broad scale. However,

technological reasons alone cannot explain why there are so few working examples
of road pricing on a smaller scale.
The term practical barrier in the above classification refers to issues such as:
1. quality and insufficiency of data on marginal and other costs as well as of the
welfare benefits and other potential impacts of road pricing (land use impacts,
impacts on business, etc); 2. complexity of transport networks (spatially) and
related to this, geography of the city/country and the interaction between urban and
interurban traffic; and 3. insufficient standardisation and harmonisation of tech-
nological solutions or pricing principles across different countries. The first two
types of issue may generate important barriers to urban road pricing. (The third
type is more relevant in the interurban road context, as discussed in Section 2.5.2
below.)
The main legal barriers are the lack of powers in many countries to introduce
road pricing and restrictions on the degree of prices that would be legally
permissible. For instance in France urban road pricing is restricted to new
infrastructure. In Sweden, road tolls are considered as taxes which must be decided
by the Parliament and which by law cannot be earmarked to transport infrastructure
investments (although the government has promised this in relation to the
Stockholm road pricing plan, see section 2.4.3 below). In some countries, civil
liberties legislation prevents certain forms of road pricing which require tracking of
the location of individual vehicles. Major institutional barriers (beyond the legal
ones) are related to the lack of co-ordination between responsible authorities or
actors. This may apply to different parts of government at the same level (for
example, those responsible for roads and those for public transport, or
neighbouring communities or countries competing with each other for business and
tax payers rather than co-operating). Second, co-ordination between different
levels of government (for example, national interests versus local) may be
insufficient. On a European scale, an important aspect of the problem here is the
subsidiarity principle that restricts the development of pricing policies at the
European level. (The principle of course may have some other virtues which the
negative commenting here in no way wants to deny.) And third, the lack of co-
ordination between government and non-government institutions may also cause
problems, particularly with regard to parking and public transport when they are
privately owned or run so that the local public authority has only limited powers to
control charges.
However important, technological and practical barriers or legal and institu-
tional barriers in themselves can evidently be no real reason for road pricing to be
so rare in urban contexts. The technology either in principle exists or could be
developed rather easily. Similarly, data problems in a modern world should not be
insurmountable. And finally, new and more appropriate laws and institutions could
in many cases be passed and built already in the short or medium term if desired.
Instead, the key issue and barrier clearly is low acceptability public, business
and political acceptability. Public acceptability of course is a key factor in formu-
lating and implementing policies in the western democracies. Public acceptability
may be influenced by factors like the public dislike of new or higher charges as
 Road Pricing in Europe A Review of Research and Practice 17

well as complex charging methods and technology. But public acceptability of road
pricing evidently is (negatively) affected also by the following fundamental
asymmetry relating to the distribution of benefits versus that of costs: many of the
benefits are indirect and small in per capita terms, whilst the costs are direct and
relatively large in per capita terms. This means that those who would gain do not
care much whereas those who would lose tend to be more active, forming interest
groups. (Though intuitively plausible, however, no attempts are made to our
knowledge to test this hypothesis empirically.) Another aspect of public accept-
ability is that it is generally lower for urban transport than for interurban road
transport. In urban transport, the people are the key users and they use the car for
their regular daily and often inflexible routines.
Political acceptability is important because it is the politicians who ultimately
take the necessary decisions, although their decisions are naturally affected by the
attitudes of the general public (also the media) and the business community.
Politicians (and other decision-makers) may naturally fear major mistakes, particu-
larly if there are sunk costs or consequences such as driving away footloose
industries that cannot be undone. But there is also a more personal aspect in the
way they function: they typically worry about their careers; even those politicians
who perceive that pricing could help to alleviate the problems, may fear the conse-
quences of new or higher charges in the next election. The problem from their
point of view is that (this is related to the asymmetry of costs and benefits above)
many of the welfare benefits would be indirect and they might not be able to
receive credit for them, whilst they have to take the blame for the costs and
nuisances which typically are more direct. This, in particular, applies to local
politicians in the cities where the pricing would be implemented and especially if
many of the benefits would go elsewhere (also depending on earmarking arrange-
ments) and not directly to their own voters. Therefore, as argued by Frey (2003)
and many others, politicians do not generally benefit from pursuing road pricing.
A final important observation is that the different types of barrier to pricing
that we have identified may be strongly interrelated; for instance, which is the true
or real barrier and which (at least) seemingly independent and relevant barrier is
only a reflection of the other one, may not always be obvious.
In the light of all these considerations, we might ask why road pricing has
been adopted in Singapore and in the Norwegian cities, and why in Rome and in
London? What are the key lessons to be learned from these cities? Or is this list of
cities a pure coincidence?
The fact that Singapore is a state comprising a single city has evidently made
the implementation of road pricing easier there than in many other big cities which
have suffered from equally acute problems. Clearly (at least) two aspects which
complicate implementation in big European cities and which were referred to
above, are missing here: 1. no need to consider interaction between urban and
interurban traffic; and 2. no possibility of contradicting interests between the city
level and the national government level.
As for the Norwegian cities, Ramjerdi et al. (2004) mention two considera-
tions that evidently have been affected here. First, the country has a long history
(dates back to the 1930s) of toll financing of specific road improvements such as
18 E. Niskanen and C. Nash

tunnels and bridges. A second apparent factor has been the skill of the planners and
politicians in packaging the pricing schemes for each toll ring with well-defined
investment schemes for road infrastructure improvements in such a way that the
benefits became apparent soon after the rings were introduced.
The London case in turn demonstrates how much political will can matter. The
political will was personified in Mayor Livingstone and was expressed during his
election campaign. As a result, the road pricing system was implemented in a
situation where national government was not supporting it (in this form) and the
main political parties and much of the media were hostile (at the time of his initial
election, Livingstone was not the candidate of any political party).

2.4.3 The Next Steps in Urban Road Pricing

For urban road pricing in the short term, pricing schemes involving simple charges
structures and technologies, and avoiding major changes in overall price levels,
seem the most likely to be acceptable. The most likely systems are area-based
charges and cordon tolls using simple electronic technology (such as in London),
introduced only for the most congested central areas and on weekdays. In the
medium term (3-10 years), it may be possible (for some cities) to move towards
more sophisticated systems, as has happened in Singapore. Distance-based charges
using GPS-based electronic road pricing (ERP) can replace area-based charges.
Pricing may still be restricted to central areas and weekdays for technological,
practical and acceptability reasons. In the long term, all charges may ultimately be
fully differentiated according to true marginal social costs, as a result of adopting
GPS-based ERP on all urban links and at all times. Also, the charging system could
be integrated in the sense of covering both roads, parking charges and smart card
ticketing for public transport.
In London, the re-election of Mayor Livingstone has ensured the survival of
the London scheme for the time being. However, at the moment, no other cities
appear to be quickly following suit. This can be said although, in many European
cities, different kinds of demonstration projects or experiments have been carried
out or are underway. One such demonstration has been Project PROGRESS. The
cities participating in the project are Bristol, Copenhagen, Edinburgh, Genoa,
Gothenburg, Helsinki, Rome and Trondheim. Some of these cities (Rome,
Trondheim) already have road-charging systems and some others (Edinburgh,
Bristol) have fairly well-advanced plans for the introduction of road pricing. An
interesting question is whether these demonstration projects and experiments have
to any degree increased the likelihood of adopting true road pricing policies in
those cities in near future.
Continued success in London could evidently encourage these and other
European cities to follow suit and with a gradual spread of the acceptability of road
pricing through European cities as a whole. However, the defeat of road pricing
proposals in the recent referendum in Edinburgh makes it unlikely that other
British cities will implement road pricing in the near future. On the other hand,
both the London and the Norwegian experiences suggest that opposition to road
 Road Pricing in Europe A Review of Research and Practice 19

pricing will be much less vocal after it has actually been implemented (for a related
theoretical argument, see Glazer, 2003).
Perhaps the most interesting European city considering urban road pricing,
besides London, currently is Stockholm. In Stockholm, a full-scale trial with con-
gestion taxes will be performed between 3 January and 31 July 2006. A planned
referendum in September 2006 will then decide on whether the toll system should
be made permanent or abolished. Because of a court process related to the procure-
ment of the system, the trial has been delayed and it will be shorter than originally
planned. The congestion tax scheme in Stockholm is based on a cordon toll
charged with an automatic payment system using short-range microwave convey-
ance. The tolled area covers the whole central business district. Tolls will be
charged from inbound and outbound vehicles during morning and afternoon peak
hours (SEK20 or 2.18, one-way, maximum SEK80 or 8.73 per day; the toll is
stepwise ascending and descending in the beginning and end of the toll periods;
taxis and vehicles using non-fossil fuels are exempted). The national government
decided on April 7 2006 to go on with the trial.2

2.5 Road Pricing in Practice in Interurban Transport

2.5.1 Current Schemes in Interurban Transport

In interurban road transport, in contrast to urban transport discussed above, the

question of the appropriate roles of the EU and the national governments assumes a
particular importance. Another difference is the relative importance and treatment
of freight transport (as compared to passenger transport and private car). The
White Paper (CEC, 2001) indicates that in interurban road pricing, the need for
change is the greatest in freight transport.
The overall picture is quite mixed as there have been policy developments
both at the EU level and in many countries at a national level and these have not
necessarily always been consistent with each other. Currently in Europe there are:
1. Eurovignette countries with time-based charges; 2. countries with nationally
implemented kilometre-based or distance-based charges; 3. countries with tolls on
specific roads; and 4. countries with no direct road charging at all. Ricci and
Fagiani (2003) and the references therein provide useful information on these
cases.
The Eurovignette system was originally adopted in six EU member countries:
Germany, Belgium, Denmark, Luxembourg, the Netherlands and Sweden. The
Eurovignette Directive of 1999/62/EC aimed to limit competition problems within
the road freight sector caused by the existence of very different methods and levels
of charging for infrastructure use in different countries. In particular, vehicles
licenced in a country with a low annual licence duty plus supplementary tolls were

2
We thank Professor Lars Hultkrantz for providing updated information on the case.
20 E. Niskanen and C. Nash

felt to have an unfair competitive advantage when competing with a vehicle

licenced in a country with a high licence duty and no supplementary tolls.
Under the Eurovignette system, heavy goods vehicles (HGVs) for freight
transport are required to buy a time-related supplementary licence (i.e. time-based
toll) or vignette in order to be able to use certain defined parts of the European
motorway system for a certain period of time (usually a year). The Eurovignette
Directive sets a limit for the maximum infrastructure access charges payable as
such a licence, on the basis of average infrastructure costs, and with non-dis-
crimination between goods vehicle operators of different nationalities.
The Eurovignette system is limited to motorways and is only related to the
cost of providing those roads, thus excluding external cost. It is based on time,
rather than on the distance travelled. Indeed, as said, its original purpose was to set
maximum charges and in this way to protect hauliers coming from other countries
rather than paving the way for internalising external costs according to the user and
polluter pay principles.
The European Commission has proposed certain revisions to the Eurovignette
Directive (CEC, 2003); these revisions would permit extension of the system to
parallel main roads or indeed to all roads in the country in question thus correcting
the feature of the existing system that it may divert some traffic to untolled roads,
where marginal social costs are not necessarily lower. These revisions, whilst per-
mitting differentiation of charges according to congestion and environmental costs,
would still tie the average level of charges to average infrastructure costs. Even
these modest changes have yet to be agreed at the time of writing.
Switzerland was the first European country to introduce a kilometre-based
charge on all heavy goods vehicles in the country (a phased introduction started in
2001). Moreover, the level of charges makes specific reference to external costs,
although these are average rather than marginal. In Germany the new kilometre-
based system was originally planned to come into effect in autumn 2003, but its
introduction was delayed because of serious technical problems and it only came
into operation in 2005. Austria also now has a kilometre-based charging system for
heavy goods vehicles on motorways. Other European countries also are examining
the case for kilometre-based charging of heavy goods vehicles and Britain plans to
introduce such a system in 2008. Elsewhere, New Zealand has long had a
kilometre-based charging system.
In Southern Europe, France, Spain, Portugal and Italy have tolls on their
motorways, which are differentiated by type of vehicle and sometimes by time of
day or day of the week. These tolls are mainly seen as a way of raising money to
pay for roads. Although these tolls may be of some value in improving allocative
efficiency, they may also have negative effects in diverting traffic to untolled roads
(like the existing Eurovignette system above), where marginal social costs are not
necessarily lower.
 Road Pricing in Europe A Review of Research and Practice 21

2.5.2 Barriers in Interurban Road Pricing

For pricing in interurban road transport, the same broad categorisation of potential
barriers as was assumed for urban transport in Section 2.4.2 applies: 1. techno-
logical and practical barriers; 2. legal and institutional barriers; and 3. accept-
ability-related barriers. However, the above-mentioned short review of the current
status of interurban road pricing in Europe suggests that barriers to pricing in
interurban transport are generally lower than in urban transport. Three important
exceptions to this general picture can however be concluded, as discussed below.
These are the interoperability problems in cross-border traffic (a practical barrier),
the limitations of the current EU legislation (a legal barrier), and the lack of a
common European strategy (an institutional barrier). The discussion below on
these and other issues is again based on Niskanen et al. (2003) and Niskanen and
Nash (2004). See also Viegas (2002).
Key technological barriers are similar to those in the urban context above:
although appropriate technologies exist in principle, they are not widely tested and
thus may not straightaway permit introduction of distance-based or kilometre-
based pricing as full-scale fully differentiated marginal social cost-based pricing.
(The delays in the introduction of the kilometre-based charging system in Germany
showed that the significance of technology-related problems must not be
underestimated.) As for practical barriers, in interurban road networks the links or
routes to be priced are easier to define and isolate than in urban road networks
(which can be, as discussed in Section 2.4.2, very complex). Similarly, the avail-
ability of good data on costs and of impacts of pricing does not seem to be as big
an issue as in the context of urban transport pricing.
Instead, as stated above, inter-operability problems in cross-border traffic are
an important practical barrier. The main legal barrier (considering implementation
of full-scale marginal social cost road pricing) is that currently the EU legislation
does not allow the inclusion of externalities (charges can only be based on
infrastructure costs) and does not allow charges to be applied except on main
roads. The major institutional barrier to the European-wide (cross-border) imple-
mentation of the kilometre-based pricing system is the lack of a commonly agreed
European strategy, including the lack of European-wide standards to ensure inter-
operability across national borders.
Acceptability barriers, political, public or business though important, are less
of a problem for interurban road pricing than for urban road pricing. There are (at
least) two reasons for this. First, the tolls would be mostly paid not by voters, but
by companies or commercial operators of lorries, which often can pass on their
additional costs to their customers. Second, depending on the country many of
these companies/lorries are foreign. Politicians in European countries where there
is considerable through traffic have a natural incentive to use the tolls to collect
revenue. Moreover, even the commercial operators themselves can support a
charging system (as has happened in Germany) which they see as leading to a level
playing field in relation to operators based in other countries (of course, as long as
this, after possible compensations in the form of lowering other taxes, does not
increase their charges overall).
22 E. Niskanen and C. Nash

2.5.3 The Next Steps in Interurban Road Pricing

In the short term (up to 3 years), it can be expected that distance-based kilometre
charges for heavy goods vehicles (HGVs) will continue to gain more ground. In
particular, also other countries currently using the time-based Eurovignette system
can be expected to follow Germany (and Austria and Switzerland) to adopt
kilometre-based charging systems instead. But, as said, many other countries
including the U.K are also considering this kind of charging. However, to secure
acceptability and also for technological reasons, the kilometre-based charging
systems potentially implemented in these and other countries may exhibit two
features or restrictions: 1. no differentiation within a country in time or space, and
2. revenue neutrality i.e. no increase in total payments.
To compensate for the no-differentiation condition and the fact that these
charges apply to heavy goods vehicles only, in certain parts of Europe the
kilometre-based pricing scheme may be complemented by a system of charges
which would use simple technology and would cover certain roads (or stretches of
roads) with particularly serious environmental and/or congestion problems or with
particular financial needs related to those roads (e.g. when adopting public-private
partnership types of solution). The revenue neutrality condition requires that the
road charges will be accompanied by reductions in other taxes and/or vehicle
licence fees. In the medium to long term, however, these restrictions may become
irrelevant and fully differentiated distance-based charges for HGVs and
ultimately all vehicles may become possible, using GPS-based ERP technology
and applying to all roads.

2.6 Conclusions

2.6.1 Lessons from Research

Recently, a lot of progress has been made in making better quality data available
and in providing more reliable, accurate and complete impact and policy analyses
for designing optimal road pricing policies and for estimating their impacts. In
particular, many EU-funded research projects have addressed these issues. Many
interdisciplinary projects (such as EXTERN-E) have developed better methodolo-
gies for producing relevant data, for analysing it and for estimating relevant
environmental and other external costs. Other projects (including PETS, TRENEN,
UNITE and RECORDIT) have applied these methodologies to produce better
estimated figures for external costs and have suggested optimal marginal cost
prices based on these estimates as compared to the current price levels. Some other
studies (such as AFFORD, TRENEN, MC-ICAM) have in turn used these
estimated figures to estimate, by means of numerical simulation modelling
analyses, welfare and other impacts of internalisation of externalities and hence of
(short-run) marginal cost-based road pricing, and in different situations. Further-
more, the AFFORD and MC-ICAM modelling analyses also explicitly considered
 Road Pricing in Europe A Review of Research and Practice 23

second-best situations where the effective second-best constraints assumed reflect

the different types of barriers to pricing discussed in Sections 2.4.2 and 2.5.2
above.3
The AFFORD and MC-ICAM studies demonstrated, among other things, the
following two general results. First, when considering both first-best and second-
best pricing policies, in many instances, simple (second-best) systems could
possibly do much of the job whilst waiting for more sophisticated (first-best)
solutions. Second, much of the benefit of urban road pricing is indirect and is
related to the use of revenues. These kinds of results can have important implica-
tions both for the formulation of effective policies and their acceptability. On the
other hand, whilst presenting these and other results, the two projects emphasised
the need for caution in interpreting them (and similar results, more generally):
there may be potential biases involved in the analyses, either due to biases inherent
to the models or deficiencies in the data (see Milne et al., 2000, and de Palma et al.,
2004).
Overall, despite the long tradition of research and despite the considerable
benefits of road pricing that economists and other analysts have shown, the general
public and majority of politicians still do not appear to be convinced of the
available results. The benefits of road pricing and of marginal cost-based pricing in
particular (as it often requires quite radical changes to current practices in many
respects), to society at large and to individual stakeholders involved, still have to
be demonstrated more convincingly. For instance, as argued, the analyses carried
out thus far can still contain great uncertainties and may also contain serious
biases. More research work is needed and, because of the great number of issues
and dimensions to be allowed, this needs to be interdisciplinary work combining
modelling, economic, institutional, etc. approaches.
An important objective of such research, as discussed above, is to produce
reliable estimates of welfare benefits and other impacts of road pricing. But a
genuinely interdisciplinary approach to research may also contribute at a more
general level, through affecting the overall thinking of people and policymakers of
the relevant issues. Currently, there is still a clear gap between research and
practice in this respect.

3
MC-ICAM went in this respect the furthest by considering the relationship between the second-
best constraints (as modelled in welfare economics) and the different types of barriers considered
here. For that purpose, MC-ICAM made conceptual distinction between barriers and constraints.
The constraints, as defined in second-best welfare economics, are limitations on the pricing
system and measures used. The barriers, instead, represent factors or societal phenomena that are
reasons for the constraints, they generate them. As contrasted to barriers that may be rather
general and in some cases rather abstract, it should be possible to express the constraints in
mathematical terms and quantify them for the purposes of theoretical and simulation modelling
analysis. Another key principle is that a given barrier may give rise to or contribute to more than
just one constraint or conversely different barriers may lead to similar constraints. MC-ICAM
also investigated barriers and their relationship with the second-best constraints along
implementation paths or transition paths ranging from a phased introduction of pricing with
accompanying measures to a sudden widespread implementation (big bang).
24 E. Niskanen and C. Nash

One reflection of this gap is that, from local politicians' viewpoint in particu-
lar, the economists' main criterion or (theoretical) justification in advocating
marginal cost pricing, the promotion of efficiency, may be too general and abstract
to communicate with voters or to support effective decision-making. Efficiency-
based and thus rather abstract explanations of policies simply may not be regarded
as important and relevant by people and politicians, who mainly tend to judge
policies in terms of their impacts on their immediate surroundings including the
fairness or equity types of issue. Local politicians are too close to their voters and
their everyday problems to practise politics and to judge policy alternatives in
terms of abstract efficiency criteria. Instead, more concrete and practical goals or
targets such as reducing traffic congestion or environmental nuisances in certain
parts of their city may appear more reasonable, but then there is the problem (from
the point of view of applying congestion pricing) that there may be other more
attractive measures for pursuing these targets.

2.6.2 Lessons from Practical Experience: What Next?

Two key features of the current situation in European land transport are, on the one
hand, the unbalanced growth of road transport as compared to rail and, on the other
hand, the great differences between different countries in their approaches to road
pricing. A third feature is the lack of common strategy or policy framework at the
EU level. In this situation, although road pricing is most likely to be adopted in the
long run as a major policy approach throughout Europe, both in urban and
interurban context, the question of likely developments in the near future is very
much open.
Important preconditions to successful policy implementation on a broad scale,
besides sufficiently great benefits shown by practical modelling analyses, are
credible benchmark cases providing convincing practical experience. So far, the
available experience and examples of best practice that could be transferred to
other contexts are not too many. This, in particular, holds in urban transport where
the Norwegian cities and Singapore, as examples of actual successful applications,
are somewhat exotic to be considered as true benchmarks considering urban road
pricing in bigger and smaller cities throughout Europe. Indeed, if they were such
examples, one could expect (given that they have been around for some time) that
the effects would already be more visible in the form of similar applications
elsewhere. (This suggests, as conjectured in Section 2.4.2, that, excluding pure
coincidence, there must be some specific features in these applications that do not
necessarily hold elsewhere.) The really significant benchmark applications for
urban road pricing still have to come. London certainly can be such and continued
success there will no doubt speed up the progress (or alternatively possible
setbacks will slow it) in urban road pricing in other countries and cities in the near
future.
By contrast in interurban road pricing, the situation appears more clear-cut: the
kilometre-based charging of heavy goods vehicles in Austria, Germany and
Switzerland most likely will show the way for other countries to follow, especially
 Road Pricing in Europe A Review of Research and Practice 25

those in Central Europe and with a lot of through traffic. However, what will
happen in the peripheral countries in the north and south, whether the Central
European examples make them to follow and within what time frames, is harder to
predict. The new EU countries in the east complicate the picture even further.
Clearly, the role of the EU, which is somewhat unclear at the moment, will be
critical here.
Future policy developments in the area of road pricing will inevitably be
influenced by technological development (in communication technology and car
making and thus largely exogenous to the transport sector). In particular, in the
longer run, new technology, especially GPS-based electronic road pricing (ERP) or
electronic fee collection (EFC), will make many of the arguments of opponents to
road pricing obsolete. Whilst acceptability problems appear to be more difficult in
urban transport than in interurban, it can be expected that developments in
interurban transport, when ERP systems are seen to work, will over time facilitate
the broad-scale application of similar systems in urban contexts, too. Similarly, in
urban transport, increased application of smart card technology in public transport
and of route guidance and other information technology in cars (the relevant
accessories on board will become standard) will make ERP systems more
acceptable.
Perhaps the most important single lesson from actual attempts to implement
road pricing so far is that institutional aspects of the implementation problem need
to be given particular attention. Many issues need to be allowed here; one is the
importance of getting the general public and stakeholder groups to be involved in
developing the proposals from the very beginning. Another, and related key lesson,
is that politics matters; this is because many stakeholders are involved (with
widely-diverging interests) and because many of the issues involved are politically
highly sensitive. As the London case shows, political will and skill is extremely
important and can make a big difference.

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3 Road Pricing: Consequences for Traffic,
Congestion and Location

Lars-Gran Mattsson

Department of Transport and Economics, the Royal Institute of Technology, Stockholm.

Abstract
Congested roads seem to be an unavoidable characteristic of large cities. Transport
economists and planners have regularly suggested that road pricing would be an
appropriate and effective instrument in an overall policy to relieve congestion.
Politicians and the public at large have usually been quite sceptical, however. In this
paper, three ex ante studies of transport and location effects of alternative road
pricing systems are presented and compared. Different models estimated with
different data sets are applied to calculate the effects. The first two studies deal with
the effects on the traffic pattern of a zone-based and a distance-based road pricing
system for the Stockholm area, respectively. In the third study, location effects are
also included in an analysis of optimal congestion charges in a stylised symmetric
city adjusted to resemble Stockholm. All studies indicate a substantial reduction in
vehicle distance travelled. For the zone-based system, traffic volumes in the inner
city of Stockholm are predicted to decrease by 30% for charged hours at a charge
level equivalent to 3 SEK/km. For the distance-based system, traffic volumes in the
inner city are predicted to be reduced by 35 and 19% at charge levels of 4 and 2
SEK/km for peak and office hours, respectively. For the case of optimal congestion
pricing, the reduction is 25% at an average charge level of 2 SEK/km. Additional
effects in the first study are that speed might increase on inner city roads and arterials
by around 20%. Moreover, accessibility to activities in the other half of the city will
be reduced significantly. The most affected relation is the one between inner northern
and inner southern suburbs. In that case, a reduction of the number of vehicle trips by
around 30% is predicted. In spite of quite substantial transport effects, the location
effects are predicted to be very limited.

3.1 Introduction

Congested roads seem to be unavoidable in our large cities. Attempts to meet

demand by a larger supply have often been unsuccessful. Addition of new roads to
the existing network tends to induce new traffic that sooner or later neutralises the
immediate relief of the situation. Transport researchers and planners have for a long
time argued that road pricing has to be a vital element in a successful transport policy
that could reduce the level of congestion and improve the efficiency of the transport
system.
30 L.-G. Mattsson

This conviction among many researchers and planners has generally been
without parallel among politicians and the public at large. It has been difficult to
convince decision-makers that road pricing is a sensible policy and, accordingly,
there are only a few implementations in the world of citywide road pricing schemes.
The only operational systems for the moment are those in Singapore, in the
Norwegian cities of Bergen and Oslo, and in London. Stockholm will probably also
be added to this list. From January 3 to July 31, 2006, a full-scale test of congestion
charging was carried out in the city of Stockholm. This test was followed by a
referendum in connection with the general election in September 2006. In the city of
Stockholm 51% voted yes and 46% voted no. In response to this outcome, con-
gestion charging will be permanently re-introduced by August 2007.
Road pricing is an ambiguous concept. It is used here as a general term for a
pricing system that charges the road users for their right to use a certain road or to
drive in a certain area. This terminology excludes parking fees and fuel and vehicle
taxes from being seen as a kind of road pricing.
Road pricing has been advocated for different reasons. Above, we referred to the
efficiency objective or road pricing as a way of reducing congestion to an optimal
level (going back to the seminal work of Vickrey, 1955). First-best congestion
pricing would be to charge each road user a fee that is equivalent to the increased
costs his/her presence on the road implies for all other road users. In such a system,
the charge level should theoretically vary not only with the time of the day and the
type of the road but also with the time values of the road users that happen to be
present on the road. This would be far too complicated. Any second-best congestion
pricing scheme that would be a candidate for actual implementation has to be
simplified in many respects and also predictable for the road user as to the charge
level.
Road pricing has also been proposed as a way of reducing the environmental
impacts of road traffic. The charge level in such a system should be related to the
costs of pollution and noise that the traffic contributes to and which could be added
to the congestion-related charge.
A third, and among policy-makers more popular reason for road pricing, is that
of raising funds to finance transport infrastructure. In fact, the Norwegian toll rings
have all been set up with this objective in mind.
These different objectives for road pricing are partly in conflict with each other.
A revenue-oriented system should allow for season tickets and it would also be
tempting to choose charging points to avoid reductions of traffic flows. A congestion
pricing system, on the other hand, aims directly at reducing the traffic flows. How-
ever, in order to increase the political acceptability of road pricing, a combination of
the objectives in an integrated strategy has also been considered (May and Roberts,
1995). One of the key issues for the political, and probably also public, acceptability
is how the revenues from road pricing are spent (Goodwin, 1987; Small, 1992).
A road pricing scheme might affect the road user in many ways. The direct
effect is that the monetary cost of using charged road segments during charged hours
would increase. As an indirect effect, the time cost for the same segments will be
reduced, since some road users will leave the road. For the typical user, this will to
some extent, but not fully, compensate for the increased monetary cost. Those who
 Road Pricing: Consequences for Traffic, Congestion and Location 31

leave the charged road segment will change their route, destination, frequency, mode
or timing of the trip. In the long run, car ownership and land use would also be
affected.
The purpose of this chapter is to discuss how road pricing might affect traffic,
congestion and location. Assuming that each road user makes the adjustments that
are most favourable to him/her, it is obvious that the consequences of a road pricing
scheme will depend on how good the alternatives to the present travel decisions are.
But these alternatives vary from city to city. If we should be able to say something
more precise about the effects, we have to consider specific pricing proposals for
specific cities. The most direct approach would be to compare the situation before
and after a road pricing system has been implemented in a city (see Ramjerdi, 1995,
for an excellent study of the Oslo toll system).
An alternative approach is an ex ante study where the effects of alternative
pricing schemes are simulated by the use of some travel demand analysis system (see
May and Milne, 2000, for a very interesting study for Cambridge). Broad results
from three studies will be presented here. The first two studies deal with traffic
effects of a zone-based and a distance-based road pricing system for the Stockholm
area. In the third study, location effects are also included. That study involves the use
of an integrated transport and location model of a stylised symmetric city.

3.2 Application of a Zone-Based Road Pricing System to

Stockholm

In the first case study, we consider the application of a zone-based road pricing
system to the city of Stockholm. The particular study was carried out for the city
executive board as part of an assessment of alternative road pricing systems
(Mattsson, 1995). To reduce the amount of data to present, we will concentrate on
one road pricing system and compare it with a situation without road pricing.

3.2.1 Scenarios

In the zone-based road pricing system to be analysed, the inner city of Stockholm
is subdivided into five zones. A charge is imposed on each vehicle entering in an
inbound direction the area covered by these zones, i.e. crossing the outer border of
the five zones. In addition, the same level of charge is also imposed on each
vehicle crossing any of the borders between the five zones independent of direc-
tion. This means that a vehicle will not only have to pay for entering the inner city,
but also for travelling within the inner city. The total charge on a vehicle will hence
depend on the amount of travel within the inner city, operationalised as the number
of times the vehicle crosses the borders between any zones. For the main semi-
orbital route (which includes the Grndalsbron bridge), which actually crosses the
western part of the charged area, vehicles are only charged for entering the outer
32 L.-G. Mattsson

border of the charged area. This implies that a vehicle can go between the northern
and southern suburbs of Stockholm for a charge of one crossing.
Such a zone-based system would be fairly complicated to implement. Some
kind of electronic system would probably be necessary. The topography of Stock-
holm facilitates the practical implementation of the system. It is to a great extent
possible to use the natural subdivision of the inner city by water when constructing
the zones. This means that there are relatively few road connections between the
zones, often in the form of bridges. It would be necessary to have 12 charging
points to form the outer cordon of the area covered by the five zones and in
addition to that 29 charging points for the borders between the zones inside the
covered area, i.e. in total 41 charging points.
This zone-based road pricing system was intended to represent congestion
pricing in so far that the charges are only imposed during Monday to Friday, 6 a.m.
to 7 p.m. The charge level was set to 9.75 SEK for light vehicles1 . For heavy
vehicles (over 3 tonnes) the charge level was three times as high.
The analysis was carried out based on population, employment and car
ownership forecasts for the year 2005. It was assumed that there would be no
important upgrading of the transport network as compared to 1995.
The zone-based road pricing scenario will be compared with a reference
scenario that is exactly the same except that no charges are imposed.

3.2.2 Modelling Approach

To predict the traffic effects of the scenarios, we have applied one of the most
advanced traffic analysis systems that was available for Stockholm at the time
the Fredrik system. The Fredrik system combines a nested logit travel demand
model with the network equilibrium assignment model of Emme/2. The logit-based
travel demand module handles trip frequency, travel mode and destination choices
with separate models for 8 different individual-based trip purposes, whereas the
assignment module predicts route choices and traffic flows on the road network. In
the assignment module, additional vehicle flows representing freight transport and
distribution traffic are added to the individual-based flows on the road network.
The Emme/2 system allows congestion on the road network to be modelled by
specifying the travel time of each link on the network as an increasing function of
the traffic flow on the same link. The pertinent property of the network equilibrium
assignment is the Wardrop principle of user optimum (or Nash equilibrium). It
implies that the predicted car travel demand for any origin-destination zone pair
will be assigned to the different possible routes on the network between the origin
and the destination so that all routes that are actually used, i.e. have positive flows,
will also get the same generalised cost, and so that no unused route has a lower
generalised cost. The generalised cost is then calculated as the travel time multi-
plied by an assumed value of time plus the monetary cost, where the latter one

1
To facilitate comparisons between the studies, all monetary values are expressed in constant
value of money of the year 2000.
 Road Pricing: Consequences for Traffic, Congestion and Location 33

includes possible road user charges. Different values of time are then applied to
private trips, business trips and additional flows of freight transport and distribu-
tion traffic. In this way, it is possible to represent different sensitivities to costs for
these different categories.
In the assignment module of the Fredrik system, car travel times between the
different zones are calculated with respect to the congestion levels that are implied
by the assigned flows to the links on the road network. These car travel times are
then fed back to the module calculating the travel demand between the zones and
this new demand is in turn returned back to the assignment module. The Fredrik
system iterates between the demand module and the assignment module until an
overall equilibrium is achieved.
The demand and supply of travel vary considerably over the time of the day.
To handle this, the traffic effects have been calculated for three separate time
periods, representing the morning peak, afternoon peak and the rest of the day. The
results for the different time periods are then weighted together to represent
different aggregate time periods.
Road user charges may, in principle, affect a trip makers choice of route,
departure time, travel mode, destination and frequency. It may also affect the pro-
pensity for trip chaining and in the longer run car ownership and activity pattern by
relocation of the trip makers residence or of the activities to which the trip maker
is travelling. Of these potential behavioural responses, the Fredrik system handles
route, mode, destination and frequency choices. These adjustments probably repre-
sent the most important responses with one obvious exception the choice of
departure time. The likely consequence of this shortcoming is that the Fredrik
system will underestimate the car traffic reduction effect of road pricing during the
time periods when charges are in place, while overestimating the overall reduction
effect.

3.2.3 Transport Effects

Table 3.1 presents the effect of the zone-based road pricing system on the vehicle
distance travelled subdivided by where the travelling takes place. The inner city
coincides almost perfectly with the charged area with the exception of the semi-
orbital route, which is partly inside. Since the road pricing system is consciously
designed to divert traffic to that route, its traffic volume is presented separately.
Obviously, the proposed road pricing system has a substantial effect on the traffic
volumes in the charged area, i.e. the inner city. The system is designed to have a
certain congestion pricing profile. In fact, only 39% of the hours of a week are
charged. Since the charges are in place during the most congested hours, however,
the traffic reduction effect as an average over all hours of a week is as high as 19%
compared to 30% when considering only charged hours. Some of the traffic that
disappears from the inner city is diverted to the semi-orbital route, which will be
more congested. It is also interesting to note that although only the inner city and to
some extent the semi-orbital route are actually charged, there is a notable reduction
of traffic in the inner suburbs by 8 % for charged hours. The reason is that vehicle
34 L.-G. Mattsson

trips that in the reference scenario go between one inner suburb and the inner city
or another inner suburb on the other side of the inner city may in the road pricing
scenario change destination or mode or not even take place. Finally, it should be
remembered that in a county like Stockholm as much as 60% of the traffic is in the
outer suburbs (in the reference scenario). Hence, the traffic reduction effect of the
proposed road pricing system on a county scale is only 4% for the charged hours
and 3% as a weekly average.

Table 3.1. Total vehicle distance travelled by subregion

Subregion Percentage of total Percentage change in road pricing scenario with
distance travelled in respect to reference scenario
reference scenario Mon-Fri, 6 a.m. Weekly average
to 7 p.m.
Inner city 6 -30 -19
Semi-orbital route 2 15 10
Inner suburbs 32 -8 -5
Outer suburbs 60 0 0
County 100 -4 -3

The Saltsj-Mlar water strait subdivides the Stockholm region into a northern and
a southern part connected by five bridges. Because of the way in which the road
pricing system is designed, one cannot go between these parts without being
charged. Trips that only use the semi-orbital route are only charged once, however.
Table 3.2 shows how the road pricing system affects the vehicle volumes on these
critical bridges during the charged hours. The results indicate a substantial
reduction by more than 40 % of the vehicle flows across the central bridges in the
inner city. To some extent, these flows are rerouted to the Grndalsbron bridge
(which is a section of the semi-orbital route). The net reduction of the flows across
the Saltsj-Mlar passage is 25%.

Table 3.2. Vehicle traffic volumes across the Saltsj-Mlar passage (thousand vehicles per
workday, 6 a.m. to 7 p.m.)
Bridge Scenario Percentage
Reference Road pricing change
Bridges in Old Town 56 32 -43
Central bridge 92 52 -43
Western bridge 41 22 -46
Grndalsbron 109 117 7
Total 264 223 -25

The implementation of the proposed road pricing system will lead to less
interaction between the different subregions in the County of Stockholm. This is
clearly illustrated in Table 3.3, which displays percentage changes in individual
vehicle trips for charged time periods. It should be remembered, however, that the
reduction in vehicle trips to some extent is explained by a change of mode of
transport. The inner city exhibits the largest overall change with a 15% reduction
of the vehicle trips to and from this subregion. Also, the trips that are totally inside
 Road Pricing: Consequences for Traffic, Congestion and Location 35

the inner city are reduced substantially, by 12%. This is, of course, a consequence
of the design of the road pricing system with zonal boundaries inside the inner city.
There are even more obvious reductions in the vehicle trips between suburbs on
opposite sides of the inner city. This is particularly the case for trips between the
inner suburbs for which the reductions are about or slightly below 30%. These trips
are very dependent on priced links through the heart of the city centre. Trips
between the outer suburbs can to a larger extent use the less heavily priced semi-
orbital route. As a consequence, they are not reduced to the same extent. Consider-
ing the county as a whole, the number of vehicle trips goes down by 5%, which is
about the same reduction as was noted for the vehicle distance travelled (see Table
3.1). In sum, the road pricing system will have a clear effect on the spatial pattern
of interaction. This is partly a consequence of the particular structure of the Stock-
holm road network. All vehicle trips between the northern and southern parts have
to go through the inner city and will be more or less heavily priced.

Table 3.3. Percentage change in vehicle trips between subregions for road pricing scenario with
respect to reference scenario for workdays, 6 a.m. to 7 p.m.
To Outer Inner Inner Inner Outer Total
From northern northern city southern southern
suburbs suburbs suburbs suburbs
O. n. suburbs 2 2 -9 -21 -15 -1
I. n. suburbs 2 4 -16 -30 -23 -5
I. city -10 -17 -12 -23 -13 -15
I. s. suburbs -22 -28 -21 6 4 -5
O. s. suburbs -16 -21 -13 4 3 0
Total -1 -5 -15 -5 -1 -5

The next two tables present the effects of the proposed zone-based road pricing
system on average vehicle speed and trip travel time. Table 3.4 indicates that the
road pricing system has a substantial impact on the level of congestion in the inner
city. The system leads to an increase in speed on inner city roads by 17% and on
inner city arterials by 24%. As noticed, the road pricing system will cause some of
the traffic to be rerouted from inner city roads to the semi-orbital route (cf. Table
3.1). Hence, this route will be more congested and speeds will actually go down.
Although the road pricing system only charges car driving in the inner city, it has a
perceivable effect on the speed in inner suburbs as well, an increase of 9%,
whereas there is no such noticeable effect in outer suburbs.

Table 3.4. Average vehicle speed (km/h) during workdays, 6 a.m. to 7 p.m.
Scenario Percentage
Reference Road pricing change
Inner city roads except arterials 24 28 17
Inner city arterials 29 36 24
Semi-orbital route 41 37 -8
Inner suburbs 42 45 9
Outer suburbs 63 63 0
36 L.-G. Mattsson

Table 3.5 shows the impact on vehicle travel time per trip by subregion of the
origin. The largest effect is in the inner suburbs, where travel time goes down by 7-
8%. This is a result of a combination of shorter trip length (not shown here) and
higher speed (as was shown in the previous table). For trips originating in the inner
city, there is only a slight reduction in travel time per trip, though there was a
substantial increase in average speed on inner city roads and arterials. This is a
consequence of an increase in travel distance per trip in this subregion, which in
turn may be an effect of rerouting to avoid passing charging points in the inner
city.
It is also of interest to estimate the level of revenue to which the road pricing
system would give rise. Table 3.6 shows that the number of crossings of the outer
border of the charged area is about of the same magnitude as that of the borders
inside this area. This means that of the total daily revenue of 5.7 million SEK from
the road pricing system, about half comes from the outer and half from the inner
border crossings. This implies an average charge level of 3.1 SEK per workday and
inhabitant in the Stockholm County.

Table 3.5. Vehicle travel time per trip (min) during workdays, 6 a.m. to 7 p.m.
Subregion of trip origin Scenario Percentage
Reference Road pricing change
Outer northern suburbs 26.0 25.2 -3
Inner northern suburbs 22.5 20.8 -8
Inner city 28.7 28.4 -1
Inner southern suburbs 22.4 20.9 -7
Outer southern suburbs 23.3 22.6 -3
County 24.5 23.4 -4

Table 3.6. Number of charging point crossings and revenue from charging for a workday, 6 a.m.
to 7 p.m., in the road pricing scenario
Place of charging Number of crossings Revenue
(million SEK)
Outer border of the charged
240,000 2.9
area (inbound direction)
Zone borders inside the
230,000 2.8
charged area (both directions)
Total 470,000 5.7

The total annual revenue can be estimated as 250 times the revenue for a workday.
In the present case, this amounts to 1.4 billion SEK/year or 780 SEK per inhabitant
per year in Stockholm County. Net of collection costs, the total revenue would
amount to 1.2 billion SEK/year (see Mattsson, 1995, for the calculation of collec-
tion costs). If the total net revenue were to be refunded to the inhabitants in the
County of Stockholm on a per head basis, the refund would be 680 SEK/year.
The average charge level per crossing is 12.0 SEK, which is higher than the
charge level for a light vehicle because of a certain share of heavy vehicles in the
traffic flow. The charge per vehicle distance travelled in the county as a whole
during charged hours is 0.21 SEK/km. Since the charge is actually imposed only in
 Road Pricing: Consequences for Traffic, Congestion and Location 37

the inner city, it might be more appropriate to calculate the charge per vehicle
distance travelled in the inner city including the semi-orbital route, which amounts
to 3.0 SEK/km. This could be compared to other vehicle operating costs that are
assumed to be 1.1 SEK/km for private trips. It is also interesting to calculate an
approximate arc elasticity of vehicle distance travelled with respect to total vehicle
operating costs 2 . This calculation leads to an elasticity for the proposed road
pricing system of -0.23. According to a review by Goodwin (1992), the long-term
elasticity with respect to fuel cost (which represents the main part of the operation
cost) could be around -0.33 and the short-term elasticity around -0.16. The present
value is therefore well inside this interval and does not represent any extreme
assumption about the trip makers cost sensitivity.

3.3 Application of a Distance-Based Road Pricing System to

Stockholm

The next case study is of a more recent date. It concerns the application of a
distance-based road pricing system to the city of Stockholm and its inner suburbs.
This particular study was carried out by the Transek consultancy firm by order of
the Swedish National Environmental Protection Agency (Lindqvist Dilln et al.,
2001). The purpose was to illustrate to what extent some kind of congestion
pricing, in this case operationalised as a distance-based road pricing system, could
reduce congestion and improve passability in the city.

3.3.1 Scenarios

In this distance-based road pricing system, the densely built-up area of Stockholm
is subdivided into two charge areas inner city and inner suburbs. Inner city is
defined almost exactly as in the previous case study, whereas inner suburbs are
only roughly defined in the same way3. When driving in these charge areas during
peak hours or office hours, a distance-based charge is levied on each vehicle. Peak
hours are defined as workdays, 7 a.m. to 9 a.m. and 4 p.m. to 6 p.m., and office
hours as workdays, 9 a.m. to 4 p.m. Two different road pricing scenarios are
studied a high and a low scenario. The charge levels in the high scenario are

2
Let TR and T0 be the total vehicle distance travelled in the county as a whole during charged
hours in the road pricing and the reference scenario, respectively. Furthermore, let S be the total
revenue and c operating vehicle cost per unit of distance excluding possible road charges. The arc
elasticity of total vehicle distance travelled with respect to total vehicle operating cost per unit of
distance can then be approximated by (TR  T0 ) /(TR  T0 ) .
S /(2TRc  S )
3
The main differences are that the present definition of inner suburbs includes part of the
municipalities of Huddinge, Sollentuna and Tby but not the municipality of Nacka.
38 L.-G. Mattsson

shown in Table 3.7. The levels in the low scenario are simply half of the levels in
the high scenario.

Table 3.7. Distance-based charge levels in the road pricing high scenario (SEK/km)
Inner city Inner suburbs
Peak hours 4 1
Office hours 2 0

Compared to the previous case study, the period of charging is reduced by two hours.
Moreover, the idea of congestion pricing is more pronounced, since peak hours are
priced more heavily than office hours. The area that is charged is larger during peak
hours, since the inner suburbs are also included. The previous system was found to
be equivalent to a charge level of 3.0 SEK/km in the inner city, which is midway
between the levels for peak hours and office hours in the present high scenario.
To implement a distance-based road pricing system, an electronic system would
be necessary. Such technique is under development but will not be discussed further
here.
The analysis will be carried out for the year 2015. Assumptions about popula-
tion, employment and economic development are chosen in agreement with the
present regional plan. As for the transport system, the semi-orbital route has been
extended by the southern and northern links as compared to today. In addition, a
number of other road and public transport investments are assumed to have been
completed.
The distance-based road pricing high and low scenarios will be compared to a
reference scenario that is exactly the same except that no charges are imposed.

3.3.2 Modelling Approach

Recently, a new national transport model, Sampers, has become operational (Beser
and Algers, 2002). Sampers is a comprehensive forecasting tool that combines an
advanced application of nested logit models for travel demand and the network
equilibrium assignment model Emme/2. The system includes a regional model
system that covers the Stockholm region, and which is the specific model system
that has been applied in the present study. It treats similar choice dimensions to the
Fredrik system that was applied in the previous case study. This means that most of
the important behavioural responses to road pricing are treated with the exception
of the choice of departure time. Sampers is estimated on recently collected data and
has been extensively validated. It is meant to be the reference model for Sweden
(Widlert, 2002).

3.3.3 Transport Effects

The effects of the distance-based road pricing system on vehicle distance travelled
are displayed in Table 3.8. The first observation is that the proposed pricing system
 Road Pricing: Consequences for Traffic, Congestion and Location 39

leads to a substantial reduction in travel distance. The reduction level varies in an

expected way between peak and office hours and between the high and low charge
scenario. Overall, the reduction is at the same level or possibly somewhat lower
than in the previous case study. There, we observed a reduction of 30% for charged
hours in the inner city at an equivalent charge of 3.0 SEK/km. Here, we have a
reduction in the inner city of 35 and 19% for peak and office hours at a charge of 4
and 2 SEK/km, respectively. The high scenario has charges which are exactly
twice as high as the low scenario. The reduction is almost proportional to the
charge level in the inner suburbs, whereas it is less than proportional in the inner
city. It can also be noted that there is a spill-over effect of the pricing system in so
far that there is a discernible reduction of travel distance in the inner suburbs also
during office hours when the charge in that area is zero.

Table 3.8. Total vehicle distance travelled by subregion

Subregion Percentage change with respect to reference scenario
Road pricing high scenario Road pricing low scenario
Peak hours Office hours Peak hours Office hours
Inner city -35 -19 -21 -13
Inner suburbs -22 -5 -11 -3

The traffic volumes on the bridges across the Saltsj-Mlar passage are also
reduced substantially (see Table 3.9). The rerouting effect is less pronounced com-
pared to the previous zone-based road pricing system, however. In the latter case,
the volume on the central bridge was reduced by 43%, while the volume on the
Grndalsbron bridge was increased by 7%. Here, the volume on the Central bridge
is reduced to a lesser extent, and the volume on the Grndalsbron is reduced rather
than increased. In the present system, the vehicles pay strictly for driven distance
in the charged area, whereas in the previous system Grndalsbron as part of the
semi-orbital route was consciously lower priced to offer a rerouting option. The
present system is less effective in reducing traffic through the city centre. If this is
not desirable, pricing the semi-orbital route less heavily than inner city roads could
probably modify the effect. In an electronic implementation of a distance-based
road pricing system, such fine-tuning would be technically feasible.

Table 3.9. Vehicle traffic volumes on bridges across the Saltsj-Mlar passage
Bridge Percentage change with respect to reference scenario
Road pricing scenario high Road pricing scenario low
Peak hours Office hours Peak hours Office hours
Central bridge -24 -13 -20 -12
Grndalsbron -12 -6 -10 -5

The revenues that would be generated by the present pricing system are 2.7 and 1.6
billion SEK/year for the high and low scenarios, respectively. This represents a
charge level of 1,280 and 730 SEK per inhabitant and year, respectively. Of these
revenues, 1.8 and 1.0 billion SEK/year, respectively, are from driving in the inner
40 L.-G. Mattsson

city. The corresponding value for the zone-based system was 1.4 billion SEK/year,
all of which was collected in the inner city.

3.4 Application of Optimal Congestion Pricing to a Generic City

So far, the analysis has been focussed on the most immediate behavioural
responses to road pricing such as route, mode, destination and frequency choices.
There are also long-term effects that may be important. The most prominent
examples are changes in car ownership and in the location of traffic generating
activities. How road pricing affects location is an issue that has been subject to
varying opinions among researchers and public debaters. This is motivation for the
fact that in this final case study we also include location effects of road pricing in
our analysis. In the previous case studies, we have assessed systems for road
pricing where the charge levels have been fixed in advance. Here, we take a
normative approach and evaluate transport and location effects of a system of
optimal congestion pricing, i.e. a system where the charge levels are determined
endogenously to internalise the external effects of congestion and hence will vary
with level of congestion on the different links in the road network. For the moment,
such a system would not be technically possible to implement. It should rather be
seen as a benchmark for other more feasible systems.

3.4.1 Modelling Approach

To analyse optimal congestion pricing, a combined transport and location model of

a generic city will be applied. The city is completely symmetric in all respects,
which simplifies the analysis. The model will be described very briefly. For a full
account, see Eliasson and Mattsson (2001).
The city consists of 8 symmetric rays from the city centre, with 4 suburban
zones on each ray at every 5th kilometre. There is a radial network, where links
consisting of two lanes in each direction connect the zones on each ray. In addition,
the zones in the ring immediately outside the city centre are connected by a ring
road, also with two lanes in each direction. Since the city is completely symmetric
in all respects, it will be sufficient to look at only one ray when presenting the
results. The zones will then be denoted 1 to 5, from the city centre to the outermost
suburbs, and the links A to D, from the innermost links to the outermost ones (see
Fig. 3.1).
There are four types of activities that are located in the zones in the city:
households, workplaces, shops and service establishments. Logit models govern
the location of activities, where the most important location factor for households
is accessibility to shops, services and workplaces, for shops and service establish-
ment it is accessibility to households (as customers) and workplaces (as deliverers)
and for workplace it is accessibility to households (as workforce).
 Road Pricing: Consequences for Traffic, Congestion and Location 41

ring
ring
zone 1 A zone 2 B zone 3 C zone 4 D zone 5
(in) (in) (in) (in)

A B C D
(centre) (out) (out) (out) (out)
ring
ring

Fig. 3.1. A representative ray of the star-shaped city with the ring road added

These activities give rise to travel that can be carried out by three different modes:
car, public transport and slow mode (the latter one is an aggregate of cycling and
walking). All modes can use all radial links. Only cars can use the ring road. The
generalised link travel costs for cars are increasing functions of the car flow on the
link. For public transport, on the other hand, the generalised link travel costs are
decreasing functions of the volume of passengers. The assumed mechanism behind
this is that when passenger volumes go up, the density and/or frequency of the
public transport lines can be increased. In both cases, the effective travel time will
go down. The slow mode has generalised travel costs that are proportional to
distance. We assume user equilibrium route choices based on generalised costs for
each mode. With the assumed simple network in the city, there is always a unique
cheapest route for public transport and slow mode. Because of the ring road for
cars, there may be alternative cheapest routes for cars.
Travel can take place during three different time periods: morning peak, office
hours and afternoon peak. The worker of the household travels every workday to
work during morning peak and returns home during afternoon peak. Shopping and
service trips take place during office hours or afternoon peak. Logit models that
take generalised travel costs into account determine the mode and destination
choices of these trips. For shopping and service trips, there are also logit-based
choices of trip frequency and time period (office hours or afternoon peak). In
addition, there are deliveries from the workplaces to the shops and the service
establishments. These deliveries have fixed frequencies, are all by car and only
during office hours. A logit model that takes generalised transport costs into
account determines the spatial pattern of the deliveries.
Thus, the travel demand for different trip types depends on where different
activities are located and what the generalised travel costs are on the different links
in the transport network. The travel times (and, in the case of congestion pricing,
also the travel costs) depend on the number of people choosing the different modes
for the different links, i.e. on travel demand. The location of activities finally
42 L.-G. Mattsson

depends on the accessibility to other activities in the different zones, which in turn
depends on the location of other activities and the generalised costs between the
zones. All these relationships result in a number of equations that are solved for
equilibrium (see Eliasson and Mattsson, 2001, for details).
The model has been calibrated with the intention to replicate location and
transport patterns of a generic symmetric European city. In the end, however,
one has to make a choice of what a generic city is. In this paper, behavioural
parameters and size variables have, when possible, been chosen so that the model
should resemble the situation in the densely built-up area of Stockholm for the year
1996 (see Eliasson and Matttsson, 2001, for a complete specification). Since the
consumer price index change is negligible between 1996 and 2000 (less than 1%
increase), we may equally well think that 2000 is the year of application.

3.4.2 Scenarios

Optimal (first-best) congestion pricing is achieved by charging each car user on a

link the social marginal congestion cost of driving on that link4. If all car users
have the same value of time, W, the optimal charge for a specific link as a function
of the flow f on the link would be

dt ( f )
charge( f ) W f ,
df

where t ( f ) is the travel time, which is assumed to be an increasing function of the

car flow on the link5. This level of charge has an intuitive interpretation. To achieve
optimal congestion pricing, each car user on a link should be imposed a charge that
is equivalent to the additional cost his presence on the link imposes on all other
users of the same link, which is the additional travel time caused by him,
dt ( f ) / d f , times the number of car users affected, f, times their value of time, W.
Since this level of charge depends on the actual car flow, it will be different for
different links and different time periods. One additional difficulty should be
noticed. The value of time varies, in fact, between different trip types, and hence
the average time value on a link depends on the mixture of trip types. For computa-
tional reasons, we neglect this difficulty and consistently apply a common average
value of time of W = 42.6 SEK/h.
A congestion pricing scenario, where optimal congestion pricing according to
the specification above is applied, will be compared to a reference scenario with no
road pricing. Scenarios with an inner or outer cordon toll ring have also been
analysed in Mattsson and Sjlin (2004), but will not be discussed here.

4
To be theoretically correct, economies of scale in the public transport system and land
congestion should also be optimally priced.
5
We have assumed that only travel time and not operational cost varies with the traffic flow.
 Road Pricing: Consequences for Traffic, Congestion and Location 43

3.4.3 Transport and Location Effects

In the present study, the road user charges are endogenously determined as optimal
congestion charges for each link and time period. Since all links have the same
capacities, the charges will directly reflect the levels of congestion on the links.
Table 3.10 presents the resulting congestion charges on a per kilometre basis. Since
the differences between link directions are small, we only present averages over
the two directions here and in forthcoming tables. Interestingly, the level of charge
varies between 0 and 4 SEK/km, which is very much the same as was assumed in
the previous two case studies. The charges and hence also the congestion levels are
highest for the ring road, link B and A during morning and afternoon peaks. For
the outermost link D during office hours, optimal congesting charge would be
practically zero.

Table 3.10. Optimal congestion charges by time period and link (SEK/km)
Time period A B C D Ring
Morning peak 3.1 3.5 1.9 0.8 4.3
Office hours 1.1 1.7 0.4 0.1 1.7
Afternoon peak 2.1 2.2 1.2 0.5 3.2

With these levels of congestion charging, the total revenue collected per inhabitant
would be 9.5 SEK per workday or 2,380 SEK per year6. This is a much higher
annual charge for the inhabitants than was the case for the zone-based system, 780
SEK, or for the distance-based system, 1,280 SEK and 730 SEK for the high and
low level of charge, respectively. One reason is that in the present model we have
assumed that the population is much more densely located than actually is the case
in the Stockholm region. In addition, the road system is sparser in the model than is
the case in Stockholm, which leads to high levels of congestion and hence of
congestion charges.
Table 3.11 presents the effects of congestion pricing on total distance and time
travelled by mode. Congestion pricing leads to a substantial reduction in car
distance travelled by 25%, again of the same magnitude as for the congested parts
of Stockholm in the previous studies. The effect on total car travel time is even
more dramatic, which reflects the fact that the link speeds are much higher in the
congestion pricing scenario than in the reference scenario (see Table 3.12). Part of
the car traffic reduction is an effect of change of mode to both public transport and
slow mode. Since we have assumed increasing returns to scale with respect to
public transport travel time, total distance travelled by public transport goes up
more than total time does.
The car link speeds during morning and afternoon peaks on the most congest-
ed links (Ring, A and B) are quite low in the reference scenario, 9 to 14 km/h. This
is too low to reflect the situation in Stockholm (cf. Table 3.4). The road network of

6
The model is expressed in workers rather than in inhabitants. We have applied the average
inhabitant to worker ratio for Stockholm to obtain this result. In addition, we have assumed 250
workdays per year and that congestion charging is effective only on workdays.
44 L.-G. Mattsson

our generic city is too sparse realistically to represent the Stockholm network.
Because of that, we also obtain unrealistically large speed increases in response to
the introduction of congestion pricing. Some qualitative conclusions can still be
drawn. By assumption, there are only work trips during the morning peak, while
there are also shopping and service trips during the afternoon peak. Since the latter
kinds of trips are elastic with respect to trip frequency and can also change time
period, speed increases are greater for the afternoon peak than for the morning
peak. We can also note that when the level of congestion is low (speed is high) in
the reference scenario, the speed increase is low. Link D during office hours is the
most extreme example.

Table 3.11. Total distance and time travelled by mode. Percentage change in the congestion
pricing scenario with respect to the reference scenario
Car Public transport Slow mode
Distance Time Distance Time Distance Time
-25 -59 17 12 25 25

Table 3.12. Car link speed by time period and scenario (km/h)
Link Morning peak Office hours Afternoon peak
Refer- Con- % Refer- Con- % Refer- Con- %
ence gestion ence gestion ence gestion
A 14 24 72 23 34 48 13 28 119
B 13 23 79 17 30 74 12 28 141
C 21 29 40 37 41 12 22 34 54
D 33 37 10 45 46 2 35 39 12
Ring 11 20 83 17 30 74 9 24 161

Table 3.13 shows the effects of congestion pricing on link mode shares. The model
predicts fairly large decreases in car shares for all links, also the outer ones. The
increases are slightly higher for slow mode than for public transport.
The effects of congestion pricing on the location pattern are displayed in Table
3.14. The most striking result is that the effects are generally very small. Congestion
pricing leads for most of the zones to a relocation of less than 1% of the activities.
The most notable exception is a relocation of shops from the suburbs connected by
the ring road, i.e. zone 2, to the city centre. Congestion pricing makes it more
expensive to use the ring road for shopping trips. This makes it more attractive to
locate shops in the city centre. In general, there is a slight tendency to move out
activities from zone 2 to the next zone farther out. Congestion pricing hence seems to
have a slight decentralising effect. This is in contrast to what was found when
congestion pricing was applied to the same generic city but without the ring road
(Eliasson and Mattsson, 2001). The location effects of congestion pricing were in
general somewhat larger in that case. But more interestingly, they went in a central-
ising direction. The explanation for the present result may be that the ring road makes
the interaction between the outer suburbs easier. When congestion pricing makes it
more expensive to use the congested central links of the road network, the outer
suburbs may become more attractive. The overall conclusion is that the location
effects of congestion pricing are ambiguous, also in a highly stylised city as in our
 Road Pricing: Consequences for Traffic, Congestion and Location 45

case. They seem to depend on the specific design of the road network and on the cost
of interaction.

Table 3.13. Absolute change in mode shares by link for the congestion pricing scenario with
respect to the reference scenario (percentage units)a
Mode Link
A B C D
Car -8 -11 -10 -7
Public transport 3 5 4 3
Slow 5 7 6 4
a
For the Ring road, which is only open for cars, there are no mode changes by assumption.

3.5 Discussion and Conclusions

The subject of this paper is the effect on transport and to some extent on location
of road pricing. General answers to that question would definitely be very useful.
One can raise doubts about whether it is possible, however. There are two different
ways of investigating the question. The most direct way is to compare the situation
before and after a road pricing system has been implemented.

Table 3.14. Percentage change of the location of activities in the congestion pricing scenario with
respect to the reference scenario
Activity Zone
1 (city 2 3 4 5
centre)
Households 0.3 -0.8 0.9 0.4 0.7
Workplaces -0.3 -0.8 1.5 0.5 -0.5
Shops 8.4 -1.6 0.6 -0.1 -0.8
Services -2.1 -0.3 2.8 -0.6 -2.1

The other way is to carry out an ex ante study by analysing what happens in an
urban transport and possibly also a location model. Such a model could be
more or less realistic. In a very abstract model of a city, such as the monocentric
model of urban economics, it may be possible to derive some general qualitative
conclusions by mathematical arguments. An analysis of this type could indicate,
under fairly general conditions, the direction of change of travel behaviour and
residential choices as a result of, say, (optimal) congestion pricing. Such con-
clusions could be of some relevance for the design of transport policies for real
cities. The standard monocentric model is an extremely crude representation of a
real city, however. First real cities are not monocentric. Moreover, the effects of
road pricing depend heavily on what alternatives the inhabitants have. Can they
avoid paying the car user charges by changing route, mode, destination or even
postponing some trips? The possibilities for extending an urban economics model
to include such behavioural mechanisms, and still keep it mathematically tractable,
46 L.-G. Mattsson

are very limited. The possibility that remains is to simulate specific road pricing
systems for specific cities by means of those detailed and often sophisticated
computer-based travel demand analysis systems that are available in many cities.
Although this may give us reasonably reliable results for the cities and pricing
systems that are studied, we may still have problems to draw very general
conclusions about the effects.
By comparing different studies, it may be possible to draw more reliable conclu-
sions about the effects. This is the philosophy behind this chapter. In the first two
studies that have been presented, different road pricing systems for Stockholm have
been analysed by two different travel demand analysis systems. In the third study,
location effects were also included. In that case, the model was not applied
specifically to Stockholm. It was rather applied to a stylised completely symmetric
city, although inspired by the situation in Stockholm. It should be noted that all
applied models are different and have been estimated using independent data sets. If
they give similar results, this should increase the credibility of the conclusions. It
must be admitted that though the models are different, they still have much in
common. The theoretical foundation for all of them is a combination of nested logit
models and principles of network equilibrium. Moreover, they are all based on cross-
sectional data. Panel data describing behavioural changes in response to travel cost
increases would be a valuable complementary data source. It is also assumed in all
studies that the road users perceive the road charge as a marginal cost and that they
respond to this cost as to other marginal costs of driving.
Comparing the results from the three studies, there are many striking
similarities. First, the road pricing systems are not so different despite the fact that
one is zone-based, one is distance-based and one is based on the principle of
optimal congestion pricing. The distance-equivalent charge level varies between 0
and 4 SEK/km. It is particularly interesting that the optimal congestion charges
varied around the levels that were applied in the other two studies. When it comes
to the transport effects, all three studies indicate a substantial reduction in vehicle
distance travelled at the assumed charge levels. For the inner city, the reduction is
30% for charged hours at a charge level equivalent to 3 SEK/km for the zone-based
system as compared to reductions by 35 and 19% at a charge of 4 and 2 SEK/km
for peak and office hours, respectively, for the distance-based system. In the third
study based on the stylised city model, the reduction was 25% for an area that also
included less congested suburbs.
There are also some interesting differences between the studies. The first study
predicts larger traffic reductions on the central bridge through the inner city than the
second study which can be traced to the fact that the semi-orbital route is less heavily
priced in the first study. This stimulates re-routing of trips from the inner city. This
result indicates that the precise design of a pricing system is very important in order
to achieve the effects that are desired.
When there are fewer vehicles on the roads, congestion will go down and speed
will go up. The first study predicts that this will result in an increase in speed for
inner city roads and arterials during charged hours by around 20%.
Both the zone-based and the distance-based road pricing systems that have been
analysed would price all vehicle passages through the inner city. Since there are no
 Road Pricing: Consequences for Traffic, Congestion and Location 47

alternative unpriced routes between the northern and southern halves of Stockholm,
this will reduce the accessibility to the activities in the opposite half of the city in a
substantial way. This is clearly illustrated in the first study. The most affected
relation is the one between inner northern and inner southern suburbs. In that case, a
reduction in the number of vehicle trips by around 30% is predicted.
Location effects of transport policies are not so often considered (see Eliasson
and Mattsson, 2001, for a brief review of the literature)7. They are included in the
third study, however. The general conclusion is that the location effects are small, in
spite of the fact that the transport effects are substantial. In the public debate, there
has often been a fear that congestion pricing might negatively affect the attractive-
ness of locating shops into the city centre. This study rather indicates the opposite;
congestion pricing increases the number of shops in the city centre. It should be
remembered, however, that the location effects reported are based on a highly
simplified stylised model of a symmetric city. On the other hand, limited location
effects are reported in many other studies (see the review in Eliasson and Mattsson,
2001)8.
Road pricing is a controversial transport policy that is much discussed among
researchers, planners, policy makers and the public at large. One reason for continu-
ing research is to provide these discussions with better information about the likely
effects. Such information has to be as reliable, factual, unbiased and comprehensive
as possible. The indicators that have been presented in this chapter are all fairly
aggregate. Now, when congestion pricing is on the political agenda again in Stock-
holm and elsewhere, one of the main questions has turned out to be the distributional
effects. Would congestion pricing benefit/harm rich or poor people, men or women,
city centre or suburban inhabitants, single persons or families with children, business
or private households? The answers to these questions are also related to how the
charge revenues would be used. To elucidate these distributional effects of road
pricing, including how the revenues could be used to compensate those who
otherwise would lose on such a reform, is an important research task that requires
much more effort in the future.

References
Beser, M., Algers S. (2002). SAMPERS: The new Swedish national travel demand forecasting
tool, in: Lundqvist, L., Mattsson, L.-G. (eds.), National Transport Models: Recent Developments
and Prospects. Springer, Berlin: 101-118.

7
The EU project PROSPECTS: Procedures for Recommending Optimal Sustainable Planning of
European City Transport Systems: http://www-ivv.tuwien.ac.at/projects/prospects.html and its
sister projects within The Land Use and Transport Research Cluster: http://www.ess.co.at/LUTR/
represent other interesting research.
8
Wegener (1996) reports small location effects in a simulation of drastically increased petrol
prices for Dortmund.
48 L.-G. Mattsson

Eliasson, J., Mattsson, L.-G. (2001). Transport and location effects of road pricing: A simulation
approach. Journal of Transport Economics and Policies, 35: 417-456.

Goodwin, P.B. (1987). The rule of three: A possible solution to the political problem of
competing objectives for road pricing. Traffic Engineering and Control, 29: 495-497.

Goodwin, P.B. (1992). A review of new demand elasticities with special reference to short and
long run effects of price changes. Journal of Transport Economics and Policies, 26: 155-170.

Lindqvist Dilln, J., Eliasson, J., Johansson, G., Sjberg, B., Ingstrmer, P. (2001). A system for
improved passability in the Stockholm region. Report no. 5165, Published by the Swedish
National Environmental Protection Agency (in Swedish).

Mattsson, L.-G. (1995). Road pricing as an instrument in traffic management? An assessment of

the proposal for inner city road pricing zones in Stockholm by the Swedish Society for Nature
Conservation. Working Paper TRITA-IP AR 95-31, Department of Infrastructure and Planning,
Royal Institute of Technology, Stockholm (in Swedish).

Mattsson, L.-G., Sjlin, L. (2004). Transport and location effects of a ring road in a city with or
without road pricing, in Lee, D.K. (ed.), Urban and Regional Transportation Modeling: Essays in
Honor of David Boyce. Edward Elgar, Cheltenham: 113-133.

May, A.D., Roberts, M. (1995). The design of integrated transport strategies. Transport Policy, 2:
97-105.

May, A.D., Milne, D.S. (2000). Effects of alternative road pricing systems on network
performance. Transportation Research A, 34: 407-436.

Ramjerdi, F. (1995). Road pricing and toll financing with examples from Oslo and Stockholm.
PhD Thesis, Department of Infrastructure and Planning, Royal Institute of Technology,
Stockholm.

Small, K.A. (1992). Using the revenues from congestion pricing, Transportation, 19: 359-381.

Vickrey, W. (1955). Some implications of marginal cost pricing for public utilities. American
Economic Review, 45: 605-620.

Wegener, M. (1996). Reduction of CO2 emissions of transport by reorganisation of urban

activities, in: Hayashi, Y., Roy, J. (eds.), Transport, Land-Use and the Environment. Kluwer
Academic Publishers, Dordrecht: 103-124.

Widlert, S. (2002). National models: The case of the Swedish national model system: SAMPERS,
in: Lundqvist, L., Mattsson, L.-G. (eds.), National Transport Models: Recent Developments and
Prospects. Springer, Berlin: 50-56.
4 Implementation Paths for Marginal Cost-
Based Pricing in Urban Transport: Theoretical
Considerations and Case Study Results

Erik T. Verhoef1, C. Robin Lindsey2, Esko Niskanen3, Andr de Palma4, Paavo

Moilanen5, Stef Proost6 and Arild Vold7
1
VU University, Amsterdam, the Netherlands
2
Department of Economics, University of Alberta, Canada
3
STA Research, Helsinki, Finland
4
University of Cergy-Pontoise, France
5
Strafica Ltd, Helsinki, Finland
6
Centre for Economic Studies, K.U. Leuven, Belgium
7
TI, Institute of Transport Economics, the Norwegian Centre for Transport Research, Oslo,
Norway

Abstract
While economic theory provides grounds to believe that a rapid implementation of
marginal cost-based pricing would be a sensible policy strategy, in the practice of
policy-making more gradual implementation paths (IPs) appear to be favoured.
Arguably the most important reason why this should be the case is the existence of
barriers and constraints. Surprisingly, however, little or no attention to the design
and performance of policy IPs has been given in the transport literature. The
purpose of this paper is to develop a structured economic approach to the design
and evaluation of such IPs. A second purpose is to apply the proposed approach to
analyse implementation paths in the context of urban transport. There is evidently
great tension or gap between an idealised approach and what is feasible in applied
modelling work using large-scale empirical network models. Four urban case
studies are presented, which seek an optimal compromise between the theoretically
ideal approach and a pragmatic approach (of fully arbitrary IPs). We believe the
results are indicative of what one might expect to encounter along a realistic IP, but
at the same time acknowledge that the IPs presented are unlikely to represent the
best possible path given the local circumstances.

The research summarised in this chapter was carried out as part of the EU Fifth Framework
research project MC-ICAM (DG TREN, Contract No. GRD1/2000/25475-SI2.316057). Financial
support from the European Commission and helpful comments from Catharina Sikow and from
MC-ICAM external experts and partners are gratefully acknowledged. Lindsey would also like to
thank the Social Sciences and Humanities Research Council of Canada for funding of the project
Road pricing in urban areas. The opinions expressed in this paper are those of the authors and
do not necessarily reflect the views of the European Commission. This paper draws from earlier,
unpublished, overviews that have been presented at various MC-ICAM meetings.
50 Erik T. Verhoef et al.

4.1 Introduction

Since Pigou (1920) economists have endorsed pricing measures as a key compo-
nent of transport policy. The basic idea is well-known: when prices are equal to
marginal social costs including external costs, agents face socially efficient trade-
offs with respect to all their travel decisions: numbers of trips, destination, time of
day, transport mode, whether to purchase an environmentally-friendly car and so
on. Over the last few decades pricing policies based on marginal costs have
gradually evolved from a purely academic theoretical construct to a realistic and
widely-discussed policy option for many areas both urban and non-urban
around the globe. The steady growth in transport-related problems such as
congestion and CO2 emissions on the one hand, and the development of technolo-
gies for automated charging on the other, are important factors explaining this
development.
At least in theory, marginal cost pricing can be combined with rules for using
the pricing revenues in a way that leaves everybody (or at least a large majority)
better off. Yet, despite the large and growing assortment of plans to adopt pricing
measures, the number of actual applications has remained small. Various types of
barriers have been identified that may explain the difficulties that have been
encountered in implementing marginal cost pricing (e.g. Niskanen et al., 2003).
Awareness of these barriers has recently triggered interest in the design of
implementation paths for pricing. If it is indeed not possible to introduce marginal
cost-based pricing immediately and throughout the transport sector, is it at least
feasible to identify a path along which pricing reform can be introduced gradually?
Can a sequence of steps be identified such that each step individually passes the
various barriers and together the steps lead to the desired end result? And what
principles underlie the design of these steps? These and other similar questions
have been addressed in the European Commission funded project MC-ICAM.
This chapter will consider these questions in the context of pricing in urban
transport, although much of the discussion in Sections 4.2 and 4.3 is also applic-
able to interurban transport. Section 4.2 starts by discussing barriers and con-
straints as the primary motivation or necessity for adopting implementation paths
as opposed to big-bang implementation in the introduction of transport pricing
policies. Section 4.3 addresses how implementation paths can be formulated in
terms of barriers and constraints and solved in a practically feasible way. Sections
4.4-4.6 then present four case studies from the MC-ICAM project that address
implementation paths for urban transport pricing. Section 4.7 concludes.

4.2 Implementation Paths: Motivation and Theory

Most studies of transport pricing have taken a comparative static approach in

which the outcome of a pricing regime is compared with a benchmark or status quo
(see, for example, various contributions in Button and Verhoef (1998)). The
 Implementation Paths for Marginal Cost-based Pricing in Urban Transport 51

process of transition from the status quo to the new equilibrium is typically ignored
even though policymakers are often at least as concerned with this transition as
with the eventual long-run design and impacts of pricing policies.
Such a phased approach or implementation path (IP henceforth) may seem
perfectly reasonable from a political standpoint. But the case for an IP is not
logically obvious. Why not follow a Big-Bang Implementation (BBI) strategy and
implement marginal cost pricing immediately and throughout the transport sector
in order to reap the largest possible net social benefits as early as possible? Why
move towards optimal prices only gradually?
Arguably the most important reasons why BBI is infeasible in practice are
barriers and constraints. Project MC-ICAM made an important conceptual distinc-
tion between barriers and constraints. According to the definitions adopted by the
project, barriers are underlying conditions that may limit the possibilities of design-
ing and implementing a most desired pricing (and broader policy). By contrast,
constraints refer to the functioning of the pricing system or the contents of the
pricing policy itself. A barrier is relevant to the design of an IP if it brings about a
constraint on pricing. To explain this bipartite approach we will first categorise
barriers and constraints and offer examples of the causal linkage between each pair
of barrier and constraint types. Then we will identify the conceptual and practical
reasons for distinguishing between barriers and constraints.

4.2.1 Barriers

Various types of barriers that can prevent BBI of optimal transport prices have
been distinguished. Table 4.1 shows the main categories, with some examples of
each. The entries are reasonably self-explanatory. It is worth noting, however, that
barriers often do not exist in isolation, but rather are linked to other barriers in the
same or other categories. At a general level acceptability depends on the existing
technology and on the legal and institutional status quo. For example, a lack of
legal safeguards to guarantee privacy may undermine acceptability. Such inter-
dependencies between barriers make them more difficult to remove than if they
were unrelated.
Of the six entries under A. Technological and practical barriers, all but the
first entry refer to practical considerations although Difficulty of computing
optimal charges might be considered a technological barrier in the sense of
computing speed or imperfect optimisation algorithms. Costs of compliance for
users include the transactions costs incurred when dealing with an established and
familiar pricing regime such as the costs borne by a driver of maintaining a
positive credit balance on a transponder, keeping track of toll schedules and so on.
Adjustment costs include the costs that households and firms incur in under-
standing new regulations and pricing instruments, and in adapting to them by
changing travel patterns, location choices for residence, work and business, etc.
Adjustment costs also include the time and money costs that regulators and
administrators encounter while learning how to operate and administer new pricing
technologies and systems, and how to enforce regulations.
52 Erik T. Verhoef et al.

While adjustment costs are listed here as a practical barrier, they may also be
manifest as an acceptability barrier; for example due to lack of public understand-
ing as per the first entry under C. Acceptability barriers in Table 4.1. Given this,
and the potential quantitative significance of adjustment costs, it is useful to
consider whether these costs provide any intrinsic reasons for preferring an IP to
BBI or vice versa. The answer depends crucially on the nature of adjustments
costs. If the adjustment costs rise more than proportionally with the size of the
adjustment (i.e. they are convex, as is the case with quadratic formulations that
have been favoured in theoretical studies) then a series of gradual changes would
be less costly, ceteris paribus, than one big change. For example, if implementa-
tion is attempted quickly, design errors or system failures may occur that might
have been avoided with a slow approach. Collecting data on costs, estimates of
demand elasticities and other information required to derive optimal prices is also
more difficult or costly in a short time span. Also, the costs and inconvenience of
installing inductance loops, overhead tolling gantries and other infrastructure are
probably smaller for system operators and users alike if the necessary roadwork is
undertaken at a slow and (more or less) steady pace in order to minimise traffic
disruptions.
The case for BBI, in contrast, is strengthened if adjustment costs have a large
fixed or lumpy component. Fixed costs are incurred in installing new types of
transponders, in learning about changes in regulations and price schedules, in
changing residential or job location in response to pricing, etc. Users are not
obliged to keep themselves fully informed or to respond to every change, but they
may still incur some costs in deciding not to do so, and if they choose not to re-
optimise they may forego some benefits.
Clearly, the shape of the adjustment cost function is an empirical question and
unfortunately there is very little relevant evidence about it. There is a literature on
adjustment costs incurred by firms in making new investments, replacing capital
and hiring workers (see Hamermesh and Pfann (1996) for an insightful review).
However, despite numerous studies, the nature of adjustment costs is still poorly
understood, and the evidence is mixed on whether adjustment costs are convex,
concave or discontinuous, and over what range of magnitude of adjustment.
Moreover, it is doubtful that the adjustment costs incurred by firms are particularly
indicative of the costs involved in the domain of transportation. There seems to be
no systematic evidence on adjustment costs incurred from transport pricing reform,
and obtaining information is severely complicated by the fact that adjustments to
pricing reform are one-off changes rather than repeated adjustments, such as those
made by firms in response to the business cycle that afford more opportunity for
study.
In short, little is known about adjustment costs with respect to transport
pricing reform. Consequently, nothing definitive in relation to these costs can be
said in favour of either phased implementation or BBI.
 Implementation Paths for Marginal Cost-based Pricing in Urban Transport 53

Table 4.1. Classification of barriers to marginal cost pricing

A. Technological and practical barriers

x Lack of technology capable of charging according to time, location, type of vehicle or
user, etc.
x Cost and time required to build tolling or other infrastructure
x Lack of data on costs and/or demand needed to compute optimal charges
x Difficulty of computing optimal charges for large transport networks
x Costs of compliance for users
x Adjustment costs

B. Legal and institutional barriers

Legal
x Constitutional right to freedom of movement
x Laws against discrimination
x Privacy laws
Organisational structures
x Lack of institutions with mandates to introduce new pricing measures
x Market power of private operators under Public-Private Partnerships or other
arrangements
Governments
x Inability of government to commit itself or a successor government; e.g. to a particular use
of revenues
x Difficulties of horizontal or vertical policy coordination between levels of government
Political
x Resistance from political parties in opposition
x Lobby groups exert undue influence on decisions

C. Acceptability barriers
(Public, political and business interests)
x Lack of public understanding of the reasons for pricing or how it will operate
x Costs of pricing measures are quantifiable, visible and immediate, whereas benefits are
often uncertain and deferred
x Costs of pricing measures are concentrated and large per capita, whereas benefits are
widely distributed and small per capita

4.2.2 Constraints on Pricing

As noted, a barrier becomes relevant when it implies a constraint on the pricing

policies that can be implemented. We will distinguish the following five types of
constraints on transport pricing policies:

1. Coverage or scope of the pricing system: This refers to which geographical

areas, transport modes, user groups, externalities etc. can be priced.

2. Composition and level of pricing measures: There may be constraints on

which types of charges can be implemented concurrently (e.g. cordon tolls and
54 Erik T. Verhoef et al.

area licenses, fuel tax surcharges and gas guzzler taxes). Tolls may be subject
to maximum or minimum levels, etc.

3. Degree of differentiation of prices: Price differentiation may be constrained

according to location, vehicle type, trip purpose, mode, time of day or season.
Time differentiation may be restricted to a predetermined schedule rather than
being responsive to weather, accidents or other circumstances.

4. Rules and principles governing revenue use: Allocation of revenues may be

earmarked to certain uses such as investments in the transport mode or
jurisdiction in which they are generated, or to cross-subsidisation of another
mode. Some uses of revenue may be precluded, such as lowering distortionary
taxes elsewhere in the economy or providing lump-sum rebates to users.

5. Use of supplementary non-price measures: Marginal cost pricing may be most

beneficial if it is accompanied by non-pricing measures such as investments,
regulations governing vehicle fuel economy, emissions and safety standards,
information provision, and so on. Various constraints may impede deployment
of such instruments.

4.2.3 Correspondence Between Barriers and Constraints

As noted above, barriers underlie constraints on pricing. Examples of the causal

linkages between each major type of barrier and each of the five types of constraint
are shown in Table 4.2. The cells give (or directly imply) examples of concrete
constraints that prevent optimal pricing from being viable. For example, the first
cell A1 of the table pertains to the linkage between technological and practical
barriers and the coverage of the pricing system. Acoustic or other engineering
considerations may preclude efficient charging of drivers for noise on busy roads
with many other noise sources particularly if the marginal disutility from noise
depends on the overall decibel level, acoustic frequency, weather conditions, etc.
Practical considerations such as infrastructure costs may militate against com-
prehensive road pricing, and so on.
 Implementation Paths for Marginal Cost-based Pricing in Urban Transport 55

Table 4.2. Correspondence between barriers and constraints

Constraints 1. Coverage 2. Compo- 3. Degree of 4. Rules and 5. Use of
on: or scope of sition and different- principles supplement-
the pricing levels of iation of governing ary non-price
Underlying system prices prices revenue use measures
barriers:
A. Technolog- Technologic- Difficulty of Inability to Excessive Lack of space
ical and al difficulty charging ne- differentiate administra- to expand
practical of pricing gative tolls tolls by tive costs of road capacity
barriers noise accord- (potentially location, targeting Technology
ing to source warranted if time, driver compensation for real-time
Excessive unpriced sub- character- to groups route guid-
cost of tol- stitutes have istics most affected ance not
ling all links high external by charging ready or too
costs) expensive
B. Legal and Freedom of Self-financ- Law against Inability of Environ-
institutional movement ing constraint price dis- government mental or
barriers necessitates implies lower crimination to commit to other laws
toll-free bounds on by time of revenue allo- prohibiting
alternatives array of day or trip cation. May acquisition of
Free parking charges purpose (e.g. require ear- rights of way
at residences Price cap commuting, marking of to build new
or workplaces regulations to business and revenues roads
prevent leisure trips) either to faci-
exploitation Requirement lity users or
of market for harmoni- to users of the
power by sation of same mode
private charges Mandatory
infrastructure across cross-subsidy
operators jurisdictions payments
from roads to
public trans-
port or rail
C. Accept- Public Toll ceilings Public senti- New toll Local oppo-
ability related demand for or floors ment against outlays to be sition
barriers toll-free discriminat- offset by prevents
alternatives ing between lower annual construction
Lack of groups vehicle taxes of new roads
precedent for
tolling inner
city roads

Table 4.2 makes it clear that a single barrier may be the source of more than one
constraint. For example, a public acceptability barrier to road pricing may create a
demand for untolled routes (cell C1), impose upper limits on tolls (cell C2), and a
requirement that toll outlays be offset by lower annual vehicle taxes (cell C4).
Similarly, a given constraint may originate from multiple barriers. For example,
differentiation of tolls according to time, location or driver type may be prevented
by a technological barrier (cell A3) as well as an acceptability barrier (cell C3).
The fact that the causal linkages between barriers and constraints can be
many-to-one or one-to-many provides one reason for distinguishing between the
56 Erik T. Verhoef et al.

two concepts. A second overriding practical reason is that the constraints on

pricing, use of revenues and supplementary measures are not predetermined and
cannot be deduced from a blank slate, but rather must be derived from the
particular economic and institutional setting which is where barriers come in. In
some cases the barriers are readily identified and concrete. For example, the
capabilities and costs of a given pricing technology may be known more or less
accurately. The same is true of laws, and whether or not particular institutions have
given legal or administrative mandates. Other barriers, such as those related to
public acceptability, may be vague and abstract; for example, the fact that people
dislike being monitored while driving. Whether the barriers are concrete or
abstract, for the purpose of simulation modelling the resulting constraints must be
formulated (from the barriers) in quantitative and mathematical terms.
The possibility of constructing an IP arises from the fact that barriers are
generally not set in stone, but can be eased or removed given sufficient time and
effort. Indeed, policy packages may include measures designed to do just this.
Barriers are therefore relevant when considering broader or longer-term policy
options, whereas constraints apply in the shorter run when choosing policies within
an existing setting or framework. However, as explained in the next section, the
formulation of IPs adopted here and in the case studies embraces a more limited
ambition in which barriers are treated as given rather than endogenous.

4.3 Formulating Implementation Paths

In a world with no constraints, policy instruments could be chosen freely. This is

the world assumed in standard economic expositions of marginal cost pricing, and
the resulting policy rules are often referred to as first-best policies. When binding
constraints exist, we enter the world of second-best. The challenge is then to set
policy instruments in such a way that the constraints are satisfied in the least
distortionary way possible. Such policy rules are referred to as second-best
policies. One important feature of second-best prices is that they typically deviate
from marginal costs. It is therefore more correct to speak of marginal cost-based
pricing as in the title to this chapter.
From a theoretical perspective the appropriate way to formulate an optimal IP
would be to set up an optimal control theory problem in which prices and any
supplementary non-pricing instruments are the control variables, and the con-
straints are embodied in the equations of motion and inequality conditions. But
given the inherent difficulties of economic dynamics, and the scale of urban trans-
portation networks, it would generally be a futile task to try to formulate and solve
such an optimal control problem.
A more practical approach is to define an IP as a temporal sequence of second-
best optima along which the constraints evolve exogenously over time as the
underlying barriers gradually erode or are removed in discrete steps. A phase in an
IP can then be defined as the time period during which the constraints remain
fixed, and hence the pricing rules and the instruments used remain fixed too. A
 Implementation Paths for Marginal Cost-based Pricing in Urban Transport 57

phase transition is the moment at which the constraints change.

The IPs are thus defined in terms of pricing rules rather than in terms of price
levels. For two reasons prices may change not only at a phase transition, but also
during phases of implementation (i.e. for given pricing rules) or indeed also after
the final phase transition has taken place. First, the monetary value assigned to
external costs may change as incomes rise or as scientific knowledge of health and
other effects advances. Second, prices can change as agents adapt by purchasing
new vehicles, changing places of residence or work, etc., and as investment and
other supply-side policy measures take effect. Both these types of price changes
would take place during the normal course of events even without pricing reform,
and also if a BBI strategy were followed. Thus, price changes should not be
assumed to occur only at times of phase transition along an IP.
Four additional important points regarding IPs should be made. The first
concerns the synergy or antagonism of deploying different policy instruments in
combination. The concept of additivity is useful here. Two or more instruments
are said to be additive in their benefits if the welfare gain from implementing them
together equals the sum of the gains from implementing them separately. Corre-
spondingly, the benefits are sub-additive if the joint gains are smaller than the inde-
pendent gains and super-additive if the joint gains are larger. When the welfare
gains are super-additive (i.e. exhibit synergies) it is advantageous to deploy
instruments at the same time rather than to postpone implementation of some to a
later phase or not at all. This is all the more true if the adverse welfare-distribution-
al effects of individual instruments tend to be offset by the other instruments. By
contrast, if the gains are sub-additive then the case for implementing the instru-
ments at the same time if at all is less clear particularly if each instrument has
large set up or fixed operating costs.
A second point regarding IPs is that, even if the barriers underlying pricing
constraints are exogenous, welfare at a given phase of implementation may depend
not only on the contemporaneous values of the policy instruments, but also on the
values chosen for the instruments in earlier phases. If so, the IP exhibits path
dependency. Path dependency may arise because of the durability and immobility
of buildings and road infrastructure, as well as from inertia in location choices. In
principle, this intertemporal linkage between phases should be taken into account
in solving the second-best optima, but for computational and other reasons this
may not be easy to do in practice.
The third point concerns the benefits from eliminating barriers (and hence
constraints) to the use of instruments. One obvious approach to this question is to
compare welfare at a given stage of an IP with welfare in the BBI in which all
relevant instruments are fully deployed. When an IP exhibits path dependency, this
comparison becomes conceptually more complicated, as a distinction can be made
between welfare at a given stage under BBI when performed from stage 1 onwards,
and when performed from the stage under consideration onwards. When multiple
barriers contribute to the same constraint, one can expect to find that the benefits of
removing barriers become interdependent.
The final point is that in applied modelling work it may not be possible to
identify strict second-best optima for given sets of constraints. This is especially
58 Erik T. Verhoef et al.

true for large-scale network models, in which the number of potential instruments
(e.g. link-based tolls) may cause full optimisation or equilibrium algorithms to be
prohibitively time consuming to implement. Likewise, it may not be possible to
translate each and every barrier into an exact, quantitative constraint. For example,
it is reasonable to assume that, for acceptability reasons, transport taxes would
often have some upper limit but it is hard or impossible to identify ex ante which
exact tax level distinguishes acceptable from unacceptable taxes. In such cases,
one could still try to design IPs according to the philosophy discussed above (e.g.
one could still aim to identify taxes that are close to the second-best optimal ones
while being likely to satisfy the relevant constraints that are likely to apply), but
some degree of arbitrariness of course becomes unavoidable. Such motivated arbi-
trariness will also be present in the case studies below, to which we will now turn.

4.4 Description of the MC-ICAM Urban Case Studies

The objective of the MC-ICAM project was to investigate how marginal cost-
based pricing should be implemented in transportation. A theoretical framework
for analysing IPs based on barriers and constraints as described above was
developed in Niskanen et al. (2003). Building on this framework, case studies were
conducted for urban transport (de Palma et al., 2003) and interurban transport
(Henstra et al., 2003). Attention is limited in this chapter to the four urban case
studies that were carried out for Paris, Brussels, Helsinki and Greater Oslo. This
section provides overviews of the studies and the simulation models that were used
to implement them. Selected features are identified in Table 4.3.

4.4.1 The Paris Case Study

The Paris case study covers Ile-de-France: an area that includes Paris Intra Muros,
the suburbs, the new town around Paris, and a dispersed distribution of residences
and employment. The number of people making morning trips in the area was 6.8
million in 2002, and is forecast to grow to about 8.5 million by 2012. Computa-
tions are performed with the software package METROPOLIS which is designed
for dynamic traffic simulation and tracks the movements of individual vehicles in
one-second time increments. It also accounts for travellers trip-timing preferences
by computing the costs incurred by each traveller of arriving at the destination
earlier or later than desired (schedule delay cost) and adding this to travel time cost
and toll payments to compute generalised travel cost. The road network consists of
nearly 18,000 links.
Table 4.3. Selected features of case study settings and models
Paris
Population size 2002: 6.8 m. travellers
2012: 8.5 m. travellers
Modes covered Auto, exog. generalised
cost for public transport
Number of links Approx. 18,000 road links
No. time periods/days Continuous over a day
Auto ownership Fixed
Vehicle technology None
Vehicle occupancy Fixed at unity
Number of trips Fixed at 2 per day
Route choice Deterministic
Departure time choice Continuous time
Exogeneous long- Modelled with exogeneous
time dynamics Origin-Destination matrices
Endogeneous long- None
run dynamics
Externalities included Congestion, emissions,
accidents, noise, social
cost of public funds
Types of pricing Flat and time-varying
link and cordon tolls,
travel time-based tax
Brussels
2005: 1.0 m. residents
0.7 m. commuters
Car, taxi, bus, rail,
non-motorised
One
Peak and off-peak
Fixed
Size and fuel type (exog.)
Function of mode choice
(solo driver or carpool)
Fixed per resident and per
commuter
None
Peak/off-peak
Exogeneous destinations and
locations
Medium-run equilibrium with
endogeneous vehicle stock
(private and public)
Congestion, emissions,
accidents, noise, unpaid
parking
Full electronic road pricing,
single cordon, parking, fuel
tax, various public transport
fares
Helsinki
2000: 1.6 m. residents
2020: 2.0 m. residents
Auto/public transport/slow
modes, freight
7,500 roads, 440 transit lines
1 hour for peak & interpeak
Function of accessibility
Emissions (exogeneous)
By mode (exogeneous)
Function of trip type & auto
availability (exog.)
Stochastic
None
Study-wide population/em-
ployment growth, building
regulations, transport infra-
structure, GDP growth, prices
Building stock, household/
employment relocation
Congestion, emissions,
accidents
Link-based, toll ring,
distance-based, zone specific
parking charges, fuel tax,
public transport fares
Greater Oslo
2002: 1.0 m. residents
2015: 1.1 m. residents
All urban modes
Implementation Paths for Marginal Cost-based Pricing in Urban Transport
Thousands (for 7 modes)
1 hour for peak & interpeak
Function of fuel costs and
annual car taxes
Emissions (exogeneous)
Fixed for car, endogenous
for transit
Function of accessibility
Deterministic
None
Short run with fixed car
ownership, residential and
workplace locations; long-
run with all variables
endogen.
Congestion, environmental
costs including VOC
emissions, accidents
Link-based, toll ring, zone
specific parking charges,
fuel tax, annual car tax, pub-
lic transport fares, housing
rent (endogeneous)
59
60 Erik T. Verhoef et al.

Public transportation is treated at a rudimentary level by specifying an exogenous

and time-independent generalised travel cost that depends on the origin and
destination, the type of traveller and idiosyncratic preferences. Each traveller is
assumed to make two trips per day and to travel alone if they drive. Trip origins
and destinations, the vehicle stock and vehicle technology are treated as fixed. In
all, three travel decisions are therefore modelled: a choice of mode and if auto is
selected a choice of departure time and route.
In addition to congestion, the external costs of noise, accidents, pollution and
greenhouse costs are accounted for in the welfare assessment. All external costs
except congestion are assumed to be proportional to distance travelled. The mar-
ginal cost of public funds is set at 0.14 cents per Euro which is the value used for
government planning in France. The consequent 14% premium on government re-
venue is tallied with external costs in the welfare assessment. Pricing instruments
include flat (time-independent) and time-varying tolls paid either on individual
road links or to pass inside a cordon, and a tax proportional to travel time that
approximates the effect of a fuel tax and could be implemented in a few years
using GPS.

4.4.2 The Brussels Case Study

The case study for Brussels encompasses the area within the outer ring road of
Brussels.
Unlike the other case studies all pricing scenarios are conducted for a single
year (2005). Impacts are assessed with the TRENEN II URBAN model. Unlike
METROPOLIS, in TRENEN the road network is modelled as a single link and
segmentation of time is limited to peak and off-peak periods. However, it features
(exogenous) differentiation of vehicles according to size, fuel type and passenger
occupancy. In the medium run the stock of automobiles is adjusted in response to
changes in the number of automobile trips taken.
Two types of public transport are featured: buses and trams, and metro. Buses
and trams use the same road network as cars and suffer from congestion, whereas
metro runs on a separate right of way. Service frequencies for both types of public
transport are optimised in the medium run, and waiting times at stops therefore
decrease with passenger volumes. The set of policy instruments includes compre-
hensive road pricing (i.e. tolling of the single link), as well as parking fees and
time-differentiated (peak/off-peak) public transport fares.1

1
In addition to studying implementation paths the Brussels study examined a scenario in which
control of these policy instruments is divided between a city government and a regional govern-
ment with different constituents and corresponding welfare objectives. The results of this exercise
are described in de Palma et al. (2003).
 Implementation Paths for Marginal Cost-based Pricing in Urban Transport 61

4.4.3 The Helsinki Case Study

The Helsinki case study covers the Uusimaa Region of Finland: an area of 14,400
square kilometres that includes the Helsinki Metropolitan Area, two surrounding
cities, and 1.6 million of the approximately 5 million inhabitants of Finland in
2000. Computations are performed with an interactive land-use and transport
model based on the MEPLAN modelling framework. MEPLAN incorporates five
dimensions of behaviour: workplace location, residential location, automobile
ownership, travel mode and route. The transport network includes about 10,000
road links and 200 transit lines. As in the Paris study, the level of transit service is
assumed to be independent of ridership. As in the Brussels study, time is divided
into two periods, but unlike either Paris or Brussels there is no substitution of
demand across time. Auto ownership and numbers of trips are both endogenous.
The land-use component of MEPLAN includes residential and workplace
location decisions and the building stock, and the re-calculation of equilibria in
five-year increments enables analysis of temporal phasing of policies. The suite of
pricing instruments is similar to that for Brussels except that parking fees are
differentiated by zone, and Brussels does not include a spatial dimension.

4.4.4 The Greater Oslo Case Study

The Greater Oslo case study area contains the city of Oslo and surrounding
municipalities in Akershus county. A land-use and transport model for Greater
Oslo (RETRO) is used to study passenger transport and land use. RETRO assesses
four dimensions of travel behaviour: trip frequency, destination choice, mode
choice and route choice, for periods with peak and off-peak traffic load. The first
three dimensions are described with a nested logit model. RETRO includes sub
models for residential and workplace location and for car ownership. Although
land use only accounts for periods of peak traffic load, the travel demand sub
model can subsequently be used to calculate the resulting off-peak transport costs
and demand.
In the short run auto ownership and location decisions are fixed, whereas in
the long run these and all other variables are endogenous. Besides a detailed road
network, network representations are included for buses, tramways, subways,
trains, water transportation, bicycling and walking. Service frequency increases
with transit volumes so that, as in Brussels, there is a positive ridership externality.
In other respects the RETRO model is similar to the MEPLAN model used for
Helsinki.

4.4.5 Assessment of the Case Studies

From these brief descriptions it should be evident that the case studies differ in a
number of respects: their geographical areas and populations, representation of
transport networks, dimensions of behaviour modelled, the sets of policy instru-
62 Erik T. Verhoef et al.

ments examined, and other aspects. Paris is distinct in terms of its large population,
its abstract representation of public transportation, and a non-zero value for the
marginal cost of public funds. Brussels is unique in specifying only a single link
for each transport mode and in evaluating IPs for a single year.2 Only the Helsinki
and Greater Oslo studies account for land use and residential and workplace
location decisions.
While the case study areas and models differ in various respects, the studies
employ a common framework that facilitates description and comparison. First and
foremost, all studies adopt the philosophy behind an IP as described in Section 4.2,
i.e. consider it as a sequence of second-best optima. In cases where constraints
cannot be formulated exactly, or second-best optima cannot be computed precisely,
the choice of policy instruments is based on what was considered a likely result
that formal second-best optimisation might have yielded. In principle, a single
level of government therefore undertakes to maximise social surplus while
accounting for the impacts on all affected parties/stakeholder groups. A second
element of the common framework is the monetary values assigned to the external
effects of transport. Local values are used where available and where appropriate
(e.g. for externalities with localised impacts, such as noise). National or EU-wide
values are employed where estimates at a more disaggregated level are lacking, or
where external effects are global in nature (e.g. climate change). The IPs are
described in the next section.

4.5 Implementation Paths in the Case Studies

Table 4.4 summarises the main features of the IPs adopted in each study. The three
columns in Table 4.4 correspond to the first three columns of Table 4.2. To
economise on space, the last two columns of Table 4.2 are not included in Table
4.4 but relevant considerations are mentioned in the text. Each IP consists of the
base year, and 2 to 4 subsequent phases of implementation. For Paris the base year
is 2002 and no form of pricing is yet in use. The first stage of implementation is
introduced in the same year, and three more phases ensue in 2005, 2008 and 2012.
For Brussels all phases are evaluated for the year 2005. Parking fees and public
transport fares are set at current levels for the base case. Two alternative scenarios
are considered for Phase 1: adjustment of parking fees (Phase 1a) or adjustment of
fares (Phase 1b). Both instruments are adjusted in Phase 2, and road pricing is
added in Phase 3. For Helsinki the base year is 2000. Pricing instruments are
adjusted in 2005, 2010 and 2015, and long-run impacts of the final phase are
evaluated in 2020.

2
Since the Brussels study lacks an explicit temporal dimension it would be more accurate to call
the implementation path an implementation plan. But for ease of reference the term path will be
used for all the studies.
Table 4.4. Implementation paths for the urban case studies

Year/ Coverage or scope of pricing Composition and levels of prices Degree of differentiation
Phase system of prices
2002 None

Implementation Paths for Marginal Cost-based Pricing in Urban Transport

2002 Subsets of radial highways & a Flat tolls. By link
ring road
2005 All selected highways and ring Flat tolls As 2002
Paris

road
2008 Replace link tolls with inner Time-dependent (single-step) cordon toll By time of day
cordon toll
2012 Cordon toll is replaced with a Travel time tax set at approximately 50% of equivalent existing By travel time
travel time tax on auto travel fuel price.
Base Parking fees + public transport Current levels. 70% of parking is free. Paid and unpaid parking
case fares
Phase 1a Parking fees Free parking abolished. Parking fees set at resource cost. No time or spatial differentiation
Brussels (2005)

Phase 1b Public transport fares
Phase 2 Parking fees + public transport
fares
Phase 3 Parking fees + public transport
fares + congestion pricing
of parking fees
Public transport fares set at 2nd best levels Peak/off-peak fares
Parking fees as in Phase 1a. Public transport fares as in Phase 1b. Parking fees as Phase
1a + fares as Phase 1b.
Parking fees as in Phase 1a. Public transport fares as in Phase 1b. As Phase 2 + tolls differentiated
Optimal space and time differentiated congestion tolls. by space and time

63
 64
Table 4.4. Continued

Year/ Coverage or scope of pricing Composition and levels of prices Degree of differentiation
Phase system of prices

Erik T. Verhoef et al.

2000 Fuel tax + public transport fares Fuel tax & public transport fares set at approximately current None/minimal differentiation
values

2005 As 2000. Alternative paths Fuel tax & public transport fares adjusted slightly to enhance By mode and vehicle type
include road or road + transit welfare while maintaining fiscal neutrality & focus on demand
investments management and environment
Helsinki

2010 Radial/cordon fixed road peak Fuel tax & public transport fares adjusted further with more By mode, link/ location &
charges added. Alternative emphasis on social welfare while maintaining fiscal neutrality peak/off-peak
paths include road, transit or
road + transit investments

2015 Cordon replaced by distance- Towards (practical) maximisation of social welfare. All relevant As 2010
based charge benefits and costs considered.

2002 Parking charges + fuel taxes Current levels None

+ toll ring charges + public
transport fares
2015 As 2002 Parking charges as in 2002. Fuel taxes either at current levels or By mode
with added CO2 charge. Peak toll ring charges & public transport
Greater Oslo

fares set at 2nd best levels with varied constraints (upper & lower
limits, equity impacts, and city budgets). Instruments and land
use adjust gradually from 2002 to 2015.

2015+ As 2015 + road link charges First-best measures: road link charges. Second-best measures: as As 2015
2015.

2030 As 2015+ As 2015+. Instruments and land use adjust gradually from 2015+ As 2015
to 2030.
 Implementation Paths for Marginal Cost-based Pricing in Urban Transport 65

Finally, Greater Oslo features two phases of implementation. In the first phase
from 2002 to 2015, existing price instruments are used. Instruments and land-use
adjustments are assumed to take place gradually over the 13-year-period. At the
end of 2015 (2015+) road link charges become available. During the second phase
from 2015+ to 2030, all instruments and land-use adjustments are again assumed
gradually to adjust. More detailed descriptions of the individual study paths follow.

4.5.1 Paris

The IP for Paris consists of four phases in the years 2002, 2005, 2008, and 2012. In
2002, flat tolls are levied on subsets of five candidates: inbound tolls on four radial
highways leading into Paris, and tolls (clockwise and counter-clockwise) on a ring
road (A86) around the city centre.3 A86 yields a higher welfare gain than all four
radial highways together, and on this basis is chosen for the first phase of pricing in
2002. In 2005, the four highways are tolled as well. By 2008, it is assumed that
political acceptability constraints have relaxed enough for tolling to be introduced
for the first time within the centre of Paris. Tolling of the radial highways and A86
is abandoned, and an inbound cordon around the city centre is introduced. The
charge incorporates limited time variation in the form of a single time step (peak
and off-peak).4 Finally, in 2012 the cordon toll is replaced by a toll proportional to
travel time on auto travel throughout the case-study area.

4.5.2 Brussels

In contrast to the other studies, the Brussels case study considered an IP for a
single year, 2005. The effects of alternative policy designs are analysed relative to
a given forecast traffic equilibrium for 2005. Three policy instruments are con-
sidered: parking fees, public transport fares, and road tolls. In the current Brussels
setting it is not obvious whether it would be easier for transport policymakers to
adjust parking fees or transit fares first, and two alternative choices for the first
phase of implementation are therefore considered, called here Phase 1a and Phase
1b (their joint implementation occurs in Phase 2). In Phase 1a, free parking is
abolished and parking fees are set at resource cost while public transport fares are
kept at their current levels.5 This is a third-best pricing rule because it does not
account for congestion and other external costs of vehicle travel. For the

3
Because the only tolls presently in Ile-de-France are on Highway A14 west of Paris Intra-Muros,
it was considered that additional tolling would be undertaken first on highways in outlying
regions such as these.
4
A peak period of 7:00-10:00 a.m. was chosen on the basis of the timing of congestion for
simulations without tolls.
5
Resource cost is the long-run cost of the resources used to provide the parking space, which was
estimated to be 1.9 ECU per trip for 1996.
66 Erik T. Verhoef et al.

alternative, Phase 1b, public transport fares are adjusted to second-best levels while
parking is kept free. In Phase 2, parking fees and public transport fares are
implemented in tandem, with parking fees still set at resource cost and fares set at
second-best levels conditional on the parking fees. Finally, in Phase 3 a time-
differentiated (peak/off-peak) road toll is added, with the other two instruments set
according to the same rules as in Phase 2.

4.5.3 Helsinki

The IP chosen for Helsinki consists of the base case in 2000 and three subsequent
phases in 2005, 2010 and 2015.6 Land-use impacts of the final phase are evaluated
over a further five-year interval so that the time horizon extends to 2020. A base-
case IP was constructed as well as several variants for sensitivity analysis (see
below). The base-case IP incorporates four instruments: a fuel tax, public transport
fares, peak-period radial/cordon tolls (introduced in 2010), and a distance-based
charge (in 2015 to replace the radial/cordon tolls). In 2000 only the first two
instruments are in place. Given the high level of transport taxes (e.g. fuel taxes
comprise more than 75% of the market price of petrol) it was assumed that further
increases in fuel taxes would have to be phased in gradually and accompanied by a
reduction in public transport fares. Thus, fuel taxes and fares are set in the first
phase at approximately 2000 values, and adjusted progressively in discrete steps
over the IP.
In 2005, the existing instruments are adjusted towards second-best levels while
maintaining overall fiscal neutrality. The practical justification emphasises demand
management in order to reduce congestion and auto usage. In 2010, peak-period
radial and cordon tolls are introduced, dividing the metropolitan area into zones
and the instruments are further adjusted to increase welfare. Finally, in 2015 it is
assumed that the technology for distance-based tolls becomes available and this
form of pricing replaces the cordon tolls.7
For sensitivity analysis several alternative IPs were also evaluated, including a
path in which reductions of public transport fares are constrained to the
metropolitan area instead of the whole study area, and a path to enhance
acceptability with additional investments in road and/or transit infrastructure. The
big-bang implementation (BBI) path discussed in Section 4.2 was evaluated too.

6
The IP was influenced by the findings of a committee struck by the Ministry of Transport and
Communications in Finland to determine possible changes to transport charges and taxes. The
Committee identified as barriers to change many of the elements listed in Table 4.1: technological
capabilities, fiscal needs of the transport sector, the current high levels of transport user charges
and taxes, a demand for identifiable linkages between charges and levels of service, and more
general concerns for equity and distributive justice.
7
Investment costs for the cordon tolls and the distance-based tolls were each estimated at 50
million.
 Implementation Paths for Marginal Cost-based Pricing in Urban Transport 67

4.5.4 Greater Oslo

Similar to the Helsinki study, a base-case IP and several variants of it were con-
structed for Greater Oslo. In the base year 2002 the pricing instruments assumed to
be available are parking charges, fuel taxes, toll ring charges, and public transport
fares. Parking charges are maintained at 2002 levels throughout the IP. The other
instruments are set at their actual levels for 2002 and at second-best levels for 2015
by which time land-use changes are assumed to have run their course. To account
in the welfare analysis for gradual changes in transport behaviour and land usage
during the intervening 13-year-period, linear interpolation is used to determine
values of the pricing instruments and welfare effects between 2002 and 2015.
Road link charging is assumed to become technologically and legally feasible
at the end of 2015 (denoted 2015+) and is used together with the other instruments.
Long-term land-use changes in response to this new package of instruments are
assumed to end in 2030. Linear interpolation is again used to determine values of
the pricing instruments and welfare effects in the intervening years. All welfare
impacts are evaluated relative to the do-min path. Along the do-min path it is
assumed that prices are real and that base-case levels of policy instruments
resemble todays situation during the whole period and that the instruments remain
the same as in 2002 except that off-peak toll ring charges are set at 10% of the
2002 level throughout the IP. Road and public transport investments in the IP are
undertaken following the same schedule as in the do-min scenario. Public transport
service frequency is adjusted automatically in response to increases in ridership8.
For sensitivity analysis two variants on the base case are considered. In one
variant an extra CO2 tax is imposed on fuel. In the other variant additional con-
straints are imposed that preclude changes in peak tolls outside the range (-100%,
+200%) relative to the do-min situation, preclude changes in public transport fares
outside the range (-75%, +100%), and prevent either equity or net present value of
finance from deteriorating relative to the do-min situation. The CO2 tax and
additional constraints variants are considered both independently and jointly, so
that three additional IPs are analysed.

8
Data for the base case are based on available statistics and official forecasts, used in several
projects led by the City authorities for demographic development, household and employment
location for 2015, land-use regulation and infrastructure development towards 2015. Given the
lack of information about future infrastructure investments, and the lack of detailed forecasts
beyond 2015, the 2015 infrastructure and demographic data were also used for the year 2030.
Model representations of the transport networks in 2002 are based on the real world situation,
whereas the transport network for 2015 is based on the current network plus planned
infrastructure projects and service provision on the PT infrastructure. The RETRO model was
calibrated to obtain a perfect fit between model output and data for residential and employment
locations in the base case situation in years 2002 and 2015.
68 Erik T. Verhoef et al.

4.5.5 Role of Barriers and Constraints in the Case Study Implementation

Paths

The structures of the four case study IPs reflect all three types of implementation
barriers in Table 4.1 as well as many of the linkages between barriers and
constraints in Table 4.2.
Technological/practical barriers: Technological and practical barriers play a
role in all studies by precluding certain types of charging until later stages of the
paths; i.e. the travel time tax for Paris in 2012, road tolling for Brussels in Phase 3,
distance-based tolling for Helsinki in 2015, and link charging for Greater Oslo in
2015+. Since these advanced types of charging are assumed to be comprehensive and
to permit differentiation of charges according to time and/or distance and/or link, the
barrier-constraint relationship corresponds to cells A1 and A3 in Table 4.2. For
Greater Oslo an extra CO2 tax on fuel was considered for sensitivity purposes, but
not as part of the base-case IP. Such a tax would be practically difficult to imple-
ment at a local level because of opportunities for drivers to buy cheaper fuel in
neighbouring regions.
Legal and institutional barriers: In Brussels free parking is assumed to be
widespread in the status quo, but it is abolished in Phase 1a (cell B1). In the
Helsinki metropolitan area an agreement governed by a special law and institutional
arrangements to coordinate public transport over the borders of the four main cities
into a single ticketing system creates a natural institutional barrier to extending the
pricing policy outside the area (cells B1). In Greater Oslo, road link charging
becomes legally (as well as technologically) feasible in 2015+ (cells B1, B3)
Acceptability barriers: For acceptability reasons tolling for Paris begins in
2002 on highways away from the city centre (cell C1). In Helsinki fuel tax
increases are accompanied by reductions in public transport fares (cell C4), and
investments are considered as a supplementary measure to enhance acceptability
(cell C5). In Greater Oslo one of the IPs considered features upper and lower
bounds on changes in peak tolls and public transport fares (cell C2), a constraint on
equity (cells C2, C3), and a constraint on finances (cell B2).

4.6 Case Study Findings

This section first summarises the main modelling results and then discusses some
specific issues that were raised in the case studies.

4.6.1 Main Results

Table 4.5 presents some of the main characteristics of the IPs.

Change in mean automobile speed: Mean auto travel speeds generally rise as
pricing reform proceeds, with larger increases realised when congestion is initially
severe (i.e. during peak periods) and for pricing measures that are wide in scope.
 Implementation Paths for Marginal Cost-based Pricing in Urban Transport 69

The one exception is Paris where mean speed drops slightly in 2002 when a flat
toll is applied on the inner ring road A86, and in 2005 when flat tolls are levied on
A86 and on the four radial highways (A1, A6, A4, A13). Speeds fall despite the
fact that the tolled roads become less congested because these roads sustain higher
average speeds than the network as a whole so that a reduction in traffic volumes
on the tolled roads brings down the overall average. Nevertheless, user benefits
grow (and welfare gains accrue) in both years as discussed below.
Pricing revenues: Pricing reform boosts annual transport revenues in most
cases. Revenues rise monotonically from phase to phase in Paris and Helsinki. But
in Brussels and Greater Oslo revenues drop in one of the phases. In Brussels
revenues rise initially if Phase 1a is selected, but then decline in Phase 2 because
second-best transit fares are below base-case levels and ridership is price inelastic.
If Phase 1b is selected instead, the decline in fares and in revenues is even more
precipitous because without elimination of free parking auto travel is priced even
further below marginal costs. In Greater Oslo the revenue drop occurs in the last
phase after road pricing is introduced in 2015+ as residents and firms relocate in
order to reduce their toll and fuel tax outlays.
User benefits: Unlike revenues (and price levels) user benefits grow mono-
tonically in every study, except for Greater Oslo in the final phase. 9 The user
benefits derive from reductions in travel costs as well as from improvements in
service. As explained above, average auto speeds rise in most of the cases. In
Brussels, buses and trams speed up because of less road congestion. Both metro
service in Brussels and transit service in Greater Oslo improve as service improve-
ments are made. Gains also accrue in Paris from reductions in early and late arrival
costs because with less traffic motorists are able to arrive closer to their preferred
times.
External cost reductions: Benefits accrue to the public from lower external
costs of accidents, local pollution, greenhouse gas emissions, noise and dust. In
Paris benefits also arise from the marginal cost of public funds premium on extra
transport revenues. The benefits of external cost reductions are appreciable, al-
though in every phase of every study they fall well short of user benefits.
Welfare gains: Welfare gains (the sum of user benefits and external cost
reductions) increase monotonically in every study, both in total and per-capita
terms. This is consistent with the definition of an IP as a sequence of second-best
optima in which constraints become less binding over time. But the rate of growth
of benefits differs across studies.

9
Information required to compute user benefits was not recorded for Brussels except in Phase 3.
The same applies to external cost reductions, considered below.
 70
Table 4.5. Comparison of selected case-study results

Year Policy measures Change in Additional User benefits External cost Welfare Welfare gains
auto speed pricing per capita reduction gains per per capita as

Erik T. Verhoef et al.

revenue (/yr) per capita capita % of last
per capita (/yr) (/yr) phase
(/yr)1
2002 Base year
2002 Flat toll on inner ring road -0.3% 20 13 7 19 6%
Flat tolls on ring road + 4
Paris

2005 -0.4% 35 26 10 36 11%

radial highways
2008 One time-step cordon toll 1.4% 43 35 9 44 14%
Two time-step cordon tolls
2012 9.6% 297 253 66 319 100%
+ travel time tax
2005 Base case
Parking fees 13% peak,
Phase 1a 42 2 2 62 36%
0.3% off-peak
Brussels

Public transport fares 6% peak,

Phase 1b -33 2 2 27 16%
0.3% off-peak
Parking fees + public 18% peak,
Phase 2 21 2 2 82 48%
transport fares 0.3% off-peak
Parking fees + public 71% peak,
Phase 3 148 157 15 172 100%
transport fares + link tolls 0.3% off-peak
1) Includes toll revenues and fuel taxes with VAT. 2) Not calculated. * Travellers monetary costs and time savings.
Table 4.5. Continued

Year Policy measures Change in Additional User benefits External cost Welfare Welfare gains
auto speed pricing per capita reduction gains per per capita as
revenue (/yr) per capita capita % of last
per capita (/yr) (/yr) phase

Implementation Paths for Marginal Cost-based Pricing in Urban Transport

(/yr)1
2000 Base year
Flat radial/cordon tolls +
Helsinki

2005 raise fuel tax + lower public 4% 81 124 17 141 35%

transport fares
Peak-period radial/cordon
2010 tolls + raise fuel tax + lower 1% 156 154 92 246 61%
public transport fares
2015 Distance-based link tolls +
(2020) raise fuel tax + lower public 2% (1%) 244 (353) 240 (247) 161 (156) 401 (403) 99% (100%)
transport fares
2002 Base year
Parking fees + public trans-
9% peak,
Greater Oslo

2015 port fares + fuel tax + toll 28 286* 4.9 62 27%

0% off-peak
ring
As 2015 with fewer 39% peak,
2015+ 749 -404* 21 246 -6%
constraints + link tolls 19% off-peak
As 2015+ with land-use 42% peak,
2030 710 -339* 23 233 100%
changes 18% off-peak
1) Includes toll revenues and fuel taxes with VAT. 2) Not calculated. * Travellers monetary costs and time savings.

71
72 Erik T. Verhoef et al.

The time pattern is quantified in the last column of Table 4.5 by expressing the
gains per capita in each phase as a percentage of the gains achieved in the final
phase. For Helsinki the gains are fairly equally distributed across the three phases
with no phase standing out as a key contributor. The other three studies display less
even trajectories, i.e. greater benefits are reaped at the later stages of the IPs
considered. For Paris the gains in the first three phases are relatively modest
because only a small part of the road network is tolled. Most of the gains accrue in
2012 with the travel time tax which is paid for all trips. Comprehensive road
pricing is also responsible for the bulk of the welfare gains in Brussels (Phase 3)
and Greater Oslo (2015+).
Costs of delaying full-scale adoption of pricing reform: As discussed in
Section 4.3, the costs of delaying full-scale adoption of pricing reform can be
determined by comparing the base-case IP with the big-bang implementation
(BBI). This was done in the Helsinki study by assuming a BBI in 2005. In present-
value terms the BBI yields an annual per capita welfare gain of 227, which is
16% above the 191 from the base-case IP. However, the BBI is more or less a
theoretical construct as it involves large immediate changes in prices, and it is
unlikely that the various technological, legal and acceptability barriers could all be
overcome at the same time.
The case for implementing instruments together as a package: As discussed in
Section 4.3, the case for implementing instruments together as a package depends
in part on whether the welfare gains are additive, sub-additive or super-additive.
The case studies provide examples of additive and sub-additive benefits. 10 For
Paris the welfare gains from tolling the four radial highways are approximately
additive because they are far apart geographically, and serve outlying areas at
different points of the compass, so that traffic spillover effects between the
highways are minimal. By contrast, parking prices and public transport fares have
sub-additive benefits in Brussels as is evident from the fact that the welfare gains
from Phase 2 fall short of the combined gains from Phase 1a and Phase 1b (see
Table 4.5). In Helsinki and Greater Oslo the benefits from the cordon toll and
distance-based road pricing are sub-additive. Indeed, by 2015+ and 2030 when
land use has responded to the introduction of link tolls in Greater Oslo, the optimal
toll ring charges are reduced nearly to zero because link tolls, fuel taxes and public
transport fares together are more effective at internalising congestion and
environmental externalities.
Welfare-distributional effects and acceptability: As is shown in Table 4.5, in
most cases user benefits fall short of additional transport payments or revenues, so
that users are left worse off. Nevertheless, except for Greater Oslo (see below) user
benefits amount to a large proportion of revenues so that in principle only a
fraction of the revenues would have to be spent on rebates or useful services to

10
The case studies did not provide notable examples of super-additive benefits although such
benefits are logically possible. For example, tolling just one of two roads in parallel is likely to
yield a small fraction of the benefits from tolling both roads because it exacerbates congestion on
the untolled route (Verhoef et al., 1996; Liu and McDonald, 1998).
 Implementation Paths for Marginal Cost-based Pricing in Urban Transport 73

leave users better off.11 In Helsinki the package of pricing instruments deployed
results in a relatively balanced distribution of benefits and costs across users,
transport operators and government. Higher fuel taxes and peak-period tolls reduce
congestion and other externalities, and generate revenues for government, while
the benefits for the new and existing public transport users from the fall in fares
exceed the increase in car users driving costs. The situation is somewhat different
for Greater Oslo, where persistent losses from pricing reform are incurred by
travellers (because charges exceed the value of travel time savings), public
transport operators (because of costly capacity expansions) and parking operators
(because of reduced demand). Still, operators of the ring road and road-link tolling
systems gain at each stage, and benefits also accrue to government, housing
providers and members of the public who suffer external costs.
In addition to carefully designed packages of pricing instruments, various
supplementary non-pricing instruments have a potential role in enhancing accept-
ability of pricing reform by lowering acceptability barriers. This possibility was
examined in the Helsinki study by considering variants of the basic IP that feature
accelerated road and/or public transport infrastructure investments. The transit
investments proved to be marginally beneficial in net present-value terms, but the
road investments yielded a loss. In part this is explained by the fact that the pricing
measures boosted transit ridership at the expense of auto travel. This illustrates the
familiar lesson from transport economics that capacity investments are not
warranted on strictly economic grounds unless there is adequate demand for new
capacity, and consequently that investments can be an expensive way to gain
political support if indeed they succeed at all.

4.6.2 Some Specific Issues

Reversals of Direction along Implementation Paths

Reversals in the movements of prices or other dimensions of an IP may create
financial or other administrative difficulties and endanger acceptability. Reversals of
various sorts do in fact appear in all the studies. For example, in Paris tolling of
road links is initiated in 2002 and expanded in 2005, but abandoned in 2008 when
cordon pricing is introduced. In Brussels transit fares and revenues drop in Phase
1b (or Phase 2 if Phase 1a is implemented first), but rise in Phase 3 when road
pricing is launched. In Helsinki introduction of the cordon toll in 2010 induces
some residents to locate inside the cordon in order to avoid paying the toll. But the
course switches to an out-migration in 2015 when distance-based tolls are brought
in and the boundary effect created by the cordon disappears. In Greater Oslo
there is also a reversal of migration: many people move outwards between 2002
and 2015 in order to avoid crossing the toll ring, and then move back towards the
centre after the cordon toll is reduced nearly to zero and road link charges are
introduced in 2015+.

11
To assess the welfare-distributional effects properly it would be necessary to identify gainers
and losers at a more disaggregated level than was done in the case studies.
74 Erik T. Verhoef et al.

Path Dependency
IPs can exhibit path dependency in the sense that the optimal policy to adopt in one
phase may depend on policy decisions taken in earlier phases. Such an inter-
temporal dependency arises if barriers are endogenous, but this possibility was not
considered in the case studies. Path dependency can also occur if policy changes
induce behavioural adjustments with long-lasting effects. This phenomenon is
allowed for in the Helsinki and Greater Oslo cases.12 For Helsinki complete adjust-
ment within the five-year periods of the MEPLAN model is assumed to take place
for location choices, but not for building stocks or transport infrastructure. For
Greater Oslo land-use decisions by households and firms play out with RETRO
over a number of years.
The Helsinki and Greater Oslo studies therefore embody inertia in their
land-use models, and this introduces the possibility of path dependency. 13 The
impacts of path dependency were demonstrated for Helsinki by considering an IP
in which pricing reform is abandoned after completing the second phase of
implementation in 2010. Because the reform measures undertaken in 2005 and
2010 trigger enduring changes in the locations of infrastructure, employment and
residences, the transport system does not revert exactly to its state in the do-
nothing scenario by 2015 or 2020. Indeed, welfare ends up lower in 2020. This
illustrates rather dramatically how erratic policy initiatives can have adverse
economic effects over and above any psychological upsets or political fallout that
may result.

Welfare Comparison across Case Studies

Returning, finally, to Table 4.5 it may seem anomalous that the per capita welfare
gains in the final phases of the IPs are smaller for Paris than for Helsinki even
though Paris has approximately four times the population. Since congestion is the
largest external cost in the studies, and since per-capita congestion tends to
increase with city size, one might expect the opposite pattern. A number of
differences between the case study areas and models could be responsible for the
anomalous result, including differences in 1) population density, road networks and
modal splits; 2) public transport ridership and land-use effects; 3) the sets of
pricing instruments considered, their coverage and the degree to which they are
differentiated by location, time and vehicle type; and 4) the time horizons over
which implementation is assumed to take place and so on. 14 It should also be
emphasised that the analysis in the case studies was largely exploratory in nature
and the quantitative results are sensitive to assumptions. For example, the welfare
gains in Paris vary widely with the level of the time-based tax, and the gains for

12
This is not the case in the Paris and Brussels studies because none of the relevant dimensions of
behaviour are subject to adjustment lags and (in the case of Brussels) because the stocks of
private and public transit vehicles adjust fully to price changes in each phase.
13
These two studies also take into account adjustment costs as discussed in Section 4.2.1 to
the extent they are built into the simulation models used.
14
These and other factors are discussed in de Palma et al. (2003).
 Implementation Paths for Marginal Cost-based Pricing in Urban Transport 75

Greater Oslo in the base-case path differ from the gains in the variants with either a
supplementary CO2 tax or additional constraints imposed on the policy instru-
ments.

4.7 Concluding Remarks

4.7.1 Summary

While economic theory provides grounds to believe that a rapid implementation of

marginal cost-based pricing would be a sensible policy strategy, in the practice of
policy-making more gradual implementation paths (IPs) appear to be favoured.
Arguably the most important reason why this should be the case is the existence of
barriers and constraints. Surprisingly, however, little or no attention to the design
and performance of policy IPs has been given in the transport literature. We have
argued that a rigorous approach to these questions would have to account for a
number of theoretical and empirical complications, which, as yet, have not been
solved. When the motivation for applying an IP as opposed to big-bang imple-
mentation (BBI) indeed lies in the existence of barriers and implied constraints,
such complications include (1) the identification of dynamic adjustment cost
functions (in order to be able to optimise the time pattern of barriers); (2) the
identification of the correspondences between barriers and quantitative constraints;
and (3) the determination of exact second-best optima for given sets of constraints.
Each of these steps becomes even more complex to handle if the IPs exhibit path
dependency as is likely to be the case in reality.
One purpose of this paper has been to develop a structured economic approach
to the design and evaluation of such IPs. A second purpose has been to apply the
developed approach to analysing implementation problems in the context of urban
transport. There is evidently great tension or a gap between an idealised approach
and what is feasible in applied modelling work using large-scale empirical network
models. The four urban case studies presented in Sections 4.4-4.6 have sought an
optimal compromise between the theoretically ideal approach and a pragmatic
approach (of fully arbitrary IPs). We believe the results are indicative of what one
might expect to encounter along a realistic IP, but at the same time acknowledge
that the IPs presented are unlikely to represent the best possible path given the
local circumstances.
We see our contribution and the contribution of the underlying MC-ICAM
project as only a first step towards a more rigorous approach to the economic
analysis of transport policy implementation issues. We therefore prefer to devote
the remainder of the conclusion to the identification of weaknesses in our
approach, and therefore implicitly to chart an agenda for future research.
76 Erik T. Verhoef et al.

4.7.2 Theoretical vs. Practical Approaches to the IPs

Numerous types of IPs are possible in practice. The nature of the initial barriers
and constraints (the rows and columns in Table 4.2) may differ across applications,
and the order in which barriers/constraints can be relaxed may differ too. Further-
more, unless the constraints are particularly tight, prices are not uniquely defined
within each phase. For example, even if no differentiation of taxes is allowed there
is still a continuum of tax levels to choose from. There are many ways to select
subsets of links on a large network to be tolled. For smaller-scale models it may be
possible to solve the second-best optimum; i.e., to identify the least distortionary
way to satisfy the relevant constraints and equivalently to find the highest
possible level of social welfare given the constraints on the policy instruments. But
for large-scale network models it may be very computationally time-consuming, if
feasible at all. In that event, it may be necessary to resort to testing a few plausible
policy scenarios and choosing the one that performs best. This was in fact the case
for the MC-ICAM urban case studies addressed in Sections 4.4-4.6 above.
Such a scenario approach does not, strictly speaking, adopt the theoretical
definition of an IP as a temporal sequence of second-best optima along which the
constraints evolve exogenously over time, as given in Section 4.3. It is even further
away from the theoretical ideal embodied in the optimal control problem with
endogenous constraints also identified in Section 4.3. The fact that the case studies
nevertheless provided some useful insights suggests that the scenario approach is a
useful first step, but methodological improvements on it should be placed high on
the research agenda.

4.7.3 Questions of Priority and Timing

A number of questions about the IP remain largely unanswered by the case studies.
Perhaps the most important is the question of priority: in what order should
marginal cost pricing be implemented by geographical region, transport mode,
links on a network, times of day, etc? There are obvious advantages to beginning
with policies that yield the largest benefits, with BBI as the polar extreme. But
because such policies tend to be comprehensive and to feature differentiation by
time, vehicle type and so on, they are also more costly and difficult to realise. The
general lesson from the case studies is that very little can be said in this respect
without detailed information on the time pattern of both the induced costs and
benefits.
A related question concerns timing: should one implement whatever is feasible
now, or should one wait until a more comprehensive, and possibly more gainful,
implementation is possible? The answer of course depends not only on the time
patterns of costs and benefits, but also on political uncertainties and windows of
opportunity. Moreover, the answer also depends on whether or not the technology
used for early-phase implementation would lend itself for future refinements (i.e.,
will sunk costs be lost when moving to a subsequent phase along the IP?). The
approach being taken in the US under the Value Pricing Initiative is to fund a
 Implementation Paths for Marginal Cost-based Pricing in Urban Transport 77

series of small demonstration projects in order gradually to gain public acceptance.

In the case of Londons congestion charging scheme, in contrast, the authorities
attached great importance to initiating some form of pricing quickly while a
window of opportunity remained open. Because of the limited size of the charge
area, the high costs of toll collection, and exemptions that have been granted to a
large fraction of vehicles, the net benefits from the existing scheme appear to be
relatively modest (Transport for London, 2003; Turner, 2004). If the charged zone
is expanded (as it is planned at the time of writing) exemptions are reduced or
eliminated, and electronic toll collection technology is introduced, the benefits may
increase substantially.

4.7.4 Other Limitations of the Case Studies

The case studies have various other limitations that reflect the early stages of
research on the practical aspects of transport pricing reform. One such defect is
that, with the exception of investment costs for Helsinki, the studies did not include
estimates of the infrastructure and operating costs of charging systems. Obtaining
accurate information on these costs is difficult particularly for technologies that
have not yet been implemented anywhere in the world and may yet be under
development. Second, with the partial exception of the land-use models used for
the Helsinki and Greater Oslo studies, the studies did not account for the fact that
physical and institutional investments in pricing reform are partially or completely
sunk, and that private decisions regarding land use, location choice, automobile
ownership and so on are long-lived and costly to alter or undo.
A third limitation is that market failures outside the transport sector are dis-
regarded, and consideration of how transport revenues are used is limited to the
inclusion in the welfare assessment for Paris of an exogenous marginal cost of
public funds. The studies also ignore any policy impacts on regions outside the
areas studied. Yet another limitation is that the theoretical approach underlying the
case studies does not address how various uncertainties should be accounted for in
the choice of IP. Of particular significance are uncertainties about the barriers and
implied constraints to pricing. For example, it is far from clear how high tolls could
be raised on a particular road or category of road without provoking widespread
resistance from the affected population of users. It is even less apparent how
rapidly the constraints will evolve (and, one can hope, diminish) with time as users
and administrators gain experience with pricing.
All these drawbacks notwithstanding, we believe that the approach to imple-
mentation of transport pricing reform described in Sections 4.2-4.3 and illustrated
in Sections 4.4-4.6 is promising. Better understanding of barriers and constraints at
both a theoretical and empirical level will be needed to take it forward. It is to be
hoped that researchers will be encouraged by the initial efforts described here to
take up the challenge.
78 Erik T. Verhoef et al.

References
Button, K.J., Verhoef, E.T. (eds.) (1998). Road Pricing, Traffic Congestion and the Environment:
Issues of Efficiency and Social Feasibility. Edward Elgar, Cheltenham, UK.

de Palma, A., Kilani, K., Lindsey, R., Moilanen, P., Proost, S., Sen, A., Vold, A., Niskanen, E.
(2003). Welfare Effects Urban Transport. MC-ICAM Deliverable 7.
http://www.its.leeds.ac.uk/projects/mcicam/reports.html

Hamermesh, D.S., Pfann G.A. (1996). Adjustment costs in factor demand. Journal of Economic
Literature, 34(3): 1264-1292.

Henstra, D., Andersen, J., de Borger, B., Bovenkerk, M., Calthrop, E., Ivanova, O., Jin, Y.,
Proost, S., Raha, N., Traa, M., Vold, A. (2003). Marginal Cost Pricing Implementation Paths in
Interurban Transport: Evaluation of welfare effects. MC-ICAM Deliverable 8.
http://www.its.leeds.ac.uk/projects/mcicam/reports.html

Liu, L.N., McDonald, J.F. (1998). Efficient congestion tolls in the presence of unpriced
congestion: A peak and off-peak simulation model. Journal of Urban Economics, 44: 352-366.

Niskanen, E., de Borger, B., de Palma, A., Lindsey, R., Nash, C., Rouwendal, J., Schade, J.,
Verhoef, E.T. (2003). Phased Approach. MC-ICAM Deliverable 6.
http://www.its.leeds.ac.uk/projects/mcicam/reports.html

Pigou, A.C. (1920). The Economics of Welfare. Macmillan, London.

Transport for London (2003). Congestion charging 6 months on. October,

http://www.tfl.gov.uk/tfl/downloads/pdf/congestion-charging/cc-6monthson.pdf.

Turner, D. (2004). Central London congestion charging scheme: Has it achieved its objectives?
Presentation at Round Table on Road Pricing in Belgium, Catholic University of Louvain,
February 3. http://www.econ.kuleuven.be/ete/downloads/Round_Table_Turner.pdf

Verhoef, E.T., Nijkamp, P., Rietveld, P. (1996). Second-best congestion pricing: The case of an
untolled alternative. Journal of Urban Economics, 40(3): 279-302.
5 The London Congestion Charging Scheme:
The Evidence

John Peirson and Roger Vickerman

University of Kent, Department of Economics, Canterbury, UK

Abstract
In February 2003, the Mayor of London introduced road pricing for driving in a
small area of Central London. The London Congestion Charging Scheme uses
relatively simple technology, was implemented over two and a half years, faced
political opposition and required the efforts of a determined political champion
who refused to be put off. The 5 charge has reduced car movements by about
30%, and increased bus use and traffic speeds. The unexpectedly large reduction in
car use is partly explained by the possibility of taking routes around the charging
zone. For this reason, the implied elasticity of about -0.8 is greater than many other
previous elasticity estimates. It is suggested that extending the Scheme to a larger
area or applying a similar scheme to certain other cities may not be quite so
successful.

5.1 Introduction

On 17 February 2003, the Mayor of London introduced the first major urban road
charging scheme in the United Kingdom. It is estimated that the London
Congestion Charging Scheme (LCCS) has reduced traffic congestion delays in the
charging zone by about 30%. The consensus opinion has been that the scheme is
successful and has encouraged other major urban areas in the United Kingdom and
the world to consider the introduction of road pricing. This chapter describes the
LCCS, examines its impacts and considers the relevance of this evidence to
extending the charging area and the use of road pricing in other urban areas.

5.2 Background to the LCCS

In considering the successful setting up and operation of the LCCS, it is important

to understand the political background to urban road pricing in the United
Kingdom. It is common to find suggestions that traffic speeds in Central London
are at the same level as those a century ago (House of Commons Committee on
Transport, 2003). Since the early 1960s, it had become clear that the unrestricted
80 J. Peirson and R. Vickerman

rapid increase in the use of urban roads would result in such high levels of
congestion that it would have serious impacts on the quality of urban life and
economic activity. As part of a solution to such problems, reports to Government
such as the Buchanan Report (1963) and the Smeed Report (1964) both proposed
charges for the use of urban roads. However, this proposal was not pursued
seriously until the mid-1990s. In 1995, the London Congestion Research
Programme, see Government Office for London (1995), considered a number of
different proposals to reduce congestion and predicted substantial benefits.
In 1999, the Labour government set up the Greater London Authority (the
local government authority for London) with the expectation that they would be the
major political party in control of the authority. At the same time, the Labour
governments support for road pricing had been curtailed as a result of political
pressure from groups representing motorists and freight hauliers following
substantial rises in the price of fuel.1 In the Transport 10 Year Plan (Department
for Transport, 2000), the government encouraged local authorities to bring forward
road charging proposals where the revenue could be used to fund local transport
expenditure.
In London, under the legislation which set up the Greater London Authority,
the Mayor was allowed to introduce congestion charging on roads.2 In order to
inform the new Mayor, a technical report on Road Charging Options for London
(ROCOL) (Government Office for London, 2000) had been published prior to the
Mayoral Election. The election of the Mayor in 2000 became a major political
event with a Labour politician, Ken Livingstone, standing against the official
Labour candidate and winning with 58% of the votes cast. An important element of
the new Mayors manifesto was to reduce road traffic by 15% and consult widely
about the best possible congestion charge scheme to discourage unnecessary car
journeys in a small zone of central London, to commence during the middle of my
term of office, with all monies devoted to improving transport (Livingstone,
2000).
The new Mayor strongly supported a London congestion charging scheme and
brought forward proposals soon after being elected. This scheme and a later overall
transport strategy were subject to a consultation process with the public, local
councils, businesses and representatives of road users. The scheme was modified
over the next 18 months, in particular with respect to discounts and exemptions.
The final scheme was adopted in February 2002, only one year before its
implementation.
An early 2001 MORI opinion poll found that 51% of Londoners were in
favour of the scheme and 35% against, but a 2002 poll by the Committee for

1
An example of the Labour government being unwilling to increase the cost of road use was the
removal in 2000 of the fuel price escalator which increased the tax on fuel to make fuel prices
increase by 3% per annum over the rate of inflation.
2
Similar powers were made available to other local authorities, although to date only one other,
Edinburgh, has made any progress towards the introduction of such a charge, planned for
introduction in 2006 subject to the outcome of a public inquiry and subsequent referendum in
2004.
 The London Congestion Charging Scheme: The Evidence 81

Integrated Transport (2002) found an approval rating of only 30%. This figure was
increased to 58% when respondents were told that all of the revenue would be used
to improve public transport. In the run up to the introduction of the LCCS, the
ruling Labour government did not positively support the Scheme and the
Conservative Party had voiced strong objections to congestion charging in London
from the initial proposals. The London Evening Standard, the major London
newspaper, had objected to the LCCS and with Transport for London conducted a
heated dispute over the benefits and costs of the scheme. Finally, many businesses
and road user groups raised objections to the scheme (see, for example, the views
of the Automobile Association, 2000).
In conclusion, the political background to the introduction of the LCCS was
that the Mayor of London took a political gamble on the Scheme working
successfully and in his own words it is bound to be messy, it is bound to involve
mistakes, but in the end everyone will look back and agree it was a good idea and
they won't be able to recall why they ever resisted the change.Yet changing
transport patterns that have built up over 30 years will clearly take time and
politicians with skins thick enough to live with short term unpopularity and
lashings of criticism (Livingstone, 1998). A conclusion to be taken from the
experience of the London and most other road pricing schemes is that the
successful implementation of road charging requires the support of a bold political
champion; see the review by Short of the OECD evidence on road pricing (ECMT,
2004).
The implementation of LCCS took account of the need for secure political
backing, careful research of the feasible options, improvements in public transport
and implementation of traffic management measures (Dix, 2002). The ROCOL
research programme (Government Office for London, 2000) was a careful and
detailed examination of road pricing through policies of area licensing and work
place parking schemes. Different options were considered with regard to the
geographical extent of possible schemes, levels of charges and issues with regard
to those who would gain and lose from different schemes. The issue of technical
feasibility was particularly important. It was suggested by ROCOL that a paper
licensing scheme, enforced visually by inspectors, would result in a high level of
non-compliance. An alternative of electronic road pricing using onboard equipment
was believed to face technical operational difficulties; despite the existence of such
schemes elsewhere, it was felt that London would present different problems. The
LCCS implemented is very close to one of the policy options given in ROCOL.
One month after election, the new Mayor of London set up a team to investi-
gate congestion charging and develop the means to implement a charging scheme,
e.g. specific project management functions were allocated. This team successfully
implemented the LCCS in two and a half years.
Part of the success of the perception of the LCCS is that it was combined with
planned improvements to the bus, underground and rail services, changes to the
road network and a major overhaul of traffic management in London (see Dix,
2002, and London Assembly, 2004). These developments were planned to be
funded through an increased central government settlement, net revenues from the
LCCS and increased spending on transport by the Greater London Authority.
82 J. Peirson and R. Vickerman

5.3 The Working of the LCCS3

The LCCS operates in a small area of Central London that covers only 21 square
kilometres. This represents only 1.3% of the total area of Greater London and the
road ringing the charging zone is not part of the charging area, see Fig. 5.1. The
charge is 5 each weekday for road users who drive into or within this central area
of the capital during the period from 07.00 to 18.30. Over 200 cameras positioned
on the zone's entry points, and some within the zone, match car number plates
against a database of vehicles whose drivers have paid the charge. Any motorist
who has not paid by the end of the day is fined 80. The proportion of users issued
with penalty fines is about 7% of the total who should pay.

Source: Transport for London (2004).

Fig. 5.1. The London Congestion Charging Zone

Road users can pay through retail outlets, the Internet, call centre, mobile phone
text messaging and the post (one year after operation the split of payments was
36%, 26%, 19%, 19% and 1%). The charge can be paid in advance or up to 22.00
on the day itself, but not in arrears. Regular drivers can register for fast track
payment to speed up the process and there is a procedure for fleet registration.

3
This paper refers to conditions during the first year of the operation of the zone. The charge was
increased and the zone extended in early 2007.
 The London Congestion Charging Scheme: The Evidence 83

Taxis, motorcycles, buses, emergency vehicles and certain alternative fuel

vehicles are exempt from paying the charge. Residents of the congestion charging
zone can register for a 90 per cent discount and disabled road users are eligible for
a 100 per cent discount. It should be noted that the charge may be claimed as a
legitimate expense by some road users.
The goals of the LCCS were, as reported in Transport for Londons (2001)
Transport Strategy:
x to reduce congestion in and around the charging zone
x to improve journey time reliability for car users
x to make radical improvements in bus services
x to invest in the Underground
x to make the distribution of goods and services more reliable, sustainable
and efficient
x to generate net revenues to improve transport in London more generally.

5.4 Theory of Area Pricing

In theory, road users should pay for the full social cost they impose on society.
Thus, road use prices should reflect the externalities of congestion, air pollution,
accidents, road damage, noise, etc. A major problem is that there are no policy
instruments available that can measure and make road users pay the full social
costs as they are incurred. One is thus forced to adopt measures that will
necessarily fail to achieve the full welfare optimum of this first-best solution (see
De Borger and Proost, 2001).
The LCCS is a scheme of area charging or licensing where road users pay for
driving within the area as opposed to cordon pricing where users have to pay for
crossing a boundary line. Other possible policies are workplace parking charging
and distance-related charging (measured electronically).
Important determinants of the full social costs are the distance travelled and
the time of travel. It is shown in De Borger and Proost (2001) that a simple cordon
pricing system adjusted for time of travel in the Greater London area would only
achieve a small proportion of the welfare gain of a pricing system that fully
differentiates between distance travelled and time of travel, etc. This result
compares with smaller cities where the proportion of the welfare gain is much
greater, e.g. in Brussels. In the exercises carried out in De Borger and Proost
(2001), charging for the full resource costs of driving in the inner London area
generates much of the full potential welfare benefit. It should be noted that such
charging would cause important switches in use of transport modes, but the
revenues raised would only be modest.
Estimation of the full social costs is difficult and can only be taken as a guide.
Santos and Shaffer (2004) suggest that the fixed congestion charge of 5 is
consistent with their estimates of the marginal congestion cost, though this implies
84 J. Peirson and R. Vickerman

that the charge is only concerned with covering congestion costs within the
charging zone and not those costs imposed in inner and outer London.
Thus, the economic theory and evidence suggest that road pricing in London
should focus on the most congested area and differentiate by time of use. Potential-
ly important switches from private road use are achievable, but the amount of
revenue is unlikely to be substantial.

5.5 Evidence on LCCS

Transport for London is committed to long-term monitoring of the impacts of the

LCCS (see Transport for London, 2003a) and making available the associated data.
Nearly all the following statistics come from the subsequent monitoring reports
(Transport for London, 2003b, 2003c, 2004). The major conclusions of these
reports are:
x Traffic flow in the charging zone and period has been reduced by about 15%.
Car movements into the zone have been reduced by 30% with taxi, bus and
coach movements all increasing by 20%. Van and lorry movements have been
reduced by 10%. Pedal and two-wheeler movements have increased by 10-
20%. The average traffic delay has been reduced by about 30%, resulting in an
increase in average speed of 1.7km/hr, with average speeds of the order of 16-
17 km/hr. Journey time reliability has improved by an average of 30%.
x There are about 110,000 payments per day. There are about 65,000 fewer
journeys crossing into the charging zone. Between 20 to 30% of this reduction
is made up of car journeys diverting around the charging zone, 50-60% is from
former car users using public transport and the remaining 15-25% comes from
other adaptations in travel behaviour. It is estimated that there are 4,000 fewer
individuals per day travelling to a destination in the charging zone.
x Traffic flow on the Inner Ring Road bounding (but not in) the charging zone
has increased by 4-5% with local variations. There are no major changes in
orbital or radial traffic flows outside the charging zone, with increases and
decreases reported at different sites. The changes in traffic behaviour settled
down quickly within the first three months and there has been little further
change over the rest of the first year of operation.
x The fall in the number of accidents of different types has been greater than the
reductions observed elsewhere in London and is in line with the reduction in
traffic flows.
x There has been a continued increase (from before the introduction of the
LCCS) in the use of buses, with an estimated 29,000 additional bus passengers
entering the zone in the morning peak since the introduction of charging,
compared with a forecast increase of 15,000. Transport for London has
provided more buses, but there has been an increase in the number of
passengers per bus. Bus speeds have improved by 7%. Excess waiting time for
buses has improved by about one-third in and around the charging zone.
 The London Congestion Charging Scheme: The Evidence 85

x The use of the Underground to travel to the charging zone has fallen by 5-10%
which compares with an approximate 2-7% reduction in use across the entire
network. This is believed to be related more to problems with the Under-
ground service as during this period parts of the Central Line were closed
following an accident, there was a reduction in visitors to London given fears
over international security and a general decline in retail activity.
x Transport for London argued that congestion charging had made little
contribution to reduced economic activity in Central London. However, the
impact would appear to vary across sectors with the retail sector suffering the
greatest loss of business.4 This may, however, reflect the general problems
faced by the retail sector in Central London given the downturn in visitor
numbers and problems with the Underground mentioned above.
x The set-up costs for the LCCS were reported as 58.2 million. The net annual
revenue was initially estimated at 200 million, but this was reduced to 121
million just before the start of the LCCS. With the introduction of LCCS, there
was an unexpectedly high reduction in the number of vehicles entering the
charging zone, fewer fleet vehicles using the automated scheme than predicted
and more evasion. The most recent forecast of net revenue is 68 million
based on gross revenue of 165 million and operational costs of 97 million.
In the future, net revenue is estimated to be 80-100 million per year. These
estimates are based on lower running costs and greater income from stricter
enforcement. Penalties for non-payment were increased in early 2004. The
lower revenue does present a problem for Transport for London as it provides
less than expected support for the improved bus services.
x Though analysis of the distributional impacts of the LCCS was carried out
before the introduction of the scheme, no current analysis is available as such
effects take time to emerge and require detailed survey data.

5.6 Interpretation of the Evidence

The most surprising result of the LCCS is the remarkable reduction in car traffic. It
is important to consider whether this reduction fits with the previous results about
the responsiveness of the demand for car travel to change in the price. The car
traffic outcomes from the LCCS are above the upper range of the predictions of the
Schemes promoters and this suggests that the Scheme may require us to reappraise
the responsiveness of car traffic to prices. The most commonly cited review of the

4
See the conclusion from the Royal Institute of Chartered Surveyors (2004) whilst the
introduction of the charge has been remarkably smooth and the overall impact on the residential
and office sectors has been broadly neutral or even positive, the retail and leisure sectors do
appear to have been adversely affected. A more recent report (Royal Institute of Chartered
Surveyors (2005) confirms that whilst nine out of ten retailers report some loss of turnover, there
appeared to have been little or no impact on either moves to relocate outside the zone or on land
values or rents.
86 J. Peirson and R. Vickerman

relation between money price and car travel demand is that of Goodwin (1992)
who concluded that the money price elasticity is in the range -0.16 to -0.33. Santos
and Shaffer (2004) suggest that the evidence from the LCCS is in line with the
lower end of this range.
The present analysis suggests that interpretation of the evidence is more
complex than may be first thought. First, it is necessary to make an estimate of the
price of car travel. The UK Department for Transport Economic Model gives a
2003 marginal price of 13.59p per vehicle-km. Alternative estimates of the average
price that include fixed costs such as insurance and vehicle excise duty may double
the price, see Santos and Schaffer (2004).5 This marginal price can be used with
trip distance data to work out the price of an average car trip. This is complicated
as car trips lengths depend on the journey that is being made, e.g. Outer to Central
London journeys are much longer than Inner to Central London journeys.
Additionally, nearly half of all journeys previously passing through Central
London did not have the Central Area as the origin or destination (see Department
of Transport, 1994). Thus, adjusting for this gives an average trip length of a
journey that goes through the Central Area of nearly 20 kilometres compared to the
13 kilometres for journeys that start or end in the centre6. The appropriate distance
to use in an elasticity calculation is double this number as on most days cars return
to their original origin. Finally, one should note that cars may make multiple trips
in a day through the Central Area, an omission that will result in underestimation
of the price elasticity.
Transport for London estimates that car vehicle kilometres have been reduced
by 34%. However, many car owners are exempt or obtain discounts from the
charge and presumably, with lower congestion levels, they will travel further than
in the past. Using Transport for London estimates and amalgamating private and
work cars, suggests that the true reduction in car vehicle-kilometres for non-
exempt or non-discounted cars is in the region of 42%. Using a constant elasticity
of demand function, these calculations imply a price elasticity of demand of -0.82 -
a much larger estimate than traditionally associated with private car travel.
In examining the response of traffic to the LCCS, it is important to remember
that, for nearly one-half of the trips which pass into the Central Area, an alternative
to paying the charge, not travelling or using some other form of transport is to
travel round the Inner Ring Road. In the charge period, traffic on the Inner Ring
Road has increased by about 4-5%. On a simple assumption that such car traffic
travels around one-quarter of the inner ring road, this increase will represent
28,000 displaced journeys through the Central area.7 In addition, other car users
who previously drove through Central London may choose routes not including the
Inner Ring Road and their presence cannot be detected in traffic flow data further

5
The use of a higher average price will give higher elasticity estimates as the relative price
increase from a congestion charge is smaller.
6
Own calculation using data supplied by Department for Transport.
7
Transport for London suggests that such road users are about half this figure.
 The London Congestion Charging Scheme: The Evidence 87

from the Central Area. This analysis suggests that changes in transport behaviour
are complex and cannot always be examined with simple notions of elasticities.
The use of the revenue from the LCCS to fund transport improvements was
important in securing public approval or acquiescence to the initial proposal (see
Automobile Association, 2000, and Committee for Integrated Transport, 2002).
After the successful implementation of the LCCS, the major negative reporting by
the media was on the failure to raise the predicted net revenues to fund planned
investment in the London transport system, e.g. see London Assembly (2004).

5.7 Extension of LCCS Area

After the successful introduction of the LCCS, Transport for London started to
consider a proposal to enlarging the charging zone to the West (Transport for
London, 2003d).
The enlargement raises various issues. The analysis of the responsiveness of
traffic to a change in the price might be taken to imply that a similar reduction in
traffic will not take place as the diversion of traffic from a larger zone may not be
so feasible. However, it is proposed that there will be an uncharged road (a section
of the Inner Ring Road) going through the enlarged zone making it still possible to
drive through Central London, though it should be remembered that this uncharged
road will only allow traffic through on North-West to South-East axis. The
proposal would also probably either abolish or reduce the residents discount as the
additional area contains many more residents. Although it is suggested that the
reduction in traffic may not be so substantial as that found in the initial LCCS,
compensation for this will derive from the availability of larger revenues and
sharing of the fixed costs of setting up and operating congestion charging in a
larger area. The enlargement would not take place before 2006.

5.8 Relevance to Other Urban Road Pricing Schemes

Many cities, both in the UK and the rest of the world, have been encouraged by the
success of the LCCS, e.g. see The Observer (2004). The relevance of the Scheme
to other urban areas has to be carefully considered. London has a large area that is
highly congested, other urban areas may have a much smaller congested area, for
example, Durham has road pricing for a single street. The effect of road pricing in
a small area may be to divert much more traffic away to the surrounding road
network.
The proposed Edinburgh scheme, which is the only large area-wide scheme
currently proposed in any detail, uses a double cordon system8. The inner cordon is

8
For further details of the scheme, see Transport Initiatives Edinburgh Ltd/The City of Edinburgh
Council (2004). Although the proposal was supported by the conclusions of a public inquiry in
88 J. Peirson and R. Vickerman

set around the central area (much smaller than the LCCS area) and operates
throughout the working day from 0700-1830, the outer cordon is set roughly along
the line of the citys Outer Ring Road (a much larger area than LCCS) and would
operate in the morning peak only (0700-1000). A charge of 2 is incurred by any
vehicle passing either cordon in the in-bound direction; the charge is imposed at
the first operational cordon crossed. The reason for the double cordon is that a
charge for the central area only would not have a significant impact on traffic
entering the city during the peak and forecast increases in peak congestion are
greatest at the edge of the built-up area. However, congestion remains high in the
central area throughout the day and thus some deterrent to driving right into the
centre is felt necessary at all times. The double cordon is predicted to achieve twice
the reduction in congestion of a single central area cordon over the first five years
of operation. By comparison with London, the Edinburgh scheme is a cordon
scheme that does not charge vehicles moving entirely within the chargeable zone
or those travelling out-bound from the city during the charging period. It is there-
fore much more focused on commuting traffic than the London scheme. The
proposed technology is similar, and charging in one direction only simplifies
operation of the cameras. As in London, the proceeds of the charging scheme are to
be channelled into a package of public transport investments, although in Edin-
burgh there is an emphasis on capital investment.
If congestion is caused by subsidised parking, it may be more efficient to
charge the true cost of parking. This was an option considered by Transport for
London. However, it should be noted that congestion is mainly caused by moving
and not parked vehicles. Thus, the actual type of road pricing system adopted by
other urban areas and the impact may be quite different from London.
The important lessons from London are to recognise the importance of secure
political backing, careful research of the feasible options, improvements in public
transport, implementation of traffic management measures and use of the revenue
to fund the transport system. These conclusions are similar to those suggested in
ECMT (2004).

5.9 Conclusions

The London Congestion Charging Scheme has shown that it is possible to intro-
duce successfully an area-wide charging scheme for the Central Area of a large
city with complex existing travel patterns, using relatively simple technology.
What has surprised most observers is the impact that the scheme has had on private
car traffic levels in the charging zone. Reductions in both levels of traffic entering
the zone and in the levels of congestion experienced have been above the upper
level of the prior forecasts. In this chapter, we have reviewed this evidence and

2004, it was significantly defeated in a local referendum in February 2005 and currently remains
in abeyance.
 The London Congestion Charging Scheme: The Evidence 89

presented some simple calculations which suggest that the price elasticities implied
in this reduction are significantly higher than those claimed in other studies, and
significantly higher than the received wisdom on own price elasticities for car
travel.
The higher estimate, of about -0.8, derives from two factors. One is the
method of calculation of the relevant prices where we argue that it should be based
on the marginal costs of driving and not the average costs of car use, since we do
not believe that for most users the imposition of the charge at its current level will
change their decision about car ownership. Secondly, the imposition of a charge of
this type, which requires drivers to confront directly their decision to make a
specific journey, or take a specific route, has a different behavioural impact from
the general increase in the cost of car use observed in most previous studies which
have looked at, for example, the increase in fuel prices which affect all journeys
made.
In deriving this estimate, we have also tried to examine in more detail, under
some simple assumptions, what we think has happened to the suppressed car
journeys. There has clearly been some significant mode switch to bus, although
some of the increase in bus use has resulted from the improved bus service leading
to switching from the Underground or from walking. There has been some
diversion of route, although not to the extent that this is simply moving congestion
to outside the charging zone. There must also be some reduction in travel in total;
what remains to be seen is whether this reduction in travel has its most significant
impact on economic activity in the charging zone, particularly in retailing, and
whether this is an overall reduction in expenditure or a redistribution within the
Greater London area.
Despite the remaining uncertainties, it is clear that the LCCS has been more of
a success than many anticipated; acceptance ratings in the business community
remain high at about 60%; the 30% who believed in advance it would not be
effective have reduced to 20% who currently do not support the scheme, see
Transport for London (2003a, 2004). This success augurs well for the introduction
of further schemes in the UK as more authorities see this as a real means of
tackling congestion in a variety of situations, and moreover one which provides
additional revenues which can go towards a wider range of transport improve-
ments.
The London scheme, and those likely to follow, are still however second best
schemes which only go part way towards the theoretically desirable outcome of a
full electronic road pricing scheme sensitive to real time information on the costs
of driving in a congested area. Even introducing this partial scheme required
considerable political courage from a maverick politician. How many more will
have the courage to do this, let alone go further, remains an open question at this
time.
90 J. Peirson and R. Vickerman

References
Automobile Association (2000). Congestion Charging in London The Views of the AA. London.

Buchanan, C. (1963). Traffic in Towns: A study of the long term problems of traffic in urban
areas. Reports of the Steering and Working Groups to the Minister of Transport. HMSO, London.

Committee for Integrated Transport (2002). Public Attitudes to Transport in England. London.

De Borger B., Proost, S. (eds.) (2001). Reforming Transport Pricing in the European Union.
Edward Elgar, Cheltenham.

Department of Transport (1994). Travel in London, London Area Transport Survey. HMSO,
London.

Department for Transport (2000). Ten Year Plan for Transport. The Stationery Office, London.

Dix, M. (2002), The Central London Congestion Charging Scheme From Conception to
Implementation. Paper delivered at Conference on Implementing Reform on Transport Pricing
Identifying Mode-specific Issues, Brussels.

ECMT (2004). Managing Transport Demand Through User Charges: Experience to Date.
OECD/ECMT Conference, London.

Goodwin, P. (1992). A Review of New Demand Elasticities with Special Reference to Short and
Long Run Effects of Price Changes. Journal of Transport Economics and Policy, 26: 155-169.

Government Office for London (1995). The London Congestion Charging Research Programme.
HMSO, London.

Government Office for London (2000). Road Charging Options for London. (ROCOL), London.

House of Commons Committee on Transport (2003). Urban Charging Schemes: First Report.
HC390-I, Stationary Office, London.

Livingstone, K. (1998). It Pays to Invest in Public Transport. Newspaper Plc 22 July 1998.

Livingstone, K. (2000). Mayoral Manifesto.

London Assembly (2004). Congestion Charging: A First Review. Greater London Authority,
London.

Observer, The (2004). Many cities look to emulate London congestion fee, 15 February 2004,
London.

Royal Institute of Chartered Surveyors (2004). RICS Research into the Impact of Congestion
Charging on London Property.

Royal Institute of Chartered Surveyors (2005). RICS Research into the Impact of Congestion
Charging on London Property. http://www.rics.org/NR/rdonlyres/BE42797B-BC58-4AAE-8737-
813278CDB601/0/congestioncharging.pdf

Santos, G., Shaffer, B. (2004). Preliminary Result of the London Congestion Charging Scheme.
Public Works, Management and Policy, 9: 164-181.
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Smeed, R J. (1964). Road Pricing: Economics and Technical Possibilities. Ministry of Transport,
HMSO, London.

Transport for London (2001). Transport Strategy. London.

Transport for London (2003a). Impacts Monitoring First Annual Report. London.

Transport for London (2003b). Congestion Charging: Three Months On. London.

Transport for London (2003c). Congestion Charging 6 Months On. London.

Transport for London (2003d). http://www.londontransport.co.uk/tfl/cc-ex/

Transport for London (2004). Update on Scheme Impacts. London.

Transport Initiatives Edinburgh Ltd/the City of Edinburgh Council (2004). The Integrated
Transport Initiative for Edinburgh and South East Scotland Proposed Congestion Charging
Scheme: Statement of Case. City of Edinburgh Council.
6 The AKTA Road Pricing Experiment in
Copenhagen

Otto Anker Nielsen and Majken Vildrik Srensen

Centre for Traffic and Transport, Technical University of Denmark

Abstract
This chapter presents the AKTA road pricing experiment in Copenhagen and its
main results. Conclusions are drawn on the behavioural impacts of the different
pricing schemes and the accuracy of different survey and modelling techniques.
AKTA followed 500 car users equipped with a GPS-based device in their cars. The
participants' normal travel pattern was estimated using observations from a control
period, after which pricing schemes (toll versus km-based) were implemented over
an 8 to 12-week period. The participants earned the money they saved by changing
behaviour compared to the control period. Surprisingly, it turned out that the
participants behavioural changes were greater than expected based on prior
surveys and modelling. Habits may have been expected to reduce changes, but the
rather high amount of money involved (budget constraints) seems to be more
important. Changes were analysed concerning the time of day, number of trips,
average length of trips, costs of trips, etc. It appeared that km-based charging
systems were more efficient than multi cordon-based.

Mai-Britt Herslund assisted in the work on the SP design and the interviews and Christian Wrtz
assisted in the work collecting and processing the GPS data.
The AKTA project was primarily financed by EUs 5th Framework Programme and the
Municipality of Copenhagen with co-funding to the research part from the Technical University
of Denmark (DTU). The principal contractor of AKTA was the City of Copenhagen, from which
Poul Sulkjr is thanked. DTU, the Danish Road Directorate and the Ministry of Transport were
assistant contractors. The AKTA SP was funded by the Danish Transport Council and the
remaining work on this was finalised by funds from DTU and the Danish Transport Research
Institute.
94 O.A. Nielsen and M.V. Srensen

6.1 Introduction

The chapter presents the design and some initial findings from the AKTA road pricing
experiment in Copenhagen1. The main experiment encompassed 2x200 car drivers
who were exposed to different road pricing schemes using a GPS-based technique
where all trips are charged and logged. The participants were paid the difference
between their expected road pricing if they did not change behaviour, and their actual
behaviour. Since realistic and planned levels of road pricing were tested, the
experiment is close to a real scheme. However, a third experimental round was
applied, where the participants were paid money according to their measured driving
pattern in a control period. They were then invoiced after the period of pricing. The
amount of savings were between zero (if negative, payment was ignored) and 8,000
DKK (1,100 EUR) per participant for the maximum scheme.
The data from the main experiment was supplemented by stated preference (SP)
analyses, questionnaires, modelling exercises, focus group interviews and telephone
interviews. Hence, the project provides a thorough knowledge of the impact of road
pricing as well as an empirical basis for comparison of different survey and modelling
techniques.
In Section 6.2, the chapter describes the experimental design of AKTA and in
section 6.3 the experience and problems of carrying out the experiment as well as
some overall results. Section 6.4 presents the main results of the experiment, the
behavioural changes of the participants. Section 6.5 discusses the findings and
methodological issues raised by the experiment. Some of the sections of the paper are
based on Nielsen and Jovicic (2003), while other includes further work on the AKTA
data.

6.2 Design of the Experiment

AKTA is the Danish part of the EU project PROGRESS, where road pricing is
examined by various approaches in 8 European cities. The field trials of the AKTA
project were carried out between autumn 2001 and spring 2003. The behaviour of the
participants was followed by GPS with and without a road pricing system. AKTA is
unique as each car was followed over a fairly long period, which provides more
information on interpersonal variation than in most revealed preference (RP) datasets.

1
AKTA is a Danish abbreviation for Alternative Driving and Congestion Charging. AKTA was
the Danish part study of the PROGRESS project (www.progress-project.org), which again was
part of EUs 5th Framework programme, The Growth Programme on Sustainable Mobility and
Intermodality that supports several projects concerning pricing (http://www.transport-
pricing.net/). In PROGRESS, eight European cities assessed in different ways impacts of different
urban pricing schemes. The cities were Bristol and Edinburgh (UK), Genoa and Rome (I),
Helsinki (SF), Trondheim (N), Gothenburg (S) and Copenhagen (DK). AKTA ran for three and a
half years with a total budget of about 13.5 million DKK (1.8 million EUR).
 The AKTA Road Pricing Experiment in Copenhagen 95

The purpose of AKTA was to test whether road use taxes would change travel
behaviour. The city of Copenhagen was equipped with virtual cordon rings and
pricing zones2. The voluntary test drivers were equipped with a GPS-based vehicle
positioning system, making it possible for them to read the virtual pricing systems on
a display. The cars movements were logged in the system and a road price cost
calculated for every trip. Each participant tested two different pricing schemes or one
pricing scheme and one control period without pricing. To save costs, only 200 GPS
units were used. The experiment was therefore conducted in two rounds, each with
200 participants, whereby a sample of 400 cars was obtained. The first round used two
8-week periods one for each charge level (the first 200 participants). As this was
found maybe to be too short, the second round used two 10-week periods (the next
200 participants). An additional third round with 100 participants was decided after
this in order to further investigate the best charging scheme. This round consisted of a
10 to 12-week control period followed by 16 weeks of charging. At the end of each
round, the test drivers were paid according to an estimate based on the difference in
behaviour between the two periods.
The control period was used to obtain information on participants usual driving
patterns; time of travel, trip length, usual number of destinations, number of stops on a
round trip, etc. In the control period, there was no pricing for road use and the display
was turned off such that the participants were not expected to change behaviour at this
time.
The 300 participants from the second and third rounds participated in a SP experi-
ment before the road pricing experiment.

6.2.1 Survey Setup

The participants were selected in compliance with a full factorial design based on
income group, commuting pattern (place of residence and work) and pricing schemes.
All participants were members of one-car households. They all lived and/or worked
within the road pricing area. No participants were allowed who neither lived nor
worked within the pricing area (the geography of Copenhagen eliminates commuting
through traffic). All participants had a daily need for transport.
The participants completed two questionnaires before the experiment plus a tele-
phone interview after; amongst other things, to test whether they had changed
attitudes.
For comparison, a telephone interview with 1,015 respondents living in the road
pricing area was carried out in order to investigate the general awareness in the
population and attitudes towards road pricing as well as to check for possible sample
bias (i.e. to secure that the stratification of the participants in the experiments was
representative of the population).

2
The multi cordon-based systems were applied in this project. It charged for the passing of one or
more cordon lines. This is different from systems, where drivers are charged for permission to
drive or stay within a zone.
96 O.A. Nielsen and M.V. Srensen

6.2.2 Pricing Schemes

Three different pricing schemes were set up:

1) A high km-based system with four different charging levels dependent on the
zone with price rising towards the inner city (Fig. 6.1). The price was twice as
high at peak hours compared to off-peak hours. The cost at peak hours varied
from 1.00 DKK/km in the outer zones to 5.00 DKK in the city centre (1
EURO was approximately 7.5 DKK at the time the experiment was con-
ducted).

2) A low km-based system designed with the same structure as 1), but only with
charges in the peak hours and with half the cost here than in 1).

3) A multi-cordon system, with different charging passing each cordon. Four

different cost levels were used ranging from 2 DKK for passing the outer
cordons to 12 DKK to pass the city centre cordon in the peak hours. The
charge was half in the non-peak hours. Fig. 6.1 shows the different cordons
(22 in total) as arrows coloured according to the charge level.

Fig. 6.1. The different road pricing and toll schemes

 The AKTA Road Pricing Experiment in Copenhagen 97

The GPS devices were pre-coded with the pricing level and they dynamically
calculated the actual cost such that the participants could see the pricing level (zone),
be informed of zone shift (cordon) and read the accumulated cost for the current trip.
Position coordinates were logged each second and imported into a digital map
(using GIS technology) after the field experiment had been completed and related
(map-matched) to roads, junctions and origin/destinations for each trip.

6.3 Practical Issues

Before general modelling results from the SP and RP experiments are presented, some
particular issues related to this project are discussed.
Recruiting of a sufficient number of participants turned out to be far more com-
plicated than anticipated; a total of 25,000 people had to be contacted in order to get a
sample of 500 one-car households distributed over the three rounds of experiments.
Fortunately, during the experiment the drop-out rate was very low.
Because the equipment was developed as prototypes especially for the AKTA
experiment, the unit price was quite high. It was therefore decided to run the
experiment in two rounds with 200 participants in each, whereby the 200 GPS
units were used twice.
The first round run over 8 weeks with one pricing level or a control period
with no pricing and the 8 weeks with another pricing level or a control period
with no pricing.
After this round, it was realised by the researchers that there was a need to
explain the experiment better for the participants (refer to section 6.4.1 and Table
6.1). This, however, turned out not to help (refer to Table 6.2). It was also decided
to add a control period of 2 weeks first and then extend the pricing level period to
10+10 weeks. The second round ran with this configuration on 200 new particip-
ants.
In the first two rounds, the participants were paid according to their change of
car use after the experiment was completed.
After the data from the first two experimental rounds had been analysed, it
was decided to launch a third round. Here only the high km-based charging was
tested, since the two first rounds showed that this was the most promising pricing
system. It was also decided to extend the period to 2x16 weeks to reduce the
variance in the data due to natural variations of trips and that all participants should
run with control first and then charging.
Finally, it was decided to change the payment to the participants in the third
round compared to the first two rounds. Now, they were paid before the charging
period, where they received the full amount similar to the estimate charge level, if
they did not change behaviour. After the charging period, they were then invoiced
according to their car use. If they reduced their car use, this invoice would be lower
than the a priori payment to them.
Participants were subjected to three ordinary questionnaires and one combined
RP and SP interviewer-assisted questionnaire. Only participants in the experimental
98 O.A. Nielsen and M.V. Srensen

rounds 2 and 3 were subjected to the SP questionnaire and only participants in rounds
2 and 3 were guaranteed a period without charge (control period for reference).

6.3.1 Problems with the GPS Technology

The GPS technology caused far more problems that anticipated. Each GPS-based
observation is dependent on the number of satellites within sight, the quality of each
signal (dependent on atmospheric conditions) and the driving course of the receiving
unit. This caused the following problems:
Signals were lost (no coordinate observation) due to too few satellite signals.
This happened often in street valleys where buildings shaded the signal and
of course also in tunnels and parking garages, after which a delay was ex-
perienced before the GPS unit could find a signal again. About 90% of the
trips lost signals to some extent. Most of the trips could be reconstructed un-
ambiguously by analysing the log-files, but about 3% of the trips had fall-outs
to an extent where the trip or even trip chain could not be recreated unam-
biguously and had to be estimated.
The coordinate accuracy was reduced due to too few satellites or atmospheric
conditions. This happened far less frequently than total fallout of signals.
When there were a sufficient number of satellite signals, the coordinates could
be estimated relatively precisely. The coordinates accuracy and location were,
however, altered systematically in a few situations when cars drove fast in a
curve e.g. on ramps to motorways. The routes could, however, in most cases
be recreated unambiguously.
Segmentations in trips were sometimes recorded wrongly by the equipment:
Some trips were segmented into sub-trips due to signal fallouts or significant
bottlenecks on roads, whilst some trips with short intermediate trips were
wrongly joined into one trip. This could be due to short time intervals for the
trips (e.g. bringing children to kindergarten, where the engine was kept run-
ning), or due to unfortunate combinations of a short trip and fallout of satellite
signals. The segmentation of trips was both problematic for the post analyses
of trip patterns and behaviour, and for the map-matching programme whose
algorithm works differently when a trip starts or ends compared to an ongoing
trip.
Specific cars had significantly more fall-outs than others. This could be due to
the place of installation of the equipment in the car, the construction of the car
and other electronic equipment within the car. To reduce this problem, ana-
lyses of the log files could have been carried out after for example a 2-week
period. However, it was estimated that the costs doing this were higher than
the additional accuracy obtained by having a larger sample.

The problems with the GPS equipment are described in more detail in Nielsen et al.
(2003).
Due to the significant amount of problems with the GPS observations, a map-
matching algorithm had to rebuild the routes (Nielsen and Jovicic, 2003). The post-
 The AKTA Road Pricing Experiment in Copenhagen 99

survey and practical experience with the equipment revealed, however, some
additional, more severe technical problems than those found in the log files, e.g.
that 46 of the participants had experienced technical problems, the most frequent of
which were:
14% experienced that the unit stopped working.
5% experienced that the car battery was discharged (total fallout).
5% experienced that the unit did not show the pricing level but worked
nonetheless.
5% on average had a non-functioning unit at any given time during the experi-
ment, when all participants were contacted.
The remaining 17% had experienced other technical problems or the reporting
did not specify the type of problem in detail.

These problems seldom took a long time to solve and the participants were aware of
these problems. Furthermore, neither the post-survey nor the focus group interviews
indicated that the participants had discovered the number of problems with fallouts
registered in the log files. It can therefore be concluded that this did not influence their
driving pattern and decision-making in the main experiment. The analyses in AKTA
were accordingly not influenced, as post experiment corrections and interpretations of
the observations were made. If a unit, for example, did not register in a period, this
should be defined as a technical fall-out, not as reduced trip making.
It can, however, also be concluded that more work must address technology
issues, if a GPS-based pricing system is to be implemented at full scale. In this
respect, it is noted that the present algorithms for map-matching (linking GPS obser-
vations to the specific roads) and for recreation of routes (linking GPS points around a
fall-out) use a sequence of points before and after the actual fall-out. To obtain the
same real-time accuracy will demand significant algorithmic development. Nielsen
and Jrgensen (2004) deal with this issue and present a new algorithm that solves the
map-matching problem satisfactorily for the AKTA data.

6.3.2 Adding a Third Round

After analysing the results from the first and second rounds especially the responses
from the focus group interviews it was suspected that the design did not resemble
real life under road pricing, as earning money is not the same as not paying money. In
the first two rounds, the expected payments for the participants normal driving
patterns were estimated. After completion of the field test, participants were re-
imbursed the difference between their normal behaviour and their actual behaviour
during the road pricing experiment. Thus, participants were rewarded for (positively)
changed behaviour though never facing the risk of additional payment. In this way,
their incentive to change behaviour even further was small and the test was less
realistic.
To validate this, a third round was undertaken where all participants were paid
according to their actual travel pattern in their control period. They were then told that
a similar amount would be invoiced after the test if they did not change behaviour.
100 O.A. Nielsen and M.V. Srensen

The charging period was longer for the third round (12 weeks rather than 8 or 10),
since it was a matter of discussion whether the period was too short in the first two
rounds, i.e. whether the participants could postpone trips to after the period or accept
alternatives to car travel for a short period. The experimental design was also simpli-
fied and all participants were subject to a control period followed by a high km-based
scheme (the most efficient of the schemes in the first two rounds).
85% of the participants earned money in the third round as compared with about
50% in the first two rounds. The amount of money paid was also higher. However, all
followed the high km-based pricing level and for a longer period.
The effect of receiving money for real before the charging experiment and having
to pay some (or most) back after the charging was accordingly higher than the effect
of "only" receiving money after the experiment. As the participants did change
behaviour to a higher extent than in the first two rounds, the payment they received on
average per day was higher than in the first two rounds. As the third round was longer,
they also received payment for more days than in the first two rounds.

6.4 General Results

During the experiment, information was collected several times from the participants.
The initial screening to select participants was recorded, a questionnaire was filed by
the participants at a pre-test information meeting, a stated preference questionnaire
was applied while the meter was installed at the garage (2nd and 3rd round only), a
post-field test questionnaire was used and finally, focus group interviews for some of
the participants related to the undertaking of the test and behavioural issues was
undertaken.
In parallel to this, a general population survey was undertaken of 1,015 persons
randomly drawn from the whole population in Copenhagen. It could hereby be
controlled that the attitudes, travel behaviour and socioeconomic attributes of the 500
participants in the main AKTA experiments were representative of the population in
the Copenhagen region.

6.4.1 Socioeconomic Variables for AKTA Participants

The initial screening and the pre-test questionnaire mainly served to check whether the
participants met the factorial design and as a source of socioeconomic information.
The three rounds were undertaken at different times of the year over a period of 19
months. The following results have been corrected for seasonal variance where such
could explain differences between the rounds.
An effort was made to ensure that the participant was the households primary car
user and that this person responded to all enquiries including questionnaires concern-
ing the experiment. For 97% of the participants, the primary user did in fact participate
in the surveys.
 The AKTA Road Pricing Experiment in Copenhagen 101

Participants were defined as the primary car user of a one-car household. The
choice of one-car households was made to prevent interchange of trips between cars,
although this could result in a gender imbalance. Two-thirds of the participants were
male. Distribution by age largely reproduced the distribution of age in the entire
population. Geographically, half of the participants resided close to, but not in, the city
centre of Copenhagen and one-third in the suburbs, and one-sixth in the rest of the
region. Thus, most of the participants were affected by the road pricing schemes every
day at their home-end of a commuting trip.
The participants observed greater freedom in planning of the job in terms of
flexibility in office hours, possibilities for working from home and frequency of work-
ing at home. More than half of the participants actually had the possibility of changing
time of travel for that trip.
For the households as many as 74% of the participants stated that they did not use
the car as the main mode of commuting this generally rising with the distance to
their workplace. 77% of the car users used the car every day. The yearly demand for
car usage was below 10,000 km for 27% and 10-20,000 km for more than half of the
participants.

6.4.2 Experience and Attitudes Towards Road Pricing

More than 8 out of 10 participants had practical experience with road pricing either as
a fixed cost for e.g. a bridge or as a distance-dependent charge. The two tolled bridges
in and to Denmark explain this relatively high figure given the limited attention road
pricing has previously received in Denmark. Comparable figures for the whole
population are not available.
Furthermore, the attitudes towards the present tax system changed because of the
experience of road pricing. Before the AKTA experiment, 18% of the participants
thought that tax on registering cars was a good principle (54% thought it a bad
principle) whilst after they had participated in the experiment, only 12% of the
participants thought of this as a good principle, while 52% were against.
Before the experiment, 69% of the participants were in favour of variable taxes
on car use (road pricing) whilst 15% were against.
Although the commuting trip is known to be determined by habit, 40% of the
participants stated that they did to some extent change their habits.
The participants were generally more likely to believe in an effect on other car
users than on themselves. 53% believed other users would alter their driving pattern
should a peak hour charge be introduced, whereas only 43% expected it to have an
effect on their own driving. 42% of the participants expected that charges like those
tested would make them drive less.
If road pricing were to be established, 26% of the participants felt that the revenue
should be used to improve the public transport system, followed by reduced fares in
public transport (13%) and improvements in traffic safety (12%). Spending the
revenue as indicated by the participants increased acceptability to 42%, although 40%
clearly opposed the extra tax.
102 O.A. Nielsen and M.V. Srensen

Prior to the field trial, 17% of the participants did expect to change their attitude
towards road pricing, whilst 27% expected not to change their attitude. After the
experiment, 31% of the respondents indicated that they changed their attitudes to
some extent and half of the respondents did not change their attitude at all. 54% of the
participants changed their attitude during the experiment, 29% becoming more
positive and 25% becoming more negative.
The participants were contacted after the experiment to answer some questions
about their behaviour and the experiment in general.
Table 6.1 shows the stated saving strategies distributed by the different pricing
schemes in the experiment. Although the procedures in the experiment had been
explained very thoroughly both orally and in writing, apparently many participants
misunderstood the design. 23 participants stated for example that they changed be-
haviour in the control period due to the experiment, which is illogical since no
charging was applied. This included even 3 participants who changed their stated
behaviour in the control period only, i.e. they use as their stated saving strategy to
reduce their trips in the free control period, but not in the charging period! It was
hereby possible to control post-experiment behaviour changes (which turned out to be
insignificant though). In the designs with no control period, one participant only
changed behaviour in the low km charge period, but not in the high km period. A total
of 24 participants (13%) had more or less misunderstood the experiment. These
participants clearly did not behave in a cost minimising manner.

Table 6.1. Stated saving strategies for the first round with 201 cars (183 answers). Number of
participants and (per cent)

Pricing levels No saving Saving 1st Saving 2nd Saving both Total
period only period only periods
Control + high km 25 (60%) 2 (5%) 8 (19%) 7 (17%) 42
Control + low km 34 (63%) 1 (2%) 12 (22%) 7 (13%) 54
Control + toll 6 (38%) 0 4 (25%) 6 (38%) 16
Low km + high km 9 (35%) 1 (4%) 5 (19%) 11 (42%) 26
Low km + toll 6 (35%) 0 0 11 (65%) 17
High km + toll 13 (46%) 0 1 (4%) 14 (50%) 28
Total 93 (51%) 4 (2%) 30 (16%) 56 (31%) 183

Note: Please notice that the two periods could be in both orders (e.g. high km before control or
visa/versa), i.e. some participants run a control period followed by a control period. It was hereby
possible to control for post-experiment behavioural changes (which turned out to be insignificant
though). These have been joined in the table for simplicity. Shaded fields indicate illogical behaviour,
bold fields a desired behavioural effect (see also Nielsen and Jovicic, 2003).

Of the participants who complied with the requirements of the experiment, some
chose to change behaviour others not; some participants did not believe that they
had an alternative as the alternative was considered too inconvenient or they did not
consider that the price was high enough to make them change behaviour (their
willingness to pay and value of time were too high). In the experiments with two
charge periods, some participants only changed behaviour in the period with the
highest charge level.
 The AKTA Road Pricing Experiment in Copenhagen 103

170 cars/households from the second round were interviewed, of which 91 tried
to save money. Table 6.2 shows changes in behaviour distributed by different pricing
strategies. A total of 21 participants had more or less misunderstood the experiment
(12%). This was somewhat improved compared to the first round, but also disappoint-
ing, since extra care had been made to explain the experiment due to the experience of
the first round. This confirms that a fraction of car users behave irrationally or not as
utility maximisers even when a high level of information is available.
Note that the figures only concern the participants stated strategies and therefore
exclude (random) variation in trip patterns.

Table 6.2. Saving strategies for the second round with 200 additional cars (172 answers)

Pricing No saving Saving 1st Saving 2nd Saving both Total

levels period only period only periods
Control + high km 23 (69%) 0 7 (21%) 3 (9%) 33
Control + low km 13 (45%) 1 (3%) 6 (21%) 9 (31%) 29
Control + toll 13 (48%) 0 12 (44%) 2 (8%) 27
Low km + high km 11 (39%) 2 (7%) 2 (7%) 13 (46%) 28
Low km + toll 12 (40%) 2 (7%) 4 (13%) 12 (40%) 30
High km + toll 7 (30%) 2 (9%) 1 (4%) 13 (57%) 23
Total 79 (40%) 7 (4%) 32 (19%) 52 (31%) 170

Note: Please notice that the two periods could be in both orders (e.g. high km before control or
visa/versa), i.e. some participants run a control period followed by a control period. It was hereby
possible to control whether there were any post-experiment behavioural changes (which turned out to
be insignificant though). These have been joined in the table for simplicity. Shaded fields indicate
illogical behaviour, bold fields a desired behavioural effect (see also Nielsen and Jovicic, 2003).

The two tables show that not all participants had understood the experiment or the
general concept of the charging systems, since 12-13% used illogical saving strategies.
About half (51% and 40%, respectively) of the participants stated that they did not
change their travel behaviour due to the experiment, which may be due to high value
of time, poor alternatives to their car trips or general preferences of the car.

6.4.3 The General Population Survey of Attitudes Towards Road Pricing

In addition to the surveys of the participants in AKTA, an opinion poll was carried out
with 1,015 randomly selected inhabitants in Copenhagen in autumn 2001.
The respondents were geographically distributed over Greater Copenhagen with a
quarter in the suburbs and the majority (73%) in the central city area. Half of the
respondents were car owners; of these most were one-car owners (92% of the 50%)
and only 8% owned two or more cars. The yearly car use was below 10,000 km for
30% of the car owners and 10-25,000 for 53%. 14% of the car owners had a yearly
need to use a car of more than 25,000 km.
Half of the respondents were aware of road pricing dominated by female
respondents (60%, 40% for male) and dominated by car ownership (60%, 40% for
104 O.A. Nielsen and M.V. Srensen

non-owners). Awareness increased with age. The rate of awareness also increased by
income level, though some of this may be due to educational level.
Understanding of road pricing was mainly described by toll for use of specific
areas and/or particular hours of the day, specific roads and a cordon around the city. In
the light of the fact that Denmark has two tolled major bridges and no other tolled road
segments, the fact that awareness was spread over several types of road pricing
schemes was reassuring.
The existing tax system is structured with a lump sum tax when the car is
acquired (only the first owner) followed by a yearly (lump sum) payment. This system
was liked by 38% of the respondents and disliked by 43%. Females were slightly
more in favour of the present taxation system than men and car owners disfavoured
the system slightly more than non-car owners.
A variable road pricing system was favoured by two-thirds (65%) of the
respondents irrespective of gender, the positive view declining with age. Car owners
were less in favour (58%) than non-owners (72%). The car owners assessment was
unaffected by how much they used the car (mileage) as well as their income.
Enthusiasm for variable road pricing was not fully maintained when an additional
peak hour fee was suggested; the fee was not further quantified. Half of the respond-
ents supported this idea, again dominated by non-car owners (60%) as compared with
car owners (45%). More respondents with flexible working hours (45%) are against
than respondents without flexible working hours (38%). As for the variable road
pricing, enthusiasm declined with increasing income level.
Belief in the effect of a peak hour fee on other car users was 40% though only
35% expected they might change their own behaviour the latter covers over
geographical differences. The figures were unaffected by whether or not the respond-
ent had flexible working hours.
Questioned on the effect of the peak hour kilometre rate on change of departure
time, one in four respondents indicated the lowest rate (1 DKK/km) and one in three
the highest rate (5+ DKK/km) without any variation by gender.
The peak hour kilometre rate needed for change of mode was on average higher;
20% of the respondents intended to change at 1 DKK/km, 35% did not intend to
switch mode before the rate was over 5 DKK/km (the highest option). This strongly
suggests respondent bias as it appears that the respondents were deliberately trying to
affect the results for political reasons.
53% of the respondents believed that a zone-based toll was good, car owners
being more in opposition (45%) than non-car owners. There were only minor varia-
tions by gender. Of the car users, 57% believed that a zone-based system would
reduce car use although only 46% believe they would reduce their own car usage.
Again, there were only minor variations by gender.
Even among opponents of road pricing, 39% regarded a zone based toll system as
a good principle. This may be due to the clarity of the toll structure and the case of
understanding the system.
28% of the respondents would alter their time of departure if a cordon fee of 4
DKK (lowest level) to the centre of the city were introduced, 35% stated that the
cordon fee should be at least 12 DKK (highest rate). This was largely independent of
 The AKTA Road Pricing Experiment in Copenhagen 105

gender. The pattern is similar for change of mode. Again, it seems that some
respondents could not comprehend the question.
The general opinion is that the revenue from road pricing should be used to
improve public transport (extend services and reduce prices) whereas improvements
of the road network was given lowest priority.
Provided the revenue from road pricing is used as specified by the respondents,
the majority (58%) were not willing to accept higher taxes for road use than today;
males (65%) being more opposed than females (52%).
The respondents largely recognised that variable road pricing would diminish
traffic in city areas (62%), that road pricing would be fairer than the existing car
taxation system (68%) and that the environment would benefit (57%).
A fairly high fraction of the same respondents also found that the car user in
general would have to pay more than today for car use (52%), that prices would
become less transparent (58%) and that an additional level of bureaucracy would
emerge (63%) if a road pricing system was introduced.
More than 50% of the respondents believed that variable road pricing would
reduce traffic in Copenhagen and reduce pollution related to traffic.
The respondents were generally sceptical with regard to public spending of the
revenue generated by road pricing as only one third believed that the revenue would
be used to improve public transport.
In general, more than half of the respondents were in favour of road pricing as an
alternative to the existing system. Two out of three were supportive of variable road
pricing and slightly more than half supportive of peak hour toll and zone-based tolls.
Respondents living in the western and southern parts of Greater Copenhagen were
more in favour of road pricing, than respondents living in other parts of Copenhagen.
These findings were largely unaffected by income level and the distance to the nearest
high service public transport. Women were slightly more supportive than men.

6.5 Behavioural Changes and AKTA: The Main Results

Table 6.3 shows the main results of the experiment. Only results with a control period
combined with a pricing scheme are shown. The km per day in the control period is
lowest in the multi cordon-based system and highest in the low km-based system. This
can perhaps be explained by the misinterpretation of the experiment by some of the
participants (Table 6.1 and 6.2) or by personal variations (few persons within each
segment).
The payment estimate per day if the participants did not change behaviour could
be estimated based on the control period. This estimate was higher in the multi
cordon-based system than in the high km-based system. The behavioural responses
(DKK per day, km per day) were greatest in the two high toll schemes, which could
be expected, and the impacts of the low km-based tolls were so small (some of the
responses even have perverse signs) that it must be concluded that no significant
behavioural responses could be found, except perhaps a slight reduction of traffic in
106 O.A. Nielsen and M.V. Srensen

the afternoon peak (e.g. postponing shopping trips to after the peak, where the toll is
zero).
The driven km per day decreased more in the high km-based system than in the
multi cordon-based system, even though the absolute payment per day was about 30%
lower in the km-based than the multi cordon-based system. This can be explained by
the fact that it is easier to save by changing route and destination in the km-based
system than in the multi cordon-based system. If, for example, an alternative
destination is closer than the preferred, but is still on the other side of a cordon, then it
is only possible to save in the km-based system. This result may, however, depend on
the design of the cordon system. Bonsall et al. (1998) found for example a greater
response to cordon tolls than a km-based system.
The average paid DKK per km increased in the km-based system, even though
the participants did reduce their travel. This means that they to a higher extent
cancelled or changed trips with low payment per km, e.g. trips outside of rush hours,
than expensive trips, e.g. typical commuting trips to the city centre in the rush hours.
The interpretation must be that the commuting trips are difficult to change, since the
location (work place) and time (fixed working hours) cannot be changed, whilst it is
easier to change non-commuting trips to other destinations, or outside the afternoon
rush hours, or to reduce the number of such trips (e.g. by shopping for larger quantities
less often). This result is in line with the discussions during the focus group inter-
views.

Table 6.3. Responses to different pricing schemes, main experiment (based on approximately 100,000
trips)
Trips High km-based toll Low km-based toll Multi cordon-based
Impact within 95%, No impact with 90% pricing
90%, 98% confidence confidence interval No impact within 90%
intervals for each round confidence intervals

Control High Change Control Low Change Control Cordon Change

All period 4.3 4.0 -7.8% 4.2 4.2 0.1% 4.0 4.0 -0.5%
Morning
peak 0.53 0.47 -12.0% 0.45 0.45 0.3% 0.51 0.48 -6.6%
Afternoon
peak 0.76 0.72 -5.5% 0.76 0.73 -4.0% 0.70 0.71 0.7%
Weekday 2.0 1.8 -9.2% 1.9 2.0 1.5% 1.8 1.9 2.9%
Weekends 1.1 1.0 -5.2% 1.1 1.0 0.2% 1.0 0.9 -4.9%
DKK/km 0.75 0.78 4.0% 0.22 0.23 4.2% 1.2 1.1 -6.4%
DKK/day 26.2 24.4 -7.5% 9.4 9.6 2.4% 38.8 33.4 -16.2%
Km/day 38.2 34.0 -12.4% 46.5 45.2 -2.8% 34.8 31.5 -10.5%

The main reduction of the number of trips in the high km-based and multi cordon-
based schemes was in the morning peak, which is somewhat surprising, since this
must be modified commuting trips. The afternoon peak was relatively smaller
changes, which is also a surprise since it could be assumed to be easier to postpone or
 The AKTA Road Pricing Experiment in Copenhagen 107

modify shopping and leisure trips (time and destination are less constrained than com-
muting). The reason can be that afternoon trips are part of more complicated trip
chains with less flexibility. The changes of behaviour on weekdays and at weekends
are surprisingly high in the km-based system compared to the charging in the peak
hours. This was not expected since the pricing was only 50% of the peak hours, and
the alternative public transport service is less frequent and with fewer direct services
outside peak hours. The response on the multi cordon-based system is more in line
with what could be expected.

6.6 Discussion and Conclusions

The results and findings of the experiment are discussed and summarised in the
following.

6.6.1 GPS Technology

The GPS experiment was perceived as realistic and it seems that the behavioural
responses are realistic. A few participants acted illogically. This could also be the case
in a real life implementation of road pricing. One could claim that the error term in
discrete choice models also usually reflects this, since the choice set is reduced to a
binary one.
The GPS technology did not perform as well as anticipated. A significant amount
of extra work had to be carried out in order to develop methods and software to
process and repair the data. Since the participants had not experienced these problems,
their behaviour was not affected. However, if a GPS-based system is to be used for a
full-scale pricing scheme, further work needs to be carried out on methodological,
software and technical issues.

6.6.2 The Main Experimental Design

Theoretically, a factorial design is optimal since a small sample can be utilised better
by this approach. However, it appeared that some of the participants could not under-
stand the experimental design, not only those who tried different pricing schemes
without any control period (which should be avoided in other experiments), but also
those who ran a control period followed by one pricing scheme. Some even mis-
understood the design in the second round, where the project leaders were aware of
the problem and where further care had been taken to explain the experiment to the
participants. By conducting a post-experiment survey by telephone, it was, however,
possible to identify those participants who had misunderstood the design.
It is recommended that participants be presented with their expected costs after
the control period or, even better, to pay them the amount, as this makes the following
period more realistic, since they have to pay back real money. To do this, data from
108 O.A. Nielsen and M.V. Srensen

the GPS units have to be downloaded and processed in order to calculate the payment
prior to the second round, which is a technical and organisational obstacle. The pricing
periods in the experiment were too short; at least 12 weeks must be used for the
control period and for each subsequent pricing level. This was compensated for in a
third experimental round, where the initial results indicate a somewhat greater degree
of change in behaviour.

6.6.3 Changes in Behaviour and Evaluation of Different Pricing Schemes

It can be concluded that road pricing does indeed affect travel behaviour; it is not
considered to be another fixed cost, but a marginal cost that drivers respond to.
The high km-based pricing level clearly made an impression on the participants
(between 1 and 5 DKK/km in the peak hours and half price in the off-peak hours).
Even if they could not change behaviour, they had examined alternative travel options
before rejecting them. The participants considered changing route, mode and occa-
sional trips and some changed behaviour. The main changes were new routes and for
occasional trips new destinations, time of day (to non-peak) and to some extent,
fewer trips. Commuting trips are assumed to be difficult to change, e.g. shifting away
from the peak hour, working at home (telecommuting) or using another mode (bicycle
or public transport). However, it turned out that the participants nevertheless changed
these as much or even more than other trips.
The low km-based pricing level was in general not sufficiently high to change
behaviour, although a few participants made some minor changes when it was easy to
do so.
The km-based schemes were in general considered more fair than the multi
cordon-based ones. The participants had nevertheless greater difficulties to understand
these than the multi cordon-based system. It is interesting to note that the fairer and
economically more justified schemes are, the more difficulties are experienced in
understanding them. Nevertheless, the km-based scheme turned nonetheless out to be
the most efficient in terms of behavioural changes.

6.6.4 Attitudes Towards Road Pricing

The participants' and interviewed persons attitudes to road pricing were less
emotional than expected (especially considering the debate in the Danish press). Most
participants did not consider surveillance as a problem (cars can be tracked by the
logged coordinates). Neither was the possibility of controlling speed limits considered
important. The participants disagreed on whether road pricing is fair or not, including
whether society becomes more class-divided between people who can pay and those
who cannot, and for people who cannot change behaviour (having fixed timetables or
with children in school and day care). Only a few participants had very strong
attitudes against road pricing.
 The AKTA Road Pricing Experiment in Copenhagen 109

References
Bonsall, P., Cho, H-J., Palmer, I., Thorpe, N. (1998). Experiments to determine differences in
drivers' response to a variety of road user charging regimes. PTRC. September 1998.

Nielsen, O.A., Jovicic, G. (2003). The AKTA road pricing experiment in Copenhagen. 10th Interna-
tional Conference on Travel Behaviour Research. Proceedings, session 3.2 Valuation/Pricing.
Lucerne, Switzerland, August.

Nielsen, O.A., Jrgensen, R.M. (2004). Map-matching algorithms for GPS data Methodology and
test on data from the AKTA road-pricing experiment in Copenhagen. Paper accepted for the
Triennial Symposium on Transportation Analyses, TRISTAN V. Le Gosier, Guadeloupe, French
West Indies, June 13-18, 2004.

Nielsen, O.A., Kristensen, J.P., Wrtz, C. (2003). Using GPS for road pricing experiences from
Copenhagen. Paper presented at the ITS world conference, Madrid. Presentation session PS117,
paper No. 2131T.
7 Experience with Measuring Equity
and Efficiency: A Case from Oslo

Farideh Ramjerdi, Knut stmoe and Harald Minken

TI, Institute of Transport Economics, the Norwegian Centre for Transport Research, Oslo,
Norway

Abstract
Road pricing has been discussed in the context of two objectives: improving
resource allocation and financing the expansion of the capacity of the road
network. Financing transport infrastructure by means of toll revenues in the
traditional sense has a history that dates back almost 70 years in Norway. Since
1986, with the opening of cordon toll schemes in Bergen, Oslo and Trondheim, and
more recently in Stavanger there has been a major shift in the location of toll-
financed projects from peripheries to urban areas. Meanwhile, the contribution
from toll financing schemes to the total funds for transport infrastructure has
increased by more than 35 percent and the scheduled projects for financing by tolls
are almost complete. It is apparent that the Norwegian tolls have successfully
achieved their purposes. The Norwegian tolls are approved for only a limited
period of time, usually 15 years. There is now a growing interest in redefining the
objectives of some of the Norwegian urban tolls from merely a financing scheme
to a part of an integrated policy package that would address transport externalities.
This chapter will discuss the performances of the Norwegian urban tolls and the
issues related to their changing roles.

7.1 Introduction

Issues of equity in transport have received extensive attention, especially more

recently related to congestion pricing. This body of research has different focuses.
Some address the distributions of economic gains and losses among different
groups of users, usually by income, and suggest how to calculate these. Others
have focused on alternative schemes for redistribution of the toll revenues in order
to address equity concerns. Still others have focused on the identification of
different stakeholders such as consumers, producers and operators, and subgroups
among stakeholders that are affected differently by a policy. See Eliasson and

This study was partly supported through the SPECTRUM project under the EU 5th framework
programme. Arild Vold has calculated the scenarios using RETRO.

After this chapter was written Knut stmoe has died.

112 F. Ramjerdi, K. stmoe and H. Minken

Lundberg (2002) for a survey. A few studies address the quantification of inequali-
ty formally. Among these are the EU-funded research projects AFFORD, MC-
ICAM and PROSPECTS (see Fridstrm, et al. 2000; Minken et al., 2002; MC-
ICAM, 2003).
The efficiency and equity of a toll scheme have most often been discussed
while looking at the transport sector in isolation. There are, however, interactions
between the transport sector and the rest of the economy, and there are distortions
in the rest of the economy. Due to these distortions, the secondary effects of
transport policies on the rest of the economy are relevant and should be evaluated.
In a general equilibrium framework, these interactions are explicitly addressed. In
a partial equilibrium framework, like an urban transport model or an integrated
land use and transport model, interactions with the rest of the economy can at best
be addressed implicitly, through the use of a so-called marginal cost of public
funds (MCF). Roughly speaking, the marginal cost of public funds is the cost to
society of raising a dollars worth of public revenue by distortionary taxation. As a
rule, it is assumed that the distortionary tax that will have to be used is the income
tax. However, different tax instruments, including the pricing instruments of
transport, will have different MCFs. From an efficiency point of view, the
instrument with the least MCF should be used. But efficiency is not our only
concern. As Sandmo (2000) points out, a main reason for distortionary taxes is to
address redistribution, otherwise uniform or arbitrary lump-sum taxes could have
been levied. The redistributional impacts depend not only on which tax instrument
is used but also on how revenue is used in the public sector or recycled to the
households.
Transport and integrated transport and land-use models are probably the most
common planning tools. The level of detail varies among models with respect to
geographical detail, presentation of the transport networks, alternative modes of
travel, time periods (usually peak and off-peak) as well as the segmentation of the
market by travel purposes. Behavioural responses with different time dimensions
such as route choice, mode and destination choices and trip frequency are usually
captured in transport models. Hence, the architecture of these models and the
manner in which they are applied will determine the time horizon of the applica-
tion of the models, usually from the very short to medium run. When disaggregated
data are used for the estimation of urban and regional models, individual and
household socio-economic characteristics can enter the model formulation as
explanatory variables. Individual or household income, gender and age are among
the socio-economic variables that are likely to influence behaviour. Consequently,
it is possible to apply this class of models to evaluate the differences in response of
different segments of a population to a transport policy. While partial equilibrium
models must inevitably represent economy-wide distortions and distributional
impacts in a coarse way, this level of detail in the representation of a few selected
markets is a strong point with respect to equity analysis of policies. A general
equilibrium approach, on the other hand, will usually lack important details in the
transport and land-use markets.
The main purpose of this paper is to illustrate some of the challenges that arise
in addressing the efficiency and equity of a package of instruments with a more
 Experience with Measuring Equity and Efficiency 113

traditional transport model system. There are two alternative approaches available
to respond to equity considerations. One approach is to respond directly to the
distributional concerns by adopting an explicit form of social welfare function and
the choice of a desired inequality aversion parameter. An example of this type of
model is TRENEN (see, for example, Proost and Van Dender, 2002). The second
approach is to apply an inequality measure for the comparison of inequality of a
given pair of distributions of a variable that changes as the result of a policy, such
as income or accessibility.
In the next section, we provide an overview of some equity measures and their
properties. Section 7.3 presents the alternative packages of instruments for Oslo as a
case study and an assessment of these packages. Section 7.4 focuses on the effect of
the assumptions regarding MCF using a sensitivity analysis. Section 7.5 shows the
performances of some of the equity measures in the case of Oslo. In Section 7.6, we
summarise our conclusions.

7.2 Equity Measures

The most central issue in the assessment of equity is related to how equity is
defined. Equity can be defined along many dimensions such as justice, rights,
treatment of equals, capability, opportunities, resources, wealth, primary goods,
income, welfare, utility and so on (see Sen, 1982, 1992). Sen (1992, p12) states
that every normative theory of social arrangement that has at all stood the test of
time seems to demand equality of something something that is regarded as
particularly important in that theory. The theories involved are diverse and
frequently at war with each other, but they still seem to have that common feature.
Sen continues by suggesting that demanding equality in one space implies
inequality in some other space. An important ethical issue is related to the equality
of consideration. Sen (1992, p.18) suggests that the need to defend ones theories,
judgements and claims to others who may be directly or indirectly involved, makes
the equality of consideration at some level a hard requirement to avoid. Moreover,
the relative advantages and disadvantages that people have compared with each
other, can be judged in terms of many different variables, e.g. their respective
incomes, wealth, utilities, resources, liberties, rights, quality of life and so on. On
human diversity, Sen (1992, p.20) states that The plurality of variables on which
we can possibly focus (the focal variables) to evaluate interpersonal inequality
make it necessary to face, at a very elementary level, a hard decision regarding the
perspective to be adopted. This problem of choice of the evaluative space (that is,
the selection of the relevant focal variables) is crucial to analysing inequality. It is
beyond the scope of this paper to provide an overview of the ways different social
philosophies have defined equity and to compare them. What is relevant for our
work is that different aspects of equity are important for different groups in society
and it is important to provide measures for the evaluation of their concerns and to
reflect their views.
114 F. Ramjerdi, K. stmoe and H. Minken

In order to address equity, a unit of analysis and the variable along which equity
is to be analysed have to be defined. In a social context, the unit of analysis can be an
individual or a collective unit such as a nuclear family, women, elderly, disabled, a
region, etc. The choice of the unit depends on the interpretation of the inequality
measurement. In some contexts, it is natural to adopt an individual as the unit, for
example when we are looking at exposure to pollutants. In other contexts, e.g. when
we are examining the distribution of wealth or income, it might be more useful to
adopt a collective unit such as a household. Furthermore, evaluation of inequalities
along a certain dimension in terms of between and within groups such as between
genders, regions, etc., is often required. Coherence and homogeneity are the import-
ant criteria in the selection of collective unit.

7.2.1 Properties of Equity Measures

Different measures of inequality reflect different perceptions of inequality. The sets

of weights that different views attach to transfers at various points in a distribution
are different. This can result in contradictory rankings of a given pair of distributions
(see Kolm, 1969; Atkinson, 1970; Sen, 1973). In this sense, inequality measures have
both normative and descriptive content. These measures can be used to describe the
differences in a population with respect to a given variable such as income, but they
can also represent the manner in which these differences are measured. There are
numerous axioms that place specific requirements on the properties of a measure of
inequality. In the following, we summarise a number of these axioms (see Harrison
and Seidl 1994; Myles, 2000). These axioms are used for the construction of the
axiomatic measures of inequality.
The symmetry or anonymity axiom requires the inequality measure for a given
income distribution in a given population not to be affected by the order in which the
individuals are labelled. In other words, it is not important who is rich and who is
poor. This axiom seems very obvious. All the measures that are described in the
following sections satisfy this axiom.
The axiom of transfer or Pigou-Dalton principle says that a transfer of income
from a rich person to a poor person should reduce the measured inequality as long as
the income of the rich person stays higher than the poor person after the transfer. This
view was originally expressed by Pigou (1954) and shared by Dalton (1920). The
Pigou-Dalton principle is an important property that any acceptable measure of
inequality should satisfy.
The principle of population requires the inequality measure to be independent of
the size of the population.
The scale invariance axiom or relative inequality aversion axiom demands that
the measured inequality should not change if all members of a population get the
same proportional increase in incomes. Kolm (1976a, 1976b) regards this as a
(politically) rightist view.
The translation invariance axiom or absolute inequality aversion axiom requires
that the measured inequality does not change by changing all incomes by the same
 Experience with Measuring Equity and Efficiency 115

amount as long as the changes do not lead to a negative income. This is regarded as a
(politically) left-wing view.
The decomposability axiom requires that there should be a coherent relationship
between inequality in the whole population and its constituent parts. The basic idea is
that one should be able to define the inequality measure of the total population as a
function of inequality within its constituent parts and inequality between subgroups.

7.2.2 Some Inequality Measures

Inequality measures are often classified as statistical, welfare or axiomatic (see, for
example, Myles, 2000 and Cowell, 1977). Statistical measures examine the distribu-
tion of any variable in a given population, such as income. Examples of these are
range, variance, measure of variation, log variance, the Gini measure and Theils
entropy measure. Welfare measures rely on welfare economics and incorporate equi-
ty concerns into a welfare function. Axiomatic measures are derived by addressing
the properties that a satisfactory measure ought to have. These measures can be
applied to the evaluation of inequality of any vector or distribution of observations,
even to non-economic data such as the distribution of the ambient level of pollutants
or accessibility over an area. The following measures are examined in this study.

1. Range, R, defined as

R=Ymax Ymin (1)

2. Variance, V, defined as
1 n
V
ni1
(Yi  Y ) 2 (2)

3. Coefficient of variation, c, defined as

V
c (3)
Y
4. Relative mean deviation, M, defined as

1 n Yi
M 1
ni1 Y
(4)
116 F. Ramjerdi, K. stmoe and H. Minken

5. Logarithmic variance, v, defined as

2
1 n Yi
v log( )
n i 1 Y
(5)

6. Variance of logarithms, vl, defined as

2
1 n Y
vl log( i )
n i 1 Ylog
(6)

7. The Gini measure, G, defined as

n n
1
G
2n 2 .Y i 1 j 1
| Yi  Yj | (7)

8. The Theils entropy measure, T, defined as

1 N Yi Y
T
N i1 Y
log( i )
Y
(8)

9. The Atkinson index, AH, defined as

1
1 Y
n
1H 1H

AH 1 i (9)
n i 1 Y

10. Kolms measure of inequality, KD, defined as

1 1 N
KD log exp( D(Y  Yi )) (10)
D N i 1
In the above measures
Y is a measure of welfare
n is the number of observations on welfare
Y is the mean level of welfare
Ylog is the mean level of log of welfare

H and D in Atkinson and Kolm measures are parameters that address inequality
aversion and H and D ! 0 .
 Experience with Measuring Equity and Efficiency 117

The first 8 measures are classified as statistical measures, while the last 2 measures
(Atkinson and Kolm) are welfare measures. The following table summarises some of
the properties of these measures.
The impacts of a package of instruments can be measured using non-economic
data. An example of the application of the equity measures to non-economic data is
related to the changes in the distribution of emission of pollutants over the area of
study. It might even be feasible to evaluate the changes in terms of within and
between segments of the population. The segments can be defined in terms of the
socio-economic characteristics of the population or by locations in the study area.
A decomposable measure is necessary for this purpose (see, for example, Myles,
2000 and Cowell, 1977).

Table 7.1. A summary of the properties of inequality measures

Some important properties
Measure Definition Transfer Scale Translation
invariance invariance
Variance Eq. (2) Yes No Yes
Coeff. of variation Eq. (3) Yes (weak) Yes No
Relative mean deviation Eq. (4) Yes Yes No
Logarithmic variance Eq. (5) No Yes No
Variance of logarithms Eq. (6) No Yes No
Gini Eq. (7) Yes (weak) Yes No
Theils entropy Eq. (8) Yes Yes No
Atkinson-Kolm Eq. (9) Yes Yes No
Kolm Eq. (10) Yes No Yes

7.3 Evaluation of Alternative Packages of Instruments for Oslo

The greater Oslo area has a population of about one million with an area of 5,305
km2. The population density is about 140 inhabitants/km2. Oslo city has a popula-
tion of about 512,000. The Oslo toll ring was established in 1990 as a financing
scheme. Originally, the toll revenue, supplemented by about equal funds from the
central government, was to finance the Oslo Package (now referred to as Oslo
Package 1), comprising some 50 new road projects. It is estimated that by 2007
the total contribution of the scheme to Oslo Package 1 will amount to NOK 9.1
billion (2002 NOK), approximately 15-20 per cent above the initial estimate. In
2000, the Parliament approved an increase in the toll fee for financing an
investment package on public transport projects, referred to as Oslo Package 2.
There is much debate and some interest in changing the direction of the scheme
to a congestion pricing scheme from 2008. Amongst the different alternatives that
have been evaluated for Oslo, there is a time differentiated toll scheme with the
purpose of reducing car traffic during peak periods. Revenues would be allocated to
public transport and to the extension and improvement of roads in the region. The
Oslo scheme is likely to continue in some form or other after 2007.
118 F. Ramjerdi, K. stmoe and H. Minken

For the purpose of this study, a reference scenario and some 12 alternative
scenarios were constructed. The reference scenario comprises the trends in income,
socio-economic and demographic changes, changes in land use and any planned
and approved changes in the transport networks. Alternative scenarios are formu-
lated by adding alternative packages of instruments to the reference scenario. The
instruments include:
x A time differentiated toll ring scheme
x Fuel tax
x Expansion of public transport services by increasing frequency of services
x Selected reduction in speed limits on the car links with low capacity.

A toll ring complemented by a distance-based pricing scheme performs closer to a

first-best pricing scheme where ideally users are charged in relation to their
social marginal costs. Since fuel tax approximates a distance-based pricing scheme
and at the same time is a good instrument to address environmental externalities,
especially related to CO2 emissions, it is an important instrument in an optimal
package of instruments. These pricing instruments will reduce the demand for car
use and increase the demand for public transport. To satisfy this additional
demand, public transport frequency can be increased optimally. Improvements in
public transport services can also address the adverse effects of pricing instruments
on equity. Finally, among the instruments is a selection of speed limit reductions
on car links with a low capacity. An instrument such as a reduction in the speed
limit decreases the car traffic and congestion, and decreases other external costs
associated with car use. Contrary to a pricing instrument, a reduction in the speed
limit results in a decrease in government revenues. This instrument clearly
illustrates the importance of the assumption about the value of the MCF in the
calculation of the net benefits of an instrument.
These instruments and their levels and the packages used in this study do not
reflect precisely any of the current proposals for the future of the Oslo scheme. The
main purpose is to illustrate some important issues in addressing efficiency and
equity by using these packages of instruments as examples. The lessons should be
valid for other package of instruments.
Table 7.2 shows the description of alternative policy scenarios that are con-
structed with a single instrument or the combination of these instruments.
 Experience with Measuring Equity and Efficiency 119

Table 7.2. Description of alternative policy scenarios

Alt Scenario description

0. Ref. Reference scenario
1. All All measures
2. S Selective reductions in speed limit
3. PTF Increase in public transport frequency by +5.8%
4. T Toll: Peak periods: 2.5 todays prices, Other periods: Todays prices
5. F Increase in fuel taxes by +50%
6. S/T Change in speed limit + toll
7. S/PTF Change in speed limit + increase public transport frequency
8. S/F Change in speed limit + increase in fuel taxes by 50%
9. T/PTF Toll + increase in public transport frequency
10. T/F Toll + increase in fuel taxes by 50%
11. PTF/F Increase in public transport frequency + increase in fuel taxes
12. PTF/F/T Increase in public transport frequency + increase in fuel taxes + toll

A multi-modal transport model, RETRO, is used in this study (Ramjerdi and Rand,
1992; Vold, 2003). RETRO has the following sub-models:

i) Disaggregate and aggregate licence-holding models

ii) Disaggregate car ownership models
iii) Disaggregate models for travel frequency and models for mode and destina-
tion choices
iv) Segmentation model
v) Network model.

EMME/2 (a software package) is used for the network model. The number of
zones is 438. In this case study, it is assumed that the land-use changes are
exogenously defined.
The alternative scenarios are evaluated according to an objective function that
accounts for the net benefits of all the affected actors, users, non-users, producers
and government, defined as
1
OF 1  r  (CS
t t  PC t  MCFt * GSt  Env t  J t g t ) (11)
tt*

where

OF is the net benefit

t* is the horizon year
r is a discount rate
CSt is the change in the consumer surplus in year t
PSt is the change in the producer surplus in year t
120 F. Ramjerdi, K. stmoe and H. Minken

GSt is the change in the government surplus in year t

MCFt is the marginal cost of public funds in year t
Envt is the external costs defined as accident, noise and pollution costs and other
external effects
Jt is the shadow cost of CO2 emissions, reflecting the national CO2 target for
year t,
gt is the amount of CO2 emissions in year t,

The rule-of-half is used for the calculation of the consumer surplus. The changes in
the producer surplus (revenues net of costs) should be calculated for all the
transport operators. Since toll and parking operators in this study are government
agencies, they will be addressed under the government surplus. The public
transport operators must earn a surplus after subsidy. Therefore, their surplus is
also accounted for under the government surplus. The tax revenue associated with
car use and car ownership will be included in the government surplus.
Tables 7.3 and 7.4 show the unit values that have been adopted in this case
study. They are based on recommended Norwegian values in urban areas (Eriksen
et al., 1999).

Table 7.3. Values of externalities (in Euro/vehicle kilometre)

Emissions
Mode (other than CO2) Noise Accidents CO2
Car (average) 0.025 0.017 0.027 0.011
Public transport (average
for bus, and light rail) 0.304 0.170 0.061 0.066

Table 7.4. Value of travel time (in Euro/hour)

Mode of travel Car Public transport

In-vehicle time 5.64 4.70
Wait and transfer time - 5.64
Auxiliary time - 5.64

Tables 7.5 and 7.6 show the changes in the net benefits of the 12 scenarios relative
to the reference scenario in 2015. The marginal cost of public funds that applies to
the changes in the government surplus is assumed to be 1.0. In the next section, a
sensitivity analysis by using a variable MCF of 1.0 to 1.4 will be presented. An
examination of these tables indicates that:
x Scenarios 10 and 12 have similar scores with respect to their net benefits. In
scenario 10, fuel tax is increased by 50% and a time-differentiated toll scheme
(for scenario descriptions, see Table 7.2) is introduced. In scenario 12, in
addition to the previous two instruments, the public transport frequency is
increased by 5.8%. Scenario 12 should be more desirable based on equity
considerations.
 Experience with Measuring Equity and Efficiency 121

x Scenarios that include an increase in the fuel tax of 50% have positive net
benefits. This is explained by the big increase in the government surplus that
compensates the decrease in the consumer surplus and the positive impacts
due to the reductions in externalities and CO2 emissions.
x Scenarios that include a reduction in speed limit have negative net benefits.
Unlike the case of a fuel tax, both the consumer surplus and the government
surplus are negative in this case. The decrease in externalities and the
reduction in CO2 emissions do not compensate for the loss in the consumer
and the government surplus.
x Scenarios that include a toll increase have positive net benefits. This again is
explained by the big increase in government surplus that compensates for the
loss in the consumer surplus as well by the big reductions in externalities and
CO2 emissions. An exception is Scenario 8 where the package includes a
reduction of the speed limit.
x The net benefit in the scenarios in which the public transport frequency is
increased is slightly negative. The cost associated with the increase in fre-
quency is the explanation.

Table 7.5. Changes in the net benefit relative to the reference scenario (in million Euro/year)

1).All 2) .S 3) P 4).Toll 5) Fuel 6) S/T

Consumer surplus -572.79 -115 10 -145.5 -343.4 -259.5
Government surplus
Fuel tax 324.8 -11.6 0.4 -22.8 378.7 -34.1
Annual car taxes -30.6 0.0 0.0 0.0 -30.6 0.0
Toll revenue (net) 157.3 0.0 0.0 171.5 0.0 170.5
Parking revenue -4.1 0.2 0.3 -1.0 -2.5 -0.8
Public transport
revenue 28.6 4.5 1.6 2.8 17.0 7.6
Public transport
investment -23.1 - -24.2 - - -
Total 452.9 -6.9 -22.0 150.6 362.6 143.2
Externalities (emission
of pollutions, noise
and accident) 44.0 6.0 -1.0 11.0 27.0 16.0
CO2 7.0 1.0 0.0 2.0 4.0 3.0
Total -68.914 -114.9 -12.99 18.104 50.2 -97.334
122 F. Ramjerdi, K. stmoe and H. Minken

Table 7.6. Changes in the net benefit relative to the reference scenario (in million Euro/year)

7) S/P 8) S/F 9) T/P 10) T/F 11) P/F 12) P/F/T

Consumer surplus -104.8 -453.6 -134.8 -474.0 -330.7 -464.5
Government surplus
Fuel tax -12.0 362.5 -22.8 344.6 378.0 343.0
Annual car taxes 0.0 -30.6 0.0 -30.6 -30.6 -30.6
Toll revenue (net) 0.0 0.0 171.6 158.8 0.0 158.7
Parking revenue -0.2 -2.2 -1.0 -4.1 -2.6 -4.1
Public transport
revenue 6.4 21.8 4.7 21.1 18.7 23.0
PT investment -24.2 - -24.2 - -24.1 -19.4
Total -30.0 351.4 128.3 489.8 339.5 470.6
Externalities (emission
of pollutions, noise
and accident) 5.0 32.0 10.0 32.0 26.0 38.0
CO2 1.0 5.0 2.0 5.0 4.0 6.0
Total -128.8 -65.2 5.5 52.8 38.8 50.1

7.4 A Sensitivity Analysis of MCF

Table 7.7 shows the effects of the MCF on the net benefits of the 12 alternative
scenarios compared with the reference scenario. The net benefit of a scenario
changes substantially with the assumption about the size of the MCF. This is due to
the importance of the contribution of the government surplus to the net benefit (see
Tables 7.5 and 7.6). Indeed, all the pricing policies get a higher rank with an increase
in the MCF. Furthermore, the assumption about the value of the MCF affects ranking
of the scenarios.
As briefly discussed earlier, the MCFs of different pricing instruments are
different and more importantly they depend on the type of public expenditure it is
used for or how it is recycled. Parry and Bento (1999) show that the labour market
should not be ignored when setting urban road prices. The effect of a tax on work
travel is similar to distortionary taxes on the labour market. In an urban setting,
especially during the peak periods, most travel is work-related. Therefore, asserting
an arbitrary value for the MCF might be without justification.
The evaluation of the efficiency as well as the equity implications of any of
these scenarios is incomplete unless the use of the government surplus is specified.
The recycling of the government surplus to inefficient projects, public transport or
roads is not justifiable based on efficiency or equity considerations. This is why the
separation of the revenues raised in the transport sector from recycling to the rest
of the economy becomes problematic.
 Experience with Measuring Equity and Efficiency 123

Table 7.7. Effect of MCF on the high level objective function

MCP= MCP= MCP=
Alt Scenario description 1.0 1.2 1.4
17. All All measures -69 22 112
18. S Selective reductions in speed limit -115 -116 -118
Increase in public transport frequency
19: PTF by +5.8% -13 -17 -22
Toll: Peak periods: 2.5 todays prices,
20.T other periods: today prices 18 48 78
21.F Increase in fuel taxes by +50% 50 123 195
22.S/T Change in speed limit + toll -97 -69 -40
Change in speed limit + increase
23.S/PTF public transport frequency -129 -135 -141
Change in speed limit + increase in fuel
24.S/F taxes by 50% -65 5 75
25.T/PTF Toll + increase in public transport frequency 5 31 57
26.T/F Toll + increase in fuel taxes by 50% 53 151 249
Increase in public transport frequency +
27.PTF/F increase in fuel taxes 39 107 175
Increase in public transport frequency +
28.PTF/F/T increase in fuel taxes + toll 50 144 238

7.5 An Evaluation of the Equity Implications of an Optimal

Package

The incidence of the net efficiency gains of a transport policy might be different
for different segments of a population or over a geographical area. We pointed out
that for a correct calculation of the net efficiency gains a spatial general equilibri-
um model is necessary. Addressing the interactions of the transport market with the
rest of the economy, especially with the labour market, is crucial for a correct
calculation of the distribution of the net efficiency gains among a population or
over a region. It is, however, possible to use different measures of inequality and
accessibility in order to obtain some indication of the distribution of the incidence
of the net benefits. Equity and accessibility measures only suggest the likely
direction of impacts, and should be treated as such. The ex-post equity analysis
provides some information on how to recycle revenues to address equity
considerations.
This section focuses on the geographical distribution of the welfare changes of
an optimal package (in this case, Scenario 12) compared to the reference sce-
nario. For this purpose, two different approaches will be used for measuring
accessibility (see Geurs and Ritsema van Eck, 2001; Baradaran and Ramjerdi,
2002, for a review of accessibility measures).
The gravity or opportunities approach defined by:
124 F. Ramjerdi, K. stmoe and H. Minken

Wj
Gi f (c , E)
jL
(12)
ij

where
Wj stands for the mass of opportunities available to i at location j
Ecij
f(cij,E) is the deterrence function = f (cij , E) e
E is assumed to equal to 0.35 (WHY 0.35??)
cij is the generalised cost of travel by car between i and j.

Three alternative accessibility measures are constructed using this approach as

follows:

G_Emp in which Wj is equal to the total employment at j

G_65+ in which Wj is equal to the total population over 65 years of age at j
G_20-65 in which Wj is equal to the total population of age 20-64 at j
G_W is which Wj is equal to the female population at j

Logsum measure is used defined as:

1
log sum in Max U nj|i ln exp(P(v nj  c ijn )) (13)
i, jL P j HL

where
log sum in is the measure of accessibility at location i for individual n
U nj|i is the utility of travel to location j given the individual n is located at i

v nj reflects attraction at j

cijn is the travel cost between i and j

P is a positive scale parameter that is estimated

Table 7.8 shows the differences between the above accessibility measures in
Scenario 12 and the reference scenario. Fig. 7.1 shows the different areas in the
Oslo region.
As can be expected, all the accessibility measures are negative in all areas in
the Oslo region. An increase in fuel tax and a time-differentiated toll ring will
drastically change accessibility by car (G_Emp, G_W, G_65+ and G_20-65). Note
that G_W, G_65+ and G_20-65 measures indicate the accessibility of a particular
segment of the population to different locations in the Oslo region while G_Emp
indicates accessibility to employment in different locations. All these measures
have similar patterns. They all indicate that accessibility by car to Upper Grorud-
dalen will decrease the most for all segments of the population. Accessibility to
 Experience with Measuring Equity and Efficiency 125

employment (G_Emp) and accessibility of the population of age 20-65 (G_20-65)

have similar patterns.

Table 7.8. Changes in the accessibility measures of Scenario 12 relative to the reference scenario
Employment Women Age over 65 Age 20-65
G_Emp G_W G_65+ G_20-65 Logsum
1. Oslo West -1.11 -0.82 -0.29 -1.31 -5.10
2. Oslo, East -2.19 -1.30 -0.50 -2.01 -5.68
3. Oslo, outer West -7.15 -5.96 -2.06 -9.57 -5.74
4. Lower Grorurddalen -4.79 -3.00 -1.15 -4.66 -5.49
5. Upper Groruddalen -16.09 -18.85 -6.24 -29.98 -8.72
6. stensjbyen -7.86 -12.37 -6.22 -18.06 -4.81
7. Oslo South -1.16 -3.65 -1.54 -5.53 -9.13
8. West region 0.00 0.00 0.00 -0.01 -3.67
9. Romerike -0.24 -0.42 -0.14 -0.64 -7.92
10. Follo -5.03 -8.89 -2.75 -14.05 -4.89

Fig. 7.1. The greater Oslo area

126 F. Ramjerdi, K. stmoe and H. Minken

A main problem with the gravity approach is that the scale is ordinal. A logsum
measure closely compares with the changes in the consumer surplus. It also
captures the effect of provision of the public transport services. This measure
suggests that the benefits from the package in Scenario 12 are not evenly
distributed and hence have potential adverse distributional effects.
The significance of the observed variations in the geographical distributions of
welfare (captured by the logsum measure) is evaluated by the equity measures
defined earlier in Section 7.2. Table 7.9 shows a summary of some of these
inequality measures applied to the geographical distributions of welfare over the 49
zones that constitute the Oslo region. While almost all measures are quite similar in
size in both scenarios, they suggest that the geographical distribution of welfare is
more even in the reference scenario than in Scenario 12.

Table 7.9. Summary of some inequality measures in Scenario 12 and the reference scenario for
the Oslo region (49 zones)

49 zones Scenario 12 Reference

Mean 498.35 504.89
Range Ymax Ymin 360.67 361.56
Variance 5175.71 5072.69
Coefficient of variation 0.144 0.141
Relative mean deviation 0.1070 0.1118
Logarithmic variance 0.0059 0.0056
Variance of logarithms 5.1210 4.5333
Theil 0.2480 0.2366

Table 7.10 shows the summary of all the inequality measures (described in Section
7.2) applied to the geographical distributions of welfare over 10 zones that
represent the Oslo region. A comparison of the measures in this table with the
corresponding measures in Table 7.9 shows that the level of zonal aggregation
affects the size of most measures. This is partly due to the approximations in
aggregation (not properly weighted) as well as the properties of the measures. This
table also suggests most measures are quite similar in size in both scenarios and
that the geographical distribution of welfare is more even in the reference scenario
than in Scenario 12. Table 7.10 also shows the sensitivity of the Atkinson and
Kolm measures to the inequality aversion parameter. The Atkinson measure is
more sensitive to the value of the inequality aversion parameter than the Kolm
measure.
 Experience with Measuring Equity and Efficiency 127

Table 7.10. Summary of inequality measures in Scenario 28 and the reference scenario for the
Oslo region (10 zones)
10 zones Scenario 28 Reference
Mean 519.09 525.29
Range, Ymax Ymin 115.20 113.01
Variance 1714.08 1710.49
Coefficient of variation 0.0798 0.0787
Relative Mean Deviation 0.0703 0.0697
Logarithmic variance 0.0013 0.0013
Variance of logarithms 5.2007 5.2205
Theil 0.0014 0.0013
Atkinson
H = 0,0001 0.0000003 0.0000003
H = 0,001 0.0000033 0.0000032
H = 0,005 0.0000163 0.0000616
H = 0,01 0.0000326 0.0001260
Kolm
D = 0,0001 0.0373 0.0372
D = 0,001 0.3765 0.3757
D = 0,005 1.9607 1.9563
D = 0,01 4.0774 4.0663
Gini 0.04199 0.04118

While the property of a measure provides information about its change with a
translation, it is relevant to get some sense of the level of the change, if any. To get
an understanding of the size of the change, the measures were calculated for both
scenarios (Scenario 12 and the reference scenario) after a translation. The
translation was performed by subtracting from welfare (logsums) 443 units. The
aim was to avoid negative values for the welfare measure as the result of the
translation and to obtain small values for welfare. Table 7.11 shows the summary
of the results.
A comparison of Tables 7.11 and 7.10 shows that the size of the measures,
which are not translation invariant, changes significantly. These measures suggest
that the geographical distribution of welfare is more inequitable in Scenario 12
than in the reference scenario once the translation is performed.
While this exercise suggests that accessibility and equity measures can be
applied to the evaluation of potential changes in the distribution of welfare caused
by a package of instruments, one needs to apply them cautiously.
Accessibility measures, other than a logsum measure, are ordinal and hence it
is problematic to apply equity measures to examine changes in their distribution.
The logsum measures in Table 7.8 suggest that the distribution of benefits of
the package in Scenario 12 is potentially uneven over the Oslo area. The difference
128 F. Ramjerdi, K. stmoe and H. Minken

between the different areas is as high as 210 Euro/year for an average traveller. Yet
the size of the different equity measures (see Tables 7.9, 7.10 and 7.11) varies
significantly as the result of the level of spatial disaggregation and a translation in
the measure of welfare. Similarly, some of the measures are quite sensitive to the
scale of the welfare measure. This illustrates that relating the equity objective to a
predefined value on any of these measures is not a desirable approach. Once we
have defined the unit for comparison and the distributional concern to be
addressed, it will, however, often be possible to rank alternatives with respect to
equity. Furthermore, it is difficult to make a judgement about the equity
implications of a policy on the basis of a single measure and without a thorough
examination of several measures and their implications.

Table 7.11. Summary of inequality measures in Scenario 28 and the reference scenario for the
Oslo region (10 zones) after a translation in welfare by 443 units

10 zones & Trans 443 Scenario 28 Reference

Mean 76.09 82.29
Range, Ymax Ymin 115.20 113.01
Variance 1714.08 1710.49
Coefficient of variation 0.5441 0.5026
Relative Mean Deviation 0.4796 0.4451
Logarithmic variance 0.6310 0.1687
Variance of logarithms 2.5538 2.5326
Theil 0.9287 0.7264
Atkinson
H = 0,0001 0.000021 0.000017
H = 0,001 0.000214 0.000167
H = 0,005 0.001072 0.000838
H = 0,01 0.002150 0.001679
Kolm
D= 0,0001 0.0373 0.0372
D=0,001 0.3765 0.3757
D= 0,005 1.9607 1.9563
D= 0,01 4.0774 4.0663
Gini 0.2860 0.2626

This exercise relies on a partial equilibrium transport model and ex-post evaluation
of the equity implication of a package of instruments. Nonetheless, the lessons can be
extended to a general equilibrium approach where an explicit form of social welfare
function and an inequality aversion parameter is used to address equity concerns.
Table 7.10 shows that Atkinson measures with aversion parameters of up to 0.001
favour the reference scenario for equity. With aversion parameters of larger than
0.001, Scenario 12 becomes the favoured scenario. This example illustrates that it is
 Experience with Measuring Equity and Efficiency 129

important to explore the implications of the form of the social welfare function (for
example, Atkinson versus Kolm) as well as the aversion parameter, perhaps in the
form of a sensitivity analysis.

7.6 Some Conclusions

Partial equilibrium models of transport or integrated transport and land-use models

are the most commonly used planning tools for the evaluation of the impacts of
transport policies with respect to efficiency and equity. The lack of spatial details
in general equilibrium models limits their applications. The main aim of this
chapter is to illustrate some important issues related to the evaluation of efficiency
and equity using a partial equilibrium model of transport with examples from Oslo.
The first issue is related to the assumption about the marginal cost of public
funds (MCF) in the calculation of the net benefit of a package of instruments. As
illustrated in this study in the case of Oslo, the net benefits and the ranking of
different packages change with the assumptions about the size of the MCF. Pricing
instruments such as a fuel tax and a congestion pricing scheme result in significant
government surplus but are potentially inequitable. The evaluations of the efficien-
cy as well as the equity implications of any of these instruments are incomplete
unless the uses of the government surplus are specified. The use of the government
surplus to finance non-efficient public transport or road investments will not
address efficiency or equity objectives. Ideally, the use of the government surplus
to pursue an overall objective of efficiency and equity should not be limited to the
transport sector.
Equity and accessibility measures can only provide information about the
potential distribution of welfare among a population or over a geographical area.
The size of the equity measures is quite sensitive to the level of spatial dis-
aggregation and to the scale and translation in the measure of welfare. While it
should in many cases be possible to pass judgment on which among a set of
alternatives is the most equitable, relating the equity objective to a predefined
value of any of these measures is not a desirable approach. Furthermore, it is
difficult to make a judgement about the equity implication of a policy on the basis
of a single measure and without a thorough examination of several measures.
Accessibility measures, other than a logsum measure, are ordinal and hence it
is problematic to apply equity measures to examine the changes in their distribut-
ions.
130 F. Ramjerdi, K. stmoe and H. Minken

References
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Cowell, F.A. (1977). Measuring inequality. Philip Allan, Oxford.

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348-361.

Eliasson, J., Lundberg, M. (2002). Vgavgifter i ttorter. En kunskapsversikt ur svensk

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Eriksen, K.S., Markussen, T.E., Putz, K. (1999). Marginale kostnader ved transportvirksomhet.
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Fridstrm, L., Minken, H., Moilanen, P., Shepherd, S., Vold, A. (2000). Economic and equity
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Harrison, E., Seidl, C. (1994). Acceptance of distributional axioms: Experimental findings, in:
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Public Economics, McMillan, London.

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Kolm, S.-C. (1976b). Unequal Inequalities II. Journal of Economic Theory, 13: 82-111.

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P., Timms, P., Vold, A. (2002). Developing Sustainable Land Use and Transport Strategies, A
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Ramjerdi, F., Rand, L. (1992). The national model system for private travel, Report on Phase II of
model development. TI-report 150, Institute of Transport Economics, Oslo.

Sandmo, A. (2000). The public economics of the environment. The Lindahl Lectures, Oxford
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Development, estimation and verification. Working paper TI/1518, Institute of Transport
Economics, Oslo.
8 Transport Costs in a Multiregional
Equilibrium Job Search Model

Morten Marott Larsen1, Ninette Pilegaard2 and Jos van Ommeren3

1
AKF, Danish Institute of Governmental Research
2
Danish Transport Research Institute
3
VU University, Amsterdam, the Netherlands

Abstract
In this chapter, we introduce a multiregional equilibrium job search model to
analyse the economic effects of intraregional and interregional transport cost
changes. The key assumption is that unemployed job seekers and firms with
vacancies have to search for each other. The regional unemployment and vacancy
equilibrium rates, as well as the wage levels, are endogenously determined.
According to the model, decreases in interregional transport costs tend to reduce
local and national unemployment and increase vacancies. Model simulations
indicate that wages are less sensitive compared to producer prices and that both
labour-market search effects and negative externalities have substantial impacts on
the overall effect of changes in transport costs.

8.1 Introduction

Transport cost reductions are thought to benefit the efficiency of the labour market
(Lakshmanan at al., 2001). In this chapter, we analyse the effects of local transport
cost changes on the labour market using a multiregional equilibrium labour-market
model. The improved efficiency argument relies on two underlying ideas. First,
more workers can be recruited within reasonable commuting distances (Lakshma-
nan at al., 2001). Second, workers can be recruited at lower cost, because workers
need less compensation for commuting costs (van Ommeren and Rietveld, 2002).
Both ideas imply that local unemployment will fall. We will also allow for
endogenous labour-market search, which may lead to higher local unemployment
because unemployed workers stop searching for a job in other regions if the
intraregional transport costs are reduced sufficiently. The effect on the local
vacancy rate is also intuitively ambiguous. The vacancy rate may fall because of
the increased probability of finding employees, or it may increase, because the
region has become more competitive and will attract more firms with vacancies.
It is common to distinguish between different time horizons to analyse the
effects of changes in transport costs. Here, we distinguish between the short
(typically less than one year), medium (typically 5 to 10 years) and long run
(typically more than 30 years) (Blanchard, 2000). This chapter focuses on the
134 M.M. Larsen, N. Pilegaard and J. van Ommeren

medium run. In the short run, reductions in transport costs reduce the costs
associated with commuting and may therefore induce unemployed job seekers to
accept job offers they otherwise would have rejected. As a result, the local
unemployment rate and the local vacancy rate will fall (Lakshmanan at al., 2001).
In the short run, labour supply (via migration) and wages will react to changes in
the labour market. Whether employers immediately adjust to the number of new
job openings due to improved labour-market conditions is not very clear. Presum-
ably, all labour-market effects are local. In the long run, the effects of transport
cost reductions are different. House prices, wages, productivity levels and regional
levels of labour supply (because of migration) adjust to the reductions and the
effect on local and national equilibrium unemployment rates is probably absent.
Employees are better off when the increased level of wages exceeds the additional
tax that has to be paid for the transport cost reductions.
In the medium run, the economy will move to its new equilibrium unemploy-
ment rate. It is probable that during the adjustment process wages will react to
transport cost reductions and changes in labour-market tightness. For example,
wages may fall, because employees receive less compensation for the commuting
costs. The main difference in relation to the short-run effects is that the fall in
wages induces firms to create more job openings and that labour markets in
adjacent regions will be affected. The main differences between medium and long-
run effects are that the effects of changes in productivity levels and in labour
supply due to migration can still be ignored in the medium run (the cumulative
effect of interregional migration is quite small in the medium run).
In this chapter, we introduce three related multiregional equilibrium job search
models. The essential idea is that the total labour force of the regions is fixed and
that the number of vacancies, the number of unemployed and wage levels are
endogenously determined, given productivity levels. Due to search frictions in each
region, unemployment and a positive number of vacancies exist at the same time.
Job seekers search for jobs in their own region and also in other regions. The
number of matches between vacancies and unemployed job seekers in a region
depends on the regional levels of vacancies and unemployment. Regional labour
markets are in equilibrium when the number of individuals who become un-
employed in a region is equal to the number of individuals who find employment
in this region. Wage levels are endogenously determined. Job seekers and
employers bargain about the wage conditionally on the commuting costs. Employ-
ers decide to create a vacancy when the expected profit from a filled job exceeds
the hiring costs.
A main contribution is that we take into account the fact that local transport
cost reductions will induce firms to create more vacancies as they will pay lower
wages in equilibrium (this is similar to the idea that the size of the labour pool is
enlarged). Intraregional transport costs may have ambiguous impact on unemploy-
ment because transport cost reductions also change the search intensity of the
unemployed workers. Intraregional transport cost reductions increase the local
vacancy rate, but decrease the number of vacancies in adjacent regions. Inter-
regional transport cost reductions between regions tend to reduce unemployment
and increase vacancies in both regions, and vacancies are more sensitive than
 Transport Costs in a Multiregional Job Search Model 135

unemployment to transport cost changes if the endogenous reactions from workers'

willingness to search are sufficiently small. An important issue is to what extent
wages are sensitive to changes in transport costs. Our results suggest that wages are
less sensitive to transport cost changes than to producer prices. Finally, we allow
for other environmental externalities and importantly, loss of leisure time.
Approximately half of the gains from the labour market generated by the transport
cost reductions are reduced through emissions, accidents, noise and lost leisure
time.
The main results can be summarised as follows:
1. Intraregional transport cost reductions have ambiguous impacts on both local
unemployment and unemployment in adjacent regions;
2. intraregional transport cost reductions increase the local vacancy rate, but
reduce the number of vacancies in adjacent regions;
3. interregional transport cost reductions between regions tend to decrease un-
employment and increase vacancies in both regions;
4. vacancies are less sensitive to transport cost changes than unemployment if the
endogenous reactions from workers willingness to search are sufficiently
small;
5. wages are less sensitive to transport cost changes than to producer prices;
6. both labour-market search effects and negative externalities related to costs
have substantial impacts on the overall assessments of the consequences of
changed transport costs.

1. and 4. are discussed in more detail throughout this chapter, because ambiguity
and sensitivity depend on the assumptions made. Results 2., 3. and 5. are supported
in the three related search models examined here, whereas 6. is only related to the
case in section 8.4.2 because this is the only part of the study which deals with the
negative externalities: emissions, accidents, and noise.
Road pricing is considered to be a transport cost. With the introduction of road
pricing transport costs increase, but we have also dealt with the opposite case:
lower road pricing and lower transport costs. In simulations with the basic version
of the model and in the applied case of the island of Zealand, there are no endoge-
nous congestion costs which affect the transport costs, but congestion costs are part
of the applied case of road pricing in Denmark.
Section 8.2 includes a theoretical description of the basic labour-market search
model. Then in section 8.3, the basic model is used to simulate in a three-region
setting in which there are different levels of productivity. Section 8.4 deals with
theoretical extensions of the basic model and section 8.4.1 applies the extended
model to the analysis of the effects of road pricing in Denmark in a multi-regional
version. Section 8.4.2 describes a two-region case with lower transport costs on the
island of Zealand and section 8.5 concludes.
136 M.M. Larsen, N. Pilegaard and J. van Ommeren

8.2 The Basic Model

8.2.1 The Matching Model

Individuals are assumed to be identical, an assumption that is relaxed later. Firms

are identical, except for the level of productivity, which is regionally specific and
exogenously determined. In the long run, the assumption of exogenous productivi-
ty levels may be hazardous, but in the medium run it is a reasonable assumption.
Individuals are either unemployed or employed. The unemployed search for jobs,
the employed do not search. 1 Here, we use the interpretation that a firm only
consists of one job, which is either filled or unfilled. Firms do not relocate filled
jobs to other regions (due to prohibitively high relocation costs), but may relocate
unfilled jobs freely at no cost. Thus, employers are free to choose the location of
the vacancy. In order to fill a job, firms advertise a vacancy. We assume that
individuals do not move residence either within or between regions. This assump-
tion is quite strong, but must be viewed as a simplifying assumption namely that a
large number of people are not completely mobile due to residential moving costs.
Later on, this assumption will be relaxed.
It is presumed that there are n regions defined as a homogeneous environment.
So, within the region all agents (workers and firms) face the same environment.
The labour force of each region contains Li individuals. We let ui denote the
unemployment rate the number of unemployed as a proportion of the labour
force in region i, and vj, the vacancy rate, the number of vacant jobs, as a
proportion of the labour force in region j (i, j =1,..n). The unemployed seek
vacancies for which they perceive a positive probability of a match.
The unemployed persons are matched to vacancies by a matching function.
The matching function Mj gives the number of matches at any one time as a
function of the number of unemployed looking for jobs and the number of firms
looking for workers in region j (all firms with vacancies). This function is assumed
to be increasing in the number of unemployed and vacancies and has constant
returns to scale (Pissarides, 2000).
The matching function Mj is usually assumed to be a Cobb-Douglas function.
An example is:

(u L )
k ij 1 k ij
Mj i i (v j L j ) ,
i

where k ij  1 . So k ij is the elasticity of the number of new filled jobs in region

i
j with respect to the number of unemployed in region i. From a theoretical point of
view, the assumption that kij is constant, and therefore does not depend on the

1
An extension would be to allow on-the-job search.
 Transport Costs in a Multiregional Job Search Model 137

spatial labour-market conditions, is undesirable. However, empirical studies

largely support the assumption that search intensity (of job seekers and firms) is
relatively constant compared to temporal and spatial changes in the UV ratio
(Russo, 1996; Burda and Profit, 1996). A model with varying search intensity is
discussed later. Let qij denote the rate at which unemployed located in region i are
hired in region j.
Let T ij denote the (regional) labour-market tightness, the number of vacancies
in region j relative to unemployment in region i. It follows that:

Ljv j
T ij .
Li u i

The share of unemployed job seekers from region i that finds employment in
region j depends on the probability that an unemployed job seeker is matched to a
vacancy in region j. The rate at which unemployed job seekers in region i find
employment in region j is denoted as fij. Given the properties of the contact
function, fij is increasing in T ij , but decreasing in T i ' j , i ' z i . This makes sense, if
the number of vacancies in j increases relatively to the number of job seekers in i,
the job seekers from this region are more likely to find employment in j. The rate at
which unemployed job seekers in region i find employment is written as fi.

8.2.2 Job Destruction

It is assumed that jobs are destroyed at rate O , which does not vary among regions.

8.2.3 Equilibrium Employment and Unemployment

In the steady state equilibrium, the number of individuals in region i who become
unemployed (O(1-ui)) must be equal to the number of individuals in region i who
become employed (ui.fi). The equilibrium regional unemployment rate ui can then
be written as follows:

O
ui .
O  fi

Similarly, it can be shown that the commuting share, eij, defined as the number of
jobs filled by residents from region j in region i, divided by the labour force in
region i, can be written as:
138 M.M. Larsen, N. Pilegaard and J. van Ommeren

f ij
eij .
O  fi

8.2.4 Job Creation

Suppose that a firm opens a vacancy. The value of the vacancy depends on the
search costs and the expected income stream of finding a suitable worker, which
depends on the difference between regional productivity level pj and the costs
connected with the job. Let Jij denote the value of a job filled by a worker living in
region i.
For example, the value of a job in region j occupied by a worker living in
region i depends on the discounted income stream and can be written as:

p j  wij
rJ ij p j  wij  OJ ij or, similarly, J ij
rO
where wij is the (bargained) wage paid by a firm in region j to a worker in region i.
Given Jij and information on the regional contact rate, the expected income stream
can be calculated.
In equilibrium, it is assumed that all profit opportunities from new jobs are
exploited, driving rents from vacant jobs to zero. So, essentially we presume free
entry (and exit) of firms.
This assumption implies that in equilibrium, regional labour-market tightness
is such that the expected value from a (new) job in region j must be equal to the
expected recruitment cost. So, the difference between regional productivity and
expected wage level is equal to the expected capitalised recruitment cost.

8.2.5 Workers

Here, we determine the lifetime utility of the unemployed and employed workers
who anticipate (future) changes in their labour-market status. For unemployed
workers, lifetime utility depends on the expected utility of not working (mainly
unemployment benefit) which is presumed to be the same in each region, and the
expected utility of getting work in a region j. For employed workers, lifetime
utility can be defined as the difference between the wage and the travel costs
(monetary and time costs) plus the expected loss of losing the job.

8.2.6 The Spatial Wage Equation

A bargaining process between firms and preselected job applicants determines the
wage rate. The wage derived from the Nash bargaining solution is the wage that
 Transport Costs in a Multiregional Job Search Model 139

maximises the weighted product of the workers and firms net return from the job
match (Pissarides, 2000).
The parameter E may be interpreted as a relative measure of labour's bargain-
ing strength (0 d E d 1). E can be interpreted as the worker's share of the total
surplus. It can be demonstrated that:

wij (1  E )(t ij  z )  E T ij ' qij ' J ij  Ep j ,

j'

Thus, the wage is an increasing function of the commuting costs tij and the value of
being unemployed, z. Since 1-E < 1, this implies that the net wage (the wage minus
the commuting costs) is a decreasing function of the commuting costs.
Furthermore, the wage is an increasing function of the productivity level in region
j. The penultimate term can be interpreted as the average search/hiring cost per
unemployed. Workers are rewarded for the saving of (future) hiring costs that the
firm enjoys when a job is formed. Given the wage rate, it is straightforward to
calculate the expected wage level.
The regional productivity level has a positive effect on the wage level in a
region for three reasons. The first reason is that a higher productivity level in-
creases the surplus of the match (the last term). The second reason is that the
expected commuting costs are an increasing function of the regional productivity
level. In other words, workers are recruited from a larger area, which increases the
commuting costs. The third reason is that the average wage costs are higher, since
the ratio of vacancies to unemployment is less favourable increasing the labour-
market bargaining position of the unemployed.

8.2.7 Reservation Commuting Costs

We have seen above that the wage is an increasing and the net wage a decreasing
function of the commuting costs. It will be convenient to make this relationship
explicit and we will write the wage rate as wij(tij). This implies that job seekers and
firms will only form a match when the commuting costs are less than a certain
maximum, which we will label the reservation commuting costs Tij.
The reservation commuting costs Tij are defined by the condition that Jij is
equal to 0. This condition implies that:

p j  wij (Tij ) 0,

and using the wage equation, the reservation commuting costs can be written as:

E
Tij pj  z 
1 E
T ij ' qij ' J ij ' .
j'
140 M.M. Larsen, N. Pilegaard and J. van Ommeren

So, the reservation commuting costs are equal to the productivity level minus the
unemployment benefits and minus the average search/hiring costs. Clearly, if the
commuting costs exceed Tij, workers from i will reject all matches in region j. In
the numerical simulations, we will assume that the commuting costs are less than
Tij, so firms and job seekers always form a match.

8.3 Simulations with the Fundamental Model

We have assumed an economy consisting of three adjacent regions, which contain

a workforce of equal size. These regions have different levels of productivity (high,
medium and low) and are therefore labelled HP, MP and LP (for details, see van
Ommeren at al., 2004).
In the base run, we find that in more productive regions, the unemployment
rate is lower and the vacancy rate is higher. The main explanation for this result is
that a high productivity level induces more firms to open vacancies, which reduces
local unemployment levels. The regional variation in the vacancies is higher than
the regional variation in unemployment (which is in line with empirical observa-
tions for the UK and Finland). Wages are higher in more productive regions.
We assume that the regional variation in search intensity does not differ
between regions. Nevertheless, the commuting flows are dramatically different. In
the HP regions, workers tend to work in their own region, whereas in the LP
regions workers tend to work in other regions. As a result, employment is not
evenly distributed over space. Nevertheless, in contrast to models which exclude
search imperfections, the results clearly imply simultaneously inward and outward
commuting (see also Molho, 2001).
The results indicate that the average productivity level increases most by
reducing transport costs of connections to the most productive regions, because in
these regions, the most productive jobs will be created. Reductions in costs of
connections to less productive regions are less effective.
Reductions in transport costs induce not only additional interregional commut-
ing flows, but perhaps surprisingly, induce intraregional commuting flows. The
main explanation for this result is that interregional improvements induce firms to
create additional vacancies in the regions which are better connected, and the local
labour force benefits the most from additional job openings.
We have investigated the effects of changes of various exogenous variables
(the regional productivity level, search costs, discount rate, bargaining strength, E,
utility of not working, destruction rate). One of the main results is that changes in
regional productivity levels have a strong effect on commuting flows. This result
may explain the finding of Cameron and Muellbauer (1998) and Heyma and van
Koppenhagen (2001), which shows that temporal changes in regional commuting
flows are much stronger than those in migration. Vacancies also react much more
strongly than unemployment to changes in regional productivity levels. One
intuitive explanation is that firms are perfectly mobile (they may open and close
vacancies in any region), whereas workers are immobile, but search in all regions
 Transport Costs in a Multiregional Job Search Model 141

in competition with other job seekers. Because workers are able to search in
adjacent regions, the effect of a change in the local number of vacancies is partly
compensated by a change in the opposite direction in the number of vacancies in
the adjacent regions. Furthermore, an increase in regional productivity always
reduces local unemployment and increases the local vacancy rate, but may have
adverse unemployment and vacancy effects on other regions. Nevertheless, wages
in all regions increase as a result of a regional productivity improvement.
In contrast to the effects of changes in productivity, the effects of changes in
search costs, discount rate, bargaining strength, the utility of not working and the
destruction rate on the unemployment rates are of the same magnitude as the
effects on the vacancy rates. The effects on the commuting flows are negligible.
Compared to the main results presented in the introduction of this chapter, we
find that intraregional transport cost reductions reduce local unemployment, but
may increase unemployment in adjacent regions. The result for local unemploy-
ment is unambiguous, because unemployed workers are not allowed to choose
between regions when searching for a job. This assumption is relaxed later, which
causes the effects on local unemployment to be ambiguous. This is also a reason
why vacancies are more sensitive to transport cost reductions than unemployment.
The rest of the main results is supported in this simulation with the basic version.

8.4 Theoretical Extensions

As described earlier, the equilibrium job search model has been formulated in two
other versions as well. These versions have some extensions and differences in
some of the assumptions.
First of all, these two versions have been formulated as general equilibrium
models whereas the first version focused partially on the labour market. This
implies that the workers maximise explicitly formulated utility functions while
firms maximise profit functions. An important aspect of the explicit utility function
is that the workers derive utility of consuming commodities and leisure. The utility
function is formulated as follows:

U k ,t i , j  Ct i , j   Q k l t i , j 

The kth consumer has in each period t consumption of commodities, C, and of

leisure, l. It is assumed that the costs of commuting consist of both pecuniary and
time costs. This implies that the commuting costs are two-dimensional and that
commuting influences both the consumption of commodities and of leisure. Both
depend on the residence region i and the workplace region j. The workers have an
exogenous individual preference for consumption of commodities relative to con-
sumption of leisure, Q k , and thus an individual value of time. This means that
some workers value leisure time consumption higher than other workers. The
implication of this assumption is that some workers will be more willing to accept
142 M.M. Larsen, N. Pilegaard and J. van Ommeren

jobs in neighbouring regions than other workers. We assume that Q k is uniformly

distributed. Another important aspect is that firms treat workers identically no
matter where the workers live. The wage is negotiated with a representative union
member who only searches for a job in the place of residence and this wage is paid
to all the workers in a firm. This implies that the firms are not willing to
compensate a worker for his individual interregional commuting costs. However,
the workers are partially compensated for the commuting costs of local transport
through the wage negotiation process.
Transport costs now affect the number of commuters between regions by the
workers individual decisions with respect to how many regions he is willing to
search for and accept a job in. This implies that the regional labour supply depends,
among other things, on local transport costs. By assumption, the cost of firms of
having a job occupied does not depend on interregional transport costs due to the
wage negotiation.
If transport costs are low, then more workers are willing to search for a job in
a neighbouring region. However, other variables also affect labour-market search
behaviour and thereby the labour supply, e.g. the wage differences between regions
and the unemployment benefits compared to the wages. Furthermore, the probabili-
ty of finding a job in the residential region affects the workers willingness to
commute to neighbouring regions. If it is difficult to find a job in a residential
region, it is more attractive to accept a job in a neighbouring region. When an
unemployed worker is to determine his search strategy, i.e. what regions to look for
jobs in he compares the expected present value of each strategy. By solving and
comparing the expected present value expressions in steady state for the different
search strategies, we can find the marginal values of Q that determine the search
strategy for a given consumer. Then the size of the population groups for each type
of search strategy can also be found.
Let v*(i) be this marginal Q for consumers living in i, i.e. the consumer who is
indifferent between searching only at home, i, and searching in the neighbouring
region as well. This v*(i) is determined by the relation:

~ T (i ) q(i )
C (i, j )  C (i )  (C (i, j )  C (i, i ))
G  s (i )
Q*
T (i ) q(i ) e
l u (i )  l e (i, j )  (l (i, i )  l e (i, j ))
G  s (i )

where C(i,j) is commodity consumption for the worker who is employed in j, and
~
C (i ) is commodity consumption if he is unemployed. lu(i) and le(i,j) are leisure
consumption in the case of being unemployed or employed in j. G is the workers
expected interest rate, i.e. the rate with which they discount future incomes is
1/(1+G). T(i)q(i) is the probability of an unemployed worker being employed in his
residential region i.
 Transport Costs in a Multiregional Job Search Model 143

In the formulation of other parts of the model, there are some smaller
modifications. One is in the definition of the matching function, which is defined
slightly differently:

Mi ( JC i ) ki ( JOi )1 ki

where JC is the number of unemployed workers who search for a job in region i.
JO is the number of job openings (vacancies) in the region. Again, we use a Cobb-
Douglas function, but in contrast to section 8.2.1 and the basic version, it is
assumed here that the number of matches in a given region is a function of the total
number of job candidates in a given region and the number of vacancies in that
region. This is a relevant definition since it is assumed that firms in a region do not
distinguish between workers from different regions.
The description of transport is further developed. In the second version trans-
port is made possible through a foreign commodity that must be purchased when
commuting. The third version models transport sectors that consume labour as
factor input. The idea that transport is costly is important when evaluating
transport. Besides the mentioned extensions, the two versions are developed in two
different directions. In the second version, the model has additionally been
extended with congestion and more regions and it is calibrated using Danish data.
Furthermore, this version is formulated as a small open economy where relations
with foreign countries are specified. In the third version, the model is formulated
with two regions and as a closed economy and it has been extended with
endogenous location of households. It is defined such that there is a possibility of
migration and it is described in a two-region setting with negative transport
externalities. The negative transport externalities are defined as separable in the
utility function and cover air pollution, noise and accidents, but not congestion.
Since the second and third versions of the model are general equilibrium
models, clearing of the output market is explicitly formulated. However, the
commodity markets are described differently in the two versions. In the second
version, the commodity markets are local. This implies that domestically-produced
commodities can only be consumed in the region where they are produced. This is
a consequence of the fact that there are no shopping trips or inter-regional trade in
this version. In the third version of the model, there are two types of regional
commodities, namely mobile and non-mobile commodities. The regional non-
mobile commodity is only consumed locally. The mobile commodity is not the
same regionally. Consequently, all regional types of mobile commodities are
consumed in all regions.
In both versions, there is no modelling of shopping transport. Shopping trans-
port influences both congestion and final consumer prices. In Denmark, the amount
of shopping-related travel roughly corresponds to around half of the total
commuting kilometres. Furthermore, freight transport is not considered. Freight
transport is expected to have some feedback effect on the level of congestion.
Freight transport prices would also be affected if road pricing on trucks was
implemented or if new infrastructures were built. In the third version of the model
144 M.M. Larsen, N. Pilegaard and J. van Ommeren

in this chapter, the mobile commodities are simply delivered without charge. Both
shopping and freight transport would improve the applied cases, but we would not
expect major changes in the results. It is a far more important matter how the
commodity markets are modelled. The spill-over effects from local production
have significant consequences for the results.
The second version of the model includes foreign trade. There is an imperfect
substitute for the domestic commodity, produced abroad. The consumers in each
region demand this commodity, but since there might be regional price differences
for the domestic commodity, the foreign commodity might be demanded in
different shares. Domestically-produced goods are similarly exported (abroad). In
the third version of the model, there is no foreign trade.
In both versions, unemployment benefit is national. In the second version, it is
modelled as a fixed level while in the third version it is modelled as a fixed share
of wages.
Furthermore, these two model versions have been calibrated to actual data sets
to represent more realistic economies. Version two describes the Danish economy
while version three only describes a Danish region.
We now turn to the presentation of a policy experiment in each of the two case
versions.

8.4.1 Road Pricing and Regional Distributional Effects

The first policy experiment is performed in a multi-regional version of the model.

The model is presented in Pilegaard (2003). This version has been used to illustrate
the regional distributional effects of a very simplified road pricing system.
In this version of the model, the parameters are chosen to replicate total
aggregate commuting in Denmark in 1999. Data for production, employment,
wages etc. are also chosen to replicate the 1999 figures at both national and
regional levels. Data and calibration are documented in Pilegaard (2003) and
Munksgaard and Pilegaard (2000). To find the distances and the time use between
the different regions, we have derived data from a GIS model. The data and the
project behind its generation are described in Leleur at al. (2002).
The spatial formulation is an important feature of the model. Since households
are distinguished according to their location of residence and job, the model can be
used to analyse the geographical distributional effects of policy changes.
Furthermore, with the spatial formulation it is possible to assign commuting
transport to an artificial network connecting each of the regions and not just to
quantify total transport. This is relevant for several practical and political reasons.
The economy's geography is described by a nested tree structure. This version
is developed from a basic version with three regions where each region is split into
three regions to a total of nine regions as presented in the Fig. 8.1 and 8.2. In
principle, the description of the economy at each level is the same. In practice,
however, this is not completely possible.
Overall, the principle in the nest structure is that the total activities of the three
connected regions at the lower level add up to the activity in the upper region. This
 Transport Costs in a Multiregional Job Search Model 145

means, for example, that total commuting inside and between the three regions at
the lower level equals total commuting inside the corresponding upper region. The
total commuting in the economy now equals the sum of commuting inside each of
the three regions at the upper level and total commuting between these three
regions. In the following, the upper level is denoted the regional level and the
lower level is denoted the local level. The total economy is the national level.
The three-region structure makes it possible to describe the regional effects of
region-specific policy changes, for example the construction or improvement of
infrastructure or special regional subsidies and we are able to describe the
geographical distributional effects. With the nested structure, we can obtain a more
detailed geography. This is also important for the geographical distributional
effects. When analysing the effects of local road pricing, it is important to include
the geographical asymmetry as well as a level of detail where commuting takes
place.

23

21 22

12 31
32
33
13
11

Fig. 8.1. The geographical map of Denmark

Production and employment are assumed to take place in the regions at the local
level only, i.e. in the nine regions. The production of each region at the regional
level is therefore the sum of production in the three corresponding local regions;
the same applies to employment. The population is defined in the local regions.
146 M.M. Larsen, N. Pilegaard and J. van Ommeren

There are only wage differences in the three upper regions. Wage bargaining
takes place at the regional level and the result is therefore potential wage differ-
ences in the three different regions, but not between three corresponding regions at
the local level. The chosen level of detail for the Danish economy almost mirrors
the counties. The population in each of the local regions ranges from around
200,000 to 800,000. In the following, to make the distinction between the two
levels easier to understand we denote the regions as local level counties. At the
regional level they will be denoted regions.

National level

Regional level

Region : I
1 2 3

11 12 13 21 22 23 31 32 33

Local level
County : i

Fig. 8.2. The nested structure of the economy

Let index I denote the regions at the regional level, I=1,2,3 and let i denote the
counties at the local level, i=11,12,13,21,22,23,31,32,33 where i=11,12,13 are the
three counties that correspond to region I=1 etc. J and j defined similarly. The
population is initially defined at the local level. In each of the counties the total
population is n(i). The search strategy of unemployed workers is only defined at
one nest level, either the local or the regional level. At the local level, the
consumers problem and search strategy are straightforward as explained in the
basic model. For the unemployed workers who search at the regional level, they
only decide in which region they want to search, I, and not at what local level
county, i, they want to search in. It is assumed that they will always search in the
whole of their residential region, i.e. all three related counties. This implies that an
unemployed worker in region I=1 who decides to search in neighbouring region
I=2 and/or I=3 automatically searches in all three of the local counties i=21,22,23
and/or i=31,32,33, as well as in the residential counties i=11,12,13. The workers
 Transport Costs in a Multiregional Job Search Model 147

are distinguished according to search only in neighbouring counties at the local

level or search in neighbouring regions at the regional level. We say that they
belong to the local population, respectively the regional population. The
distinction is determined by the marginal preference parameter Q*(reg)(I) that is
determined at the regional level in the same way as at the local level. As mentioned
earlier, an unemployed worker who searches at the regional level does not
distinguish between three related counties, but searches in all of them.
The distances between counties at the local level are exogenously given by the
infrastructure. At the regional level, the average interregional distance is exoge-
nous while the intraregional distance is endogenous. It is calculated on the basis of
the weighted average distance that a worker living in region I has to travel
weighted according to population densities in each county and the different
probabilities for a worker, searching in all three counties, of obtaining a job in each
of them.

Part of populationsearching
only in local level regions

0 Q ( ) 1
Part of population searching
in regional level regions

Fig. 8.3. Endogenous labour-market search

We have chosen to treat workers searching in the regional neighbouring regions as

a pool of identical workers. If the workers from each of the local counties were
treated differently their marginal value of Q for searching in regional neighbouring
regions would probably be different, but for practical and interpretational reasons
we have chosen the pool formulation.
Other variables at the national level are similarly determined according to a
weighted average. In steady state, the demand for labour will, as in the basic
model, be equal to the number of employed workers. Now, commuters from the
regional level also have to be included. Since firms consider all job searchers to be
identical they choose their workers randomly from the pool of job searchers. This
implies that the regional commuters implicitly are allocated to firms in the local
148 M.M. Larsen, N. Pilegaard and J. van Ommeren

counties according to the relative probability of finding a job in each of the

counties.
This nesting structure is chosen for different reasons. First of all, one nest
level, i.e. three regions, is not enough to generate sufficient commuting between
the regions. Therefore, we need more detail in the geographical description. We
could have chosen to expand the basic model with more regions, but this would in
practice have been problematic. The problem increases dramatically in complexity
when more regions are added. Many potential search strategies have to be com-
pared. Therefore, we chose this nesting structure with which we can increase the
level of geographical detail without a dramatic increase in complexity. Further-
more, detailed data sets can be dealt with using the chosen nesting structure . We
also find this nesting structure with the distinction between local and regional
search strategy convenient for purposes of interpretation. It seems reasonable to
believe that workers who are willing to accept a job in a region far from home are
also willing to accept a job in a region next to it if the remaining job characteristics
are the same. But, of course, it need not necessarily be so. Furthermore, this setting
has the advantage that it is possible to scale the problem up and down and the
national perspective can be maintained at the same time as regional distribution is
described. Finally, the nesting procedure could (with some adjustments) in prin-
ciple be extended to more than two nests.
Congestion is included in the model in a speed-flow formulation so that the
more commuters, the longer the travel time. It is formulated so that the time
required to commute a given kilometre on a given part of the network (local or
interregional in the regions) increases with the number of commuters on that given
part of the network. This formulation of congestion implies that it has a feedback
effect on the decision of the workers. The more congested a given part of the
network is, the longer it takes to commute this distance and the less attractive it is
to commute the distance. This implies that the congestion effect reduces the effects
of given changes in transport policies. The inverse speed-flow relationship is
formulated as an exponential function, which is a commonly used functional form
(Mayeres 2000, OMahony at al. 1997).

Road Pricing
We now turn to the analysis of the regional distributional effects of a simplified
road pricing system. The road pricing system is introduced in the form that all
kilometres driven inside the capital, region 31, are taxed while all others are not.
The tax is set equal to 0.30 DKK2 per kilometre. This experiment is performed,
since it is often debated whether road pricing should be used as an instrument to
reduce congestion.
Road pricing is introduced here very simply and therefore it is not strictly
comparable to a real system. We simply introduce a kilometre tax in one location.
We do not differentiate according to time of day and thereby we are unable to
examine whether the road pricing can actually make commuters change their time
of travelling, which is one of the main arguments for road pricing. Furthermore, we
2
1 DKK 0.14 EUR.
 Transport Costs in a Multiregional Job Search Model 149

neglect mode changes and other transport purposes. However, we are able to
examine how the economy reacts to this geographically asymmetric shock and how
the different regions will be affected. This is relevant since an important argument
against road pricing is that it severely and negatively affects the residents in the
city.
We simply assume that the increase in government revenue by this tax is paid
out to all consumers as lump sum payments.
First, we take a look at the national effects and some of the results that at first
merit attention. There is a slight national reduction in total production and
employment (0.12% and 0.15%). At the regional level, the production and employ-
ment increase in region 1, but decrease in the remaining regions. Total transport in
the economy decreases by 2.4% and the lump sum subsidy increases by 0.55%.
This illustrates a trade-off between reducing transport and congestion and ensuring
production and employment.
The first impression is that county 31 is not especially hit by this policy; not
more than the two other counties in region 3 at least not when looking at
employment and production.
As expected, fewer workers want to commute to region 3. Actually, now only
a small share of the workers in region 1 commutes to region 3 whereas no one from
region 2 commutes to region 3.
Unemployment decreases relatively more in county 21 (-21.8%) and increases
relatively more in counties 22 and 23 (+12.2% and +9.3%). In county 31, there is
only a small change (+0.17%), while it is larger in counties 32 and 33 (-3.8% and
+8.1%). Wages and prices are affected as well, but the changes are small. They
decrease in region 1 and increase in the remaining regions.
The level of consumption for employed workers increases in all counties in
region 1 (around 0.35%). Other groups also experience increases (from 0.12% to
0.28%) except for the groups living in county 21 and county 31 and the commuters
from 32 and 33 to 31.
When studying the distributional effects, we analyse the consequences of the
policy change for three selected counties, each in a different region: county 31,
county 21 and county 13. The three counties have different characteristics. County
31 is the capital region with many inhabitants and in this region there are initially
more workplaces than residences. Furthermore, county 31 is in the part of the
country with the highest wages. County 21 is a more sparsely populated county,
but there are still many workplaces relative to residences. This county is in the part
of the country with the lowest wages. In county 13, there are initially fewer
workplaces in relation to residences than in the other two counties. With respect to
the distances from these counties to the neighbouring counties, there are of course
also differences. County 31 has the longest internal distance and the shortest
distances to the neighbouring counties as well as the longest distances to the other
regions.
In county 31, all kilometres used for commuting are taxed. This implies that
all commuting is taxed for commuters inside 31 while commuters to and from 31
are only taxed for part of the trip. As a result, a commuter pays the same total road
150 M.M. Larsen, N. Pilegaard and J. van Ommeren

pricing for commuting inside, to and from 31. Employed residents in county 31
have no way of escaping the tax while all other workers can escape it.
The increase in commuting costs in county 31 implies that fewer regional
workers commute to region 3 and that fewer from counties 32 and 33 search in 31.
This reduces the expected duration of an unemployment period for the workers
who only search in 31, because the expected duration of a vacancy in 31 increases.
The increase in commuting costs in region 3 puts an upward pressure on
wages, which increase by 0.7%. This increase in the production costs of firms in 31
reduces production and employment in the firms. Even though fewer of the
workers in 31 now come from other locations, the resulting unemployment for the
residents in 31 increases a little (0.17%).

production unemployment
: Increase
: Decrease

Fig. 8.4. Effects of the introduction of road pricing

For the employed workers from 31, consumption is reduced, since the cost of
commuting is increased. On the other hand, unemployed workers in 31 experience
a slight increase in consumption (0.01%), which is a consequence of the increased
lump sum transfer. This increase outweighs the increase in the consumer price.
County 21 shows some interesting effects which appear dramatic, which will
be discussed in the following. What are the special features of county 21 that drive
these results? The first we notice is as commuting to region 3 gets more expensive
fewer prefer to work in region 3. No one is now willing to commute to region 3
from region 2. The labour market in county 21 initially only had limited interaction
with the remaining labour markets. Road pricing makes this interaction disappear
and the labour market in county 21 is now totally isolated. County 21 is the only
one with a totally isolated labour market. Initially there were some workers from
county 21 who commuted to region 3 and there were some workers commuting be-
tween the counties in region 2. The existence of these commuters in region 2 is a
 Transport Costs in a Multiregional Job Search Model 151

result of the modelling of the regional worker; a worker who is willing to search
for a job in a neighbouring region also searches in the neighbouring counties at the
local level. Since commuting from the neighbouring counties disappears, there are
fewer job searchers in county 21. This decrease looks quite dramatic, 22.4%, but
actually covers a small absolute number since the number of jobs relative to
population in county 21 initially is high (0.987%) and the number of unemployed
relative to jobs initially is low (0.018%), lower than in all other counties.
These changes imply that the expected duration of a vacancy increases quite a
lot (59.8%) while the expected duration of unemployment by only searching in 21
is reduced by 22.3%. This further reduces the incentives to search in more labour
markets. This implies increased production costs for the firms and thereby reduc-
tions in production and employment. At the same time, the consumers in county 21
experience income gains of the road pricing by an increase in the lump sum
transfer. In total, the employed and unemployed workers in 21 experience a slight
reduction in consumption.
The time spent commuting and the distances commuted inside county 21 are
almost unchanged. However, we do observe a slight increase in the total commuted
kilometres. Note that this happens despite the reduction in employment of firms
and the absence of long distance commuters since some unemployed workers in 21
replace workers from the neighbouring counties.
A general comment about county 13 is that the effects of the policy here seem
to be quite similar to the effects in the neighbouring counties 11 and 12. However,
it is interesting that the effects for the counties in region 1 are typically the
opposite of the effects in the other regions. For example, production and employ-
ment in firms increase in counties 11, 12 and 13 whilst decreasing in the remaining
regions. Why does region 1 behave differently? In the counties in region 1,
unemployment increases at the same time as employment in firms increases. This
happens as fewer workers now commute to region 3 and therefore there are more
workers competing for the jobs in counties 11, 12 and 13 and unemployment
increases.
The effect on congestion inside county 13 is a small reduction and the number
of commuters from region 1 to region 3 exhibits a small decrease. Commuting by
the local population in 13 increases, but commuting per local employed worker
decreases. This follows from the fact that more people from 13 are employed in the
home region relative to the neighbouring counties.
Commuters in county 13 receive the increased lump sum transfer from road
pricing without participating in its financing. Therefore, consumption from house-
holds in 13 increases and the demand effect creates increased output and employ-
ment.
152 M.M. Larsen, N. Pilegaard and J. van Ommeren

Change in number of commuters, local level

: Increase in commuters
: Decrease in commuters

Fig. 8.5. Introduction of road pricing local level

Change in number of commuters, regional level

: Increase in commuters
: Decrease in commuters

Fig. 8.6. Introduction of road pricing regional level

 Transport Costs in a Multiregional Job Search Model 153

It is important to note that when increases in government revenue are used for
lump sum transfers as in this case, the unemployed are favoured compared to the
employed who have to pay the road pricing. Therefore, this road-pricing scenario
in general reduces the incentives to search for jobs in more labour markets and
thereby reduces the labour supply compared to the situation where the revenue is
used for lowering income taxes on labour. Note that if the revenue were used for
lowering these distortionary income taxes then the negative effect on total
employment would probably be smaller or even positive.
The aggregate welfare effects can be measured by the equivalent variation:

Table 8.1. Equivalent variation, local and national, in 1000 DKK per capita
County EV(i) County EV(i) County EV(i)
11 0.8111 21 0.1748 31 -1.3415
12 0.7921 22 0.1292 32 -1.1158
13 0.7795 23 0.0766 33 -0.2106
National -0.2435

Not surprisingly, the consumers of the capital county experience the largest welfare
loss while consumers from the local neighbouring counties similarly lose, since
they generally commute regularly to the capital county and their firms suffer from
reduced labour supply. All other counties experience welfare gains from the
introduction of road pricing. This is mostly a consequence of the income effect that
these counties experience, as road pricing is paid in the capital region only. As
assumed, this indicates that the welfare effects of road pricing are geographically
biased, whilst the underlying regional effects might be smaller than expected.
The road-pricing scenario shows that geographically biased policies can be
dealt with in this model and that national, regional and local effects can be found.
By introducing road pricing, commuting is made more costly in some regions and
the incentives to search for jobs there are reduced.
The results of the policy scenarios discussed in this section are based on
assumptions and the calibration of the model. In the next section, some of these
will be discussed in more detail.

Local Commodity Markets

The assumption of local commodity markets is one of the more crucial assump-
tions in the model and has an important implication. When workers commute to
neighbouring locations to earn high wages, they spend their wages in their
residential county. This means that counties, where a large share of the population
commutes to neighbouring regions, benefit from their local spending on commodi-
ties since increases in local demand imply higher production and employment.
We could have used alternative assumptions, but the assumption of local good
markets is chosen as the best simplification when shopping transport is neglected.
The cost of this assumption is that inter-regional competition among firms is
absent.
The implications of this assumption for the results of the policy scenario are
tested under the alternative assumption of one national market equilibrium. Results
154 M.M. Larsen, N. Pilegaard and J. van Ommeren

are reported in Pilegaard (2003). It is found that the trade-off between employment
and commuting is maintained and the relative importance of the effects is
comparable. In terms of local effects, there are important differences. The effect on
total welfare, EV, actually changes for county 33. Furthermore, in this scenario the
national effects are reduced under the assumption of one national commodity
market. This is a consequence of the more efficient production across counties.
Production and employment losses and the resulting welfare loss that follows the
introduction of road pricing, are therefore smaller. The qualitative effects on
consumption are also changed for some groups. This is a logical consequence of
the fact that output price only reacts at national level and not at local level.
To conclude, the qualitative effects of the trade-off between employment and
commuting are robust in relation to the definition of the markets of domestically
produced commodities as well as the quantitative results of the relative importance
of these effects. Furthermore, it is a robust result that different regions are affected
differently by the policies. On the other hand, the regional distribution of the
effects especially with respect to consumption and overall welfare is sensitive to
this assumption and the results therefore indicate that the demand effect matters.

Results from the Danish Case with Road Pricing

We have presented a model for commuting behaviour and interactions between the
labour market and transport where geographical differences are present and well
defined. We agree that the definition of geography is important when analysing
transport policies and their effects on the economy in general. Road pricing in the
capital region has been discussed and analysed in the model.
The scenario illustrates the trade-off between, on the one hand production
efficiency and employment, and on the other hand total commuting effort and
congestion. This was also found in a more aggregate and simplified version of the
model for other policy scenarios. However, in this geographically detailed model
there are considerable differences in the regional effects of the policy. This is
important to remember since regional effects can be of crucial importance to the
political evaluation of different transport policies. As this model captures some of
the regional effects, it provides a tool for improving the understanding of these
effects at the same time as the overall effects are maintained.
We have demonstrated a CGE model that captures regional effects. However,
an even richer geographical description would improve and expand the possible
conclusions to be drawn from the model especially when analysing policies such
as road pricing, since a realistic road pricing system would involve considerably
more detail. A richer geographical description could for example be achieved in
the model by adding an extra nest level or by reducing the size of the economy
which the model represents.

8.4.2 The Case of Zealand

This section describes a case where two regions are closely linked together by for
example infrastructure or a decrease in a road-pricing tax between the regions.
 Transport Costs in a Multiregional Job Search Model 155

Economic and environmental effects arise because workers change their commut-
ing and residential search behaviour. The case examined is the island of Zealand,
Denmarks largest island. Zealand is close to being one commuting area as
Andersen (2000) demonstrates, but it does not imply that the economy of Zealand
is completely integrated. The counties of Storstrm and Vestsjlland have
relatively poor links to the metropolitan area of Copenhagen. This section analyses
a hypothetical transport investment between two Danish regions, the metropolitan
area of Copenhagen and the two counties of Storstrm and Vestsjlland defined as
the rural area in Fig. 8.7. Note that here the islands of Lolland and Falster and other
smaller islands are defined as Zealand.

The metropolitan area of Copenhagen

The rural area

Fig. 8.7. The two regions of Zealand

The definition of the two regions is derived from by Tonboe (2002).

The model is documented in Larsen (2005), which includes a detailed
description of all equations. This section presents the key components of the
model. Only the labour force of the two regions is included in the model and the
only factor input in production is labour.
The workers in the labour force are able to move residence and choose where
to search for a job. Only unemployed workers search for a job and they select one
of the following strategies: The residential search strategy (RSS), the commuting
search strategy (CSS), or the moving search strategy (MSS). Compared to previous
model versions, this one includes the MSS strategy. MSS is typically chosen if the
worker has little or no utility from his residential location. The main differences
156 M.M. Larsen, N. Pilegaard and J. van Ommeren

between RSS and MSS are that a commuter has to consider commuting and time
costs whereas a mover has to be willing to live in both regions.
In both regions, there is a commodity-producing sector which produces a
regional commodity which is different from that produced in the other region. The
commodity-producing sector is the dominate sector in both regions. Two regional
sectors produce local housing using local labour. In the long run, the supply curve
for local housing is horizontal which would not have been the case if land was
included in the model as a factor input. Hereby, all short-run problems in the local
housing market are ignored. Housing in the model plays an endogenous role in the
search strategy of the workers. A region with higher housing costs will be less
attractive than a region with lower housing costs. The price of housing is related to
development in the local wage and not directly with the number of inhabitants in
the region. In the short run, it would be natural to assume that an increasing
population would result in increasing housing costs. The same effect is in the
model, but the underlying theory differs. With an increasing population, the local
labour needed for producing local housing increases which implies that less mobile
goods are produced in that region. This has a tendency to increase the price of the
regional mobile goods and thereby also the regional wage and the regional housing
price. Thus, growing population will result in increasing housing costs, other things
being equal. Labour is also needed to make commuting possible.
There are four commuting flows: Inside the metropolitan area, from the metro-
politan area to the rural area, inside the rural area, and from the rural area to the
metropolitan area. Each commuting flow is represented by a transport sector,
which uses labour as an input. In this sector, it is assumed that the labour of the
transport sector locates in the place of residence of the commuters. The regional
public sector in the model does not produce any goods. This sector determines the
level of the regional taxes and the regional tax deductions. Furthermore, a national
level of unemployment benefit and tax deductions for commuting exist. The public
sector has a balanced budget because difference between total profit and total loss
is transferred via lump sum transfers at a national level to every member of the
labour force.
When constructing the model, initial work with building the database is
important. Data are available, but assumptions have to be made in the construction
phase. In the following, this calibration process is described.
The key values for the regional labour market are exogenous in the calibration
process and are presented in Larsen (2005). About 900,000 employed workers live
in the metropolitan area and around 250,000 employed workers live in the rural
area. 39,000 workers commute from the rural area to the metropolitan area, but
only 11,000 commute from the metropolitan area to the rural area. The unemploy-
ment rate is 9.3% in the rural area and 8.7% in the metropolitan area.
In the calibrated steady state, Fig. 8.8 illustrates the choices of search strategy
for the workers who have preferences for living in the metropolitan area. P is a
uniformly distributed parameter, which describes the degree of preferences for
living in a given area, whereas Q is a uniformly distributed parameter for leisure.
The top right corner represents a worker with maximum preferences for both place
of residence and leisure whereas the bottom left corner is a worker with no
 Transport Costs in a Multiregional Job Search Model 157

preference for both place of residence and leisure. The three lines inside the
rectangle illustrate the values of the marginal worker who is indifferent between
the two strategies. It is assumed that the share of workers who prefer to live in the
metropolitan area is equal to the number of workers living in the metropolitan area
in 1996, namely 77.4% of the labour force. This assumption in the calibration is
chosen because no information is available on workers region-specific utility.

Fig. 8.8. Search strategies of the workers who prefer to live in the metropolitan area

94.0% of the labour force with preferences for living in the metropolitan area chose
the search strategy RSS while 3.0% chose CSS or MSS, respectively.
The number of moves between the metropolitan area and the rural area has
been relatively constant for many years, and the net moves have been from the
metropolitan area to the rural area from at least 1976. In the calibrated steady state,
the net moves are zero. In 1996, around 22,000 people moved between the two
regions. The choice of moving is typically not a simple question and therefore it is
not known how many of the 22,000 people who have choice of work as an
important parameter. The calibrated model yields 4,400 moving workers per year3.
When it is remembered that it is only the labour force that is moving in the model,
the calibrated number of moving workers seems to be fair.
The picture is quite different for the workers who prefer to live in the rural
area as Fig. 8.9 illustrates. 65.3% of these workers choose only to search in the

3
Christensen et al. (1987) find that 9.8% of the Danish people in the questionnaire say that work-
related conditions are the primary reason for the last move, together with the wish to relocate. In a
questionnaire survey in the Nordic countries, Nordisk Ministerrd (2002), 17.7% of the Danish
respondents say that work relations are one of the motives for their last move. Only one out of six
work-related moves was by unemployed workers who got a new job, which indicates that search
on the job could be a useful model extension.
158 M.M. Larsen, N. Pilegaard and J. van Ommeren

rural area while 27.0% and 7.7% choose the search strategies CSS and MSS,
respectively.

Fig. 8.9. Search strategies of the workers who prefer to live in the rural area

As discussed previously, willingness to search for a job is greater in the rural area.
One out of four is willing to commute because their valuation of leisure is
sufficiently low and some workers are also willing to move to the metropolitan
area if the preferences for living in the rural area are sufficiently low.
The large share of workers choosing CSS results in commuting, which creates
externality costs. It is assumed that the workers do not consider externality costs
when they choose their search strategy.
The lump sum transfers from the public sector are the same in the two regions.
The regional profit is shared equally among all workers.
When regional incomes are compared, it is also necessary to compare the price
levels in the two regions. Commodity prices are the same in the two regions, but
there is a difference in the level of house prices. Regional housing prices are
determined by the regional wage, so housing prices are higher in the metropolitan
area.

Negative Transport Externalities

There are three kinds of negative externalities arising from commuting in this
model version: air pollution, noise and accident costs. The Danish Road Directo-
rate (2002) estimates the level of air pollution in cities to be twice as high as in
rural areas. These estimates are used with the extension that 25% of air pollution
affects both regions. It is also assumed that noise costs are high in the metropolitan
area. Accidents are differentiated with respect to interregional commuters because
 Transport Costs in a Multiregional Job Search Model 159

it is assumed that interregional commuters tend to use the safer motorway. The
local and global externality costs of commuting per worker are nearly 1,000 DKK
in the metropolitan area and around 750 DKK in the rural area. By multiplying by
the total number of workers, the costs to the regions are approximately 1.2 billion
DKK.

Lower Transport Costs

It is assumed in the model that there is no cost of implementing improvements in
infrastructure or by changing the level of the road-pricing tax. The policy appraisal
is therefore that the change in the transport system should be carried out only if the
total gain is greater than the actual cost of the new infrastructure or the
administration costs of changing the road pricing scheme. It is assumed that only
the connections between the two regions are improved.
The first improvement in the case of Zealand is that less transport effort is
needed to commute between the regions. The second improvement is a reduction in
the commuting time of interregional commuters. It is assumed that the initial cut in
transport cost is around 1,000 DKK per commuter per year and time savings from
the metropolitan area to the rural region are around 6.0 minutes per trip, and
because of less congestion commuters from the rural area to the metropolitan area
save 6.7 minutes per trip. With the maximum valuation of time, this represents
around 3,000 DKK per commuter per year.
An additive welfare function with the same weight for all workers can be
established to give a better overview of the results. When interpreting the regional
welfare function, it is important to remember that migration has an effect on the
regional result because the welfare function defined adds together the utility of the
inhabitants living in the region. It is a question whether many inhabitants are
desirable or not. The welfare function is based on the regional expected discounted
utility and inhabitants in a given region could have discounted utilities from both
regions because they also discount the possibility that they may live in the other
region in some of the future periods.
When the welfare function is defined, the equivalent variation (EV) can be
calculated. EV is a measure of how much the population is willing to pay for
improvement in the infrastructure.

Table 8.2. Regional valuations

Million DKK
Metropolitan area Rural area Total
EV 193.8 -78.3 115.6

The total gain of the additive social welfare function is 115.6 million DKK. It is
only the metropolitan area that has a gain, but the regional valuation is influenced
by migration.
The total valuation can be divided into four parts as presented in Table 8.3.
The total income, which can be consumed, is increasing. A small gain is obtained
because the labour force lives in the regions which they prefer. This is partly
because reductions in transport cost make it possible for the labour force to locate
160 M.M. Larsen, N. Pilegaard and J. van Ommeren

in the region preferred. However, the transport investment results in less leisure
and increasing externality costs. Altogether, it is the result of increased employ-
ment, but the gain is reduced by less leisure time and air and noise pollution,
together with more accidents on the roads because of increased commuting.

Table 8.3. Total valuation

Million DKK
Total result measured in EV
Real income 321.3
Utility of place of residence 7.8
Leisure -117.7
Externalities -95.8
EV

The flow utilities are only temporary states for a worker, but the development in a
given flow utility tells whether or not the temporary state would be more or less
attractive for the worker after the investment has been carried out. As expected, the
flow utilities are increasing for the commuters who are interregional commuters.
Unemployed workers and workers in the metropolitan area have small gains in
flow utility whereas the flow utility of working and living in the rural area is
slightly decreasing. This indicates that migration is not the only reason why the
total EV of the rural area is negative.
Lower transport costs imply that more workers choose a CSS. Workers choose
CSS more because it is now cheaper to commute to the other area and the workers
also save transport time. First, it has the positive effect that unemployment is
reduced, which implies increased production. Table 8.4 shows the effects on the
labour market.

Table 8.4. Labour-market effects

Place of residence: Place of residence: Total
metropolitan area rural area
Employed workers
Place of production,
metropolitan area - 10,986 + 11,535 + 549
Place of production,
rural area + 12,486 - 10,353 + 2,133
Total + 1,500 + 1,183 + 2,683
Unemployed workers - 1,202 - 1,480 - 2,683
Labour force + 298 - 298 0
Unemployment per cent - 0.1% point - 0.5% point - 0.2% point
Number of job openings +3 +135 +138
Number of job searchers - 35 + 215 + 180

Second, as Table 8.4 also shows, the labour force in the metropolitan area increases
by 298 workers, who have migrated from the rural area. It corresponds to a
reduction in the labour force in the rural area of 0.1%. Third, relatively more
workers are willing to commute from the metropolitan area to the rural region than
the other way around. One reason is that more workers have preferences for living
 Transport Costs in a Multiregional Job Search Model 161

in the metropolitan area and other things being equal it indicates this development
of interregional commuting. This is not the only reason, because valuation of time,
regional prices, taxes, and lump sum transfers also influence willingness to
commute. With this interregional commuting pattern, more workers in the rural
area by place of production results in greater production in the rural area. This
indicates that producer prices in the metropolitan area compared to producer prices
in the rural area increase because of a relatively lower supply of the commodities
from the metropolitan area.
The changes in regional production prices are reflected in regional wages. The
regional wage in the metropolitan area divided by the regional wage in the rural
area increases by about 0.5%. The size of the unemployment benefit is a convex
combination of the regional wages. Here, the unemployment benefit is decreasing
compared to the wages in the metropolitan area, which is the main reason why the
metropolitan wage is decreasing compared to the producer prices in the
metropolitan area. The opposite is the case in the rural area where the rural wage
increases compared to the rural producer prices. The profit rate defined by regional
producer prices over regional wage is therefore increasing in the metropolitan area
and decreasing in the rural area. An implication of this is that it is more attractive
for the metropolitan firm to produce, which implies more job openings and longer
job opening spells in the metropolitan area. In other words, labour-market tightness
increases in the metropolitan area. On the other hand, it also implies shorter
unemployment spells. However, these effects are small in the case investigated
(less than one day).
The commodity-producing sectors are not the only sectors affected which
table 8.5 shows.

Table 8.5. Sector effects

Employed workers by place of work
Metropolitan area Rural area Total
Commodities - 200 1,457 1,257
Housing 13 83 96
Transport 1,330
From metropolitan to
metropolitan area - 135
From metropolitan to
rural area 871
From rural to metropolitan area 726
From rural to rural area - 132
Total 549 2,133 2,683

The overall result in Table 8.5 is that more workers become employed. Roughly
half of them produce commodities and housing, but because the transport sector is
factor consuming, half of the new employed workers produce transport in which
there are no utility gains. More workers commute long distances which is the
reason why transport uses so many of the extra workers.
Minor effects on total employment are due to the housing market. Regional
housing prices follow the regional wage. Therefore, housing prices increase rela-
162 M.M. Larsen, N. Pilegaard and J. van Ommeren

tively more in the metropolitan area. The housing price effect is in the concrete
case at a sufficiently high level to dominate the income and migration effect, which
results in more housing in the metropolitan area. However, the housing sector is
growing more in the rural region. If the model was reformulated with a short
horizon fixed housing stock the housing prices would not be determined by
regional wages and the housing prices would increase relatively in the metropolitan
area alone because of increasing income and the labour force.
Larger effects on the total employment are due to the changed commuting
pattern. More labour is needed to transport the workers both because of increasing
production, and also because of longer total commuting distances. Regional
commuting transport prices are also determined by regional wages. This implies
that the metropolitan area experiences increasing transport prices compared to the
rural area. The transport price effects are minor compared to the overall change in
transport costs. The interregional commuters still benefit from lower transport
costs as compared to the intraregional commuters.
The main effect was, as noted above, that more workers chose CSS. All the
derived price effects described below also affect the choice of search strategy.
Lower housing and transport prices in the rural area attract more workers On the
other hand, an increasing wage in the metropolitan area makes more workers
search for a job in the metropolitan area.
The result of the choice of search strategy is presented in Fig. 8.10 and 8.11.

Fig. 8.10. Development in the search strategies of the workers who prefer to live in the metro-
politan area
 Transport Costs in a Multiregional Job Search Model 163

Fig. 8.11. Development in the search strategies of the workers who prefer to live in the rural area

As the figures indicate, the dominant effect in both regions is that the horizontal
marginal line separating RSS and CSS moves to the right. This is because lower
transport costs make it more favourable to commute. Almost 110% more workers
choose the CSS strategy in the metropolitan area and the increase is 30% in the
rural area. RSS decreases by 3% and 12% and MSS decreases by 6% and 3% in the
metropolitan and rural areas, respectively. The increasing wage in the metropolitan
area moderates the tendency for an increase in commuting, but the wage effect is
not marked because the value of unemployment benefit is reduced in the metro-
politan area. The higher wage in the metropolitan area also implies that fewer
workers choose MSS even though housing prices moderate this tendency. In the
rural area, the MSS strategy is influenced by two main factors. The higher wage in
the metropolitan area positively influences MSS in the rural area, but more workers
prefer RSS to MSS because of better transport conditions.
To summarise, the main results are that more workers commute over longer
distances and more workers are employed. In this experiment this version also
gives the perhaps counterintuitive result that economic activity increases in the
rural area compared to the metropolitan area as a consequence of the lower
transport costs. It is mainly due to the calibration of the workers preferences for
leisure and place of residence and, most importantly, the assumption that the
present share of workers living in a given area corresponds to the number of
workers who actually prefer to live in that area. Thus, around three out of four
workers are potential commuters from the metropolitan area to the rural area and
only one out of four is a potential commuter in the other direction. Furthermore,
164 M.M. Larsen, N. Pilegaard and J. van Ommeren

the assumption of the uniform distribution of leisure and location preferences is not
empirically founded and more information on this is desirable.
Wages pull the results regarding commuters in the opposite regional direction
because the relative regional wage increases in the metropolitan area. This implies
that workers with RSS earn money in the metropolitan area and this is the main
reason why the flow utility is increasing in the metropolitan area for a worker with
RSS, whereas it is decreasing in the rural area. This effect together with the fact
that more workers move to the metropolitan area imply that the regional EV is
increasing in the metropolitan area and decreasing in the rural area.
When interpreting the results, one should keep in mind that general economic
tendencies are not included in the model. For example, if the demand for high-tech
commodities is continuing to expand it could benefit the metropolitan area because
the metropolitan commodity is more high-tech intensive. This would move
economic activity from the rural area to the metropolitan area and perhaps domi-
nate the overall effects described in this section. In other words, the results here are
only one part of future economic development on Zealand but the results could
have significant positive (and negative) influence.

8.5 Conclusion

In this chapter, we have investigated the labour-market effects of transport cost

reductions employing a multiregional equilibrium search model, which extends the
seminal work of Pissarides (2000). One of the main advantages of this model is
that firms react to changes in the labour market by changing the number of job
openings. In contrast to the general practice in spatial interaction models assuming
that the number of jobs is given in all zones, we choose a formulation where the
number of jobs may change as a result of changes in transport costs. We have
formulated the model in different versions with different assumptions of the
workers behaviour which implies that the effects of transport cost changes on
commuting patters are driven by slightly different mechanisms.
We observe two important differences in the resulting effects of transport cost
changes in the different versions of the model. First we find that endogenous
labour-market search includes the possibility that lower transport costs could in
fact increase unemployment because the search effort of some workers may
decrease (main result 1)4. Therefore, fewer unemployed workers will search in the
neighbouring region, which increases the expected duration of their unemployment
period. This is a result of the fact that the labour supply of the population of
workers to each region is endogenous. This is in contrast to the situation where
labour supply in all regions only depends on unemployment as in the basic version
of the model. However, we find that lower interregional transport costs between
regions tend to reduce unemployment and increase vacancies in both of the affect-
ed regions.
4
See the main results in the introduction.
 Transport Costs in a Multiregional Job Search Model 165

The extension of the endogenous determination of the willingness to search

affects the sensitivity of transport costs on vacancies relative to unemployment
(main result 4). The reason is that the changes in transport costs as the first order
effect change the search strategy of the unemployed workers and thereby the
supply of labour in a given region. This affects unemployment. On the other hand,
the costs of the firms of having a worker employed might be less influenced by this
change in transport costs. This implies that employment in firms is less sensitive to
transport costs than with the former model formulation. This difference in effects is
again a result of the specification of the workers search decision and the single
wage negotiation in firms.
In both versions of the model, we find that main results 2 and 3 are supported,
i.e. we find that intraregional transport cost reductions increase the local vacancy
rate, but reduce the number of vacancies in adjacent regions and that interregional
transport cost reductions between regions tend to decrease unemployment and
increase vacancies in adjacent regions. We also find support for main result 5 in
both versions that wages are less sensitive to changes in transport costs than pro-
ducer prices. Finally, we find that labour-market search effects and negative
externalities have a substantial impact on the overall assessment of changes in
transport costs (main result 6).

References
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9 Evaluation of the Introduction of
Road Pricing Using a Computable
General Equilibrium Model

Knud J. Munk

Department of Economics, University of Aarhus and Danish Transport Research Institute

Abstract
The introduction of road pricing has important budgetary and income distribution
consequences. In countries like Denmark, due to high marginal rates of taxation,
raising government revenue and redistributing income is associated with
substantial distortionary costs and administrative costs. This chapter argues that an
evaluation of the introduction of road pricing needs to take into account not only
the effects on congestion and on the environment, but also the effects on the
governments budget and the income distribution consequences. A stylised Com-
putable General Equilibrium (CGE) model which represents the interaction of the
consumption of transport and of traffic congestion with leisure is used to illustrate
this point. In addition, model simulations show that the introduction of road pricing
may increase environmental damage, may make it desirable to reduce transport
infrastructure and potentially may be associated with a significant double dividend.

9.1 Introduction

This chapter assesses the introduction of road pricing within a second best public
economic framework using a CGE (Computable General Equilibrium) model.
Changes in transport policies often involve very substantial changes in
government revenue and have important effects on income distribution. Raising
government revenue and redistributing income are associated with substantial
costs, distortionary and as well as administrative. In evaluating the consequences
of changes in transport policy it is therefore not only the direct effect on traffic and
the related effects on pollution, road congestion and accidents that are relevant.
The effects on government revenue and the consequences for income distribution
may be equally important. The main objective of this chapter is to provide a
quantitative illustration of this point.
CGE models are increasingly being used for policy analysis. However, the
validity of the conclusions drawn is often compromised by convenient, but un-
realistic separability assumptions, for example that household consumption and
public goods are separable from leisure. An important contribution of the present
analysis is the demonstration that more realistic assumptions in this respect can be
168 K.J. Munk

implemented relatively easily in CGE models and are important for the evaluation
of the consequences of changes in transport policies.
Road pricing can be defined as a tax on road transport differentiated according
to the associated external effects (congestion externalities and environmental
externalities); road pricing has become a realistic policy option and after the
administrative costs associated with its application have been reduced significantly
by the application of new technologies. We capture these characteristics by
representing road pricing as a tax on transport where the rate of taxation differs
between households according to the external costs of their transportation and by
assuming that prior to the reduction of the administrative costs associated with road
pricing it was not desirable to differentiate the tax on transport, whereas after the
reduction it is desirable to do so.
The optimal rate of taxation depends on whether the transport is job related
(either commuting or input to production) or leisure travel. To simplify the
exposition we only consider "transport" non-job related private road travel (leisure
travel). It is possible to extend the analysis to other types of transport this would
considerably complicate the analysis without contributing to the stated objective of
the paper.
In section 9.2, the theoretical model on which the analysis is based is
formulated; in section 9.3, the public economic insight in the taxation of transport
is reviewed based on this theoretical model and a number of stylised facts. In
section 9.4, the model is parameterised in the form of a CGE model and in section
9.5 the parameterised model is fully specified. In section 9.6, simulation results
derived from the CGE model are presented and interpreted with respect to the
consequences, the desirability and the optimal level of road pricing. Section 9.7
summarises and concludes. The notation and the equilibrium conditions are
presented in the appendix.

9.2 The Theoretical Model

The theoretical model adopted is essentially that of Sandmo (1975, 2000), who
considers optimal taxation in an economy where one commodity is associated with
a public good externality which can be abated by government expenditures (see
also Mayeres and Proost 1997, 2001).
We consider an economy with many heterogeneous households who supply
only one homogeneous primary factor, labour, labelled 0, and demand two
produced commodities, transport and non-transport, labelled 1 and 2 respectively.
We represent the households preferences by utility functions,
u h =u h  xh , e  , hH, where xh {  x0h , x1h ,x2h  is the hth household's net
demand vector, and e, free road capacity, a public good negatively related to the
consumption of transport. The households face consumer prices
q {  q0 , q1h ,q2  , hH, and receive lump-sum income, I h , hH. We assume
 Evaluation of the Introduction of Road Pricing 169

that prior to the introduction of road pricing, the price of transport is the same for
h
all households, i.e. q1 q1 , but after that it is differentiated according to how
much the households consumption of transport contribute to the externalities.
The production side of the economy is represented by constant returns to scale
production sectors, each producing one output and using only labour as input.
Producer prices are p {  p0 , p1 , p2  .
The government needs revenue for transport infrastructure, G, and for other
government consumption, B. The governments expenditures are financed by
commodity taxes, t { q  p , hH, and a uniform lump-sum tax, L. Thus,
h h

unearned income is for all households equal to the uniform lump-sum tax,1 i.e.
I h =-L, hH.
Free road capacity depends negatively on the households consumption of
transport and positively on G, according to e  
e ^ x1h , h H ` , G . The
we
derivative, , indicates to what extent the hth households consumption of
wx1
h

transport congests the roads.

Using the expenditure function approach (see Dixit and Munk 1977), extended
to represent the governments provision of a public good and external effects (see
h
Munk 2000), the conditions for (t , L, G ) to be compatible with market
equilibrium may be expressed as

E h (q h , e, u h )  L , hH (1)
2

t
k 0 hH
x (q h , e, u h )  HL  G  B 0
h h
k k (2)

^
e e x1h  q h ,e,u h  , h H , G `  (3)

h h h h
where E (q , e, u ) is the expenditure function and xk (q , e, u ) , k(0,1,2)
h h

the compensated demand functions of the hth household.

The social preferences of the government, which is assumed to be inequality
averse, are represented by a social welfare function, W u , u ,..., u  1 2 H
 . The
government chooses tax rates and the transport infrastructure to maximise social
welfare.

1
L is negative if it is interpreted as the fixed element in a progressive linear income tax schedule.
170 K.J. Munk

9.3 Application of the Theory of Public Economics to the

Taxation of Transport and Investment in Transport
Infrastructure

The externalities associated with transport may be divided into environmental

externalities and congestion externalities. Environmental externalities2 (air pollution,
noise and accidents) may, as an approximation, be considered separable from con-
sumption, i.e. changes in these externalities do not impact on the pattern of consump-
tion.
However, congestion externalities clearly cannot be considered separable from
consumption. The consumption of transport clearly depends on the level of con-
gestion giving rise to the so-called feedback effect, i.e. a tax on transport reduces the
transport by less than the tax in isolation because the decrease in congestion increases
the consumption of transport. The total effect on free road capacity of an increase in
the tax on transport is therefore:

de we 1
(4)
dx1 wx1 1  e ' E1e

we
is the effect on free road capacity of a marginal increase in road capacity and
wx1
1
is the feed back effect which indicates to what extent an increase in free
1  e ' E1e
road capacity will increase the consumption of transport. Under first best
assumptions, i.e. when the governments revenue requirement can be raised by cost-
free lump sum taxes, the optimal rate of tax on transport, the so-called Pigovian tax,
is equal to

de
t1  MVe (5)
dx1

where MVe is the marginal monetary evaluation of free road capacity.

However, under the more realistic second best assumptions that the govern-
ments revenue must be raised by distortionary taxation, the optimal tax on
transport must not only reflect the external effects associated with transport, but
also how the taxation affects the governments two overall objectives, to raise
2
These are not represented in the theoretical model formulated in section 9.2, but have been
added to the parameterised version of the model in section 9.4.
 Evaluation of the Introduction of Road Pricing 171

government revenue and to redistribute income. Based on this insight and on the
following stylised facts we review the conditions for optimal taxation of transport
and for optimal provision of transport infrastructure as a background for the
subsequent interpretation of the quantitative assessment of the introduction of road
pricing. We assume
x that transport requires a relatively large amount of time for its consumption
and, partly for that reason, may be considered complementary to the non-
market use of time (leisure);
x that transport is associated with negative external effects in the form of
congestion and environmental externalities (air pollution, noise, accidents);
x that the share of leisure travel in the consumption is higher for urban house-
holds than for rural households and associated with larger congestion costs;
x that urban households are better off than rural households;
x that an increase in free road capacity will increase the supply of labour.

9.3.1 Taking into Account that Leisure Travel is Complementary to Leisure

When lump sum taxation is not feasible, raising government revenue involves
discouraging the supply of labour. This can be alleviated by taxing commodities
which are complementary to leisure at a higher rate than commodities that are less
complementary to leisure (Corlett and Hague 1953). In a one household economy
when transport is not associated with externalities, the optimal ratio of the tax on
transport relative to the tax on non-transport must satisfy:

OP
t1  H11  H 22  H10  K (6)
O
OP
t2  H11  H 22  H 20  K (7)
O

where H ij (i,j 0,1,2) are compensated demand elasticities, P the net marginal
social welfare of income, O the marginal social value of government funds and K
q 0 x0
is a positive constant. We have that H i 0 D 0V i 0 , where D 0 is the
q0Z 0  I
share of leisure in the households full income and where V i 0 V 0i is the
elasticity of substitution between commodity i and leisure. By the assumptions
made, transport is more complementary to leisure (non-market use of time) than
other goods, i.e. H10  H 20 and the optimal tax on transport is therefore, even in the
absence of externalities and distributional considerations, higher than on other
commodities.
172 K.J. Munk

Based on the assumption that transport is complementary to non-market use of

time, it would if it were possible to tax transport at a different rate than non-
transport at no supplementary administrative costs from an efficiency point of
view be desirable to tax transport at a relatively high rate.

9.3.2 Taking into Account that Transport is Associated with Externalities

In a one household economy, the conditions for an optimal tax structure may be
expressed as:

OP P wT de
t1  H11  H 22  H10  K  MVe  (8)
O O we dx1
OP
t2  H11  H 22  H 20  K (9)
O
Taking into account that transport is associated with externalities involves that an
extra tax will be levied on transport compared to when this is not the case
de
(compare (8) with (6)). The extra tax, however, not only depends on MVe as
dx1
O
under first best assumptions, but also on the cost of government funds, and on
P
wT
how a change in free road capacity influences the tax base, . The larger the
we
cost of government funds the smaller the importance of the externality for the
optimal tax structure and the more an increase in free road capacity expands the tax
base, the higher the tax.

9.3.3 Taking into Account that Leisure Travel is Predominately Consumed by

Households with a Relatively High Income

Increasing the tax on transport and decreasing the tax on other commodities will
redistribute income from the well-off (the urban households) to the less well off
households (rural households). The optimal tax on transport will therefore be
higher than it would be based only on efficiency considerations. The fact that the
decrease in congestion is more important for the urban than for the rural house-
holds pulls in the opposite direction.
 Evaluation of the Introduction of Road Pricing 173

9.3.4 Reasons for Taxing Transport Higher than Other Goods

Based on these stylised facts, there are thus four reasons why a policy-maker may
want to tax transport at a higher rate than other commodities:
x it is more complementary to leisure (non-market use of time) than other
commodities;
x it is consumed by high income households relatively more than by the low
income households;
x its consumption is associated with environmental and congestion externalities;
x a decrease in the congestion externality may stimulate the labour supply and
thus expand the tax base.

9.3.5 The Optimal Size of the Transport Infrastructure

Under first best assumptions, the condition for the optimal provision of the trans-
port infrastructure is:

MVG MCG (10)

where MVG is the marginal social evaluation of transport infrastructure and

MCG the marginal costs of its production. However, under second best conditions
the condition is

O dT
MVG MCG  (11)
P dG

O dT
where the marginal costs of government funds and is the effect of an
P dG
increase in transport infrastructure on the tax base.

If an increase in transport infrastructure expands the tax base (via its effect on the
free road capacity), then the optimal level of transport infrastructure will be larger
than if this effect is not taken into account.

9.3.6 The Effect of the Introduction of Road Pricing on the Optimal Taxation
of Transport and the Optimal Provision of Transport Infrastructure

The optimal level of road pricing is essentially determined based on the same con-
siderations as the optimal level of taxation of transport. However, some additional
174 K.J. Munk

observations are important as background for the interpretation of the simulation

results.
Disregarding administrative costs, the introduction of road pricing will always
increase social welfare as it provides the government with an extra instrument.
Road pricing will make the taxation of transport a more efficient instrument as it
will make it possible to differentiate the tax on transport according to the level of
congestion externalities. The tax on the consumption of transport for urban
households will increase whereas the tax for rural households will decrease. As the
taxation of transport has become a more efficient instrument, the introduction of
road pricing will justify an increase in the average level of taxation of transport.
The introduction of road pricing will thus result in a reduction in the level of
congestion.
Assuming that tax rates are chosen optimally both before and after the intro-
duction of road pricing, the introduction of road pricing will (disregarding
administrative costs) increase social welfare through three different channels: first,
by the reduction in the congestion; second, by the redistribution of income from the
relatively rich urban households to the rural households; and third by the
stimulation of the labour supply due to the higher taxation of transport and the
decreased congestion. This latter effect is the result of two opposite effects: on the
one hand, the decrease in congestion will encourage the consumption of transport
and thus discourage the supply of labour; on the other hand, it will diminish the
amount of time required to achieve a given amount of transportation. We have
assumed that the latter effect dominates.
As it reduces the urban households demand for transport, the introduction of
road pricing decreases the marginal social evaluation of transport infrastructure,
O
MVG . It also decreases the marginal costs of government funds, , as road
P
pricing increases tax efficiency, which justifies an increase in transport
infrastructure; however on balance, the optimal level of transport infrastructure is
likely to be smaller after the introduction of road pricing.
It is not possible a priori to establish how the introduction of road pricing will
influence the total demand of transport. As the effect on environmental externali-
ties is related to the total consumption of transport, road pricing may increase the
environmental externalities associated with road pricing although it will decrease
congestion.

9.3.7 The Introduction of Road Pricing will be Associated with a Double

Dividend

A green tax reform is a change in the tax system that reduces negative external
effects. We may therefore consider the introduction of road pricing as a green tax
reform. A green tax reform is said to be associated with a double dividend if the
overall benefits in terms of social welfare exceed the benefits due to the reduction
in negative external effects (see Bovenberg 1999). We assume that prior to
 Evaluation of the Introduction of Road Pricing 175

improvement of monitoring technology the administrative cost of differentiating

the tax on transport according to the level of congestion would have been pro-
hibitive. Only after the reduction in administrative costs due to the improvement of
technology the introduction of road pricing becomes desirable. The introduction of
road pricing will therefore, as argued above, be associated not only with a first
dividend in the form of a reduction in the external effects, but also a second
dividend due to income distributional and tax efficiency gains, even if the tax
system was optimal before the change in administrative costs. If the tax system was
not optimal, the scope for the introduction of road pricing to yield a substantial
double dividend is naturally far greater.
This contradicts the established wisdom that a green tax reform cannot be
associated with a double dividend (see Bovenberg 19993). The contradiction may
be explained by the fact that we take into account administrative costs and
distributional considerations and that we do not impose separability between the
externality and leisure (see Munk 2000).

9.4 The Parameterised Model

9.4.1 Specification of Functional Forms for Free Road Capacity and Environ-
mental Externalities

Free road capacity, e, is negatively linked to the congestion externalities and

positively linked to government investments in transport infrastructure according
to

e Z e  a1h C1h  x1h , c0h   G (12)

hH

where Ze h
is the endowment of road capacity, a1 C1 x1 , c0
h
 h h
 the congestion
th
externality generated by the h household (as a function of its consumption of the
h h h
transport good, x1 and the time use for transportation, c0 , where a1 is the
transport congestion coefficient associated with the hth household) and G the
government's provision of transport infrastructure.
In addition, in order to represent environmental damage (air pollution, noise,
accidents) associated with the consumption of transport, we extend this framework
to include environmental externalities specified as

3
Bovenberg (1999) concludes: "The overall message of this paper is disappointing for those who
expect substantial non-environmental benefits from green tax reforms. The analysis shows that
stringent conditions need to be met in order for an environmental tax reform to yield a double
dividend".
176 K.J. Munk

e x
hH
h
1 (13)

9.4.2 Specification of Household Preferences

Many CGE models that have been used to evaluate changes in environmental
policies impose separability between consumption and leisure and between
consumption and the externality (see, for example, Goulder et al. 1999). For the
analysis of transport policy issues to impose such assumptions is highly unrealistic
and may result in misleading conclusions. We have therefore chosen to specify the
households preferences using a utility function with explicit representation of the
use of time, (the CES-UT) (see Munk 2002) extended with a public good to
represent how the provision of free road capacity influences household behaviour
and with an additive term Ee e to represent the effect on welfare of the
environmental externalities, e , associated with the consumption of transport (see
Fig. 9.1)

    
u U C CT C1  x1 , c10 ;V C1  , e;V T , C2  x2 , c02 ;V C2  ;V D , c00 ;V L  Eee (14)

Ci Ci  xi , c0i ; V Ci  expresses for the transport input composite (i=1) and for
the other good composite (i=2) the preference for the amount purchased of
i
commodity i, xi , relative to the time used for its consumption, c0 . The elasticity of
substitution V Ci indicates the degree of substitutability between the two.
CT  e, C1 ; V T  expresses for the transportation composite the preferences of
free road capacity , e , relative to the transport input composite , C1 . The
elasticity of substitution V indicates the degree of substitutability between the
T

two.
C C  CT , C2 ; V D  expresses the preference for the transportation
composite, CT , and the other good composite, C2 . The elasticity of substitution,
V D , indicates the degree of substitutability between the two.
U  C , c00 ; V L  expresses the preference for aggregate consumption, C ,
relative to pure leisure, c0
0
Z0  c0i  x0 where Z 0 is the households time
i 1,2
 Evaluation of the Introduction of Road Pricing 177

endowment. The elasticity of substitution, V L , indicates the degree of substitut-

ability between the two.

Fig. 9.1. Nested structure of utility function with explicit representation of the use of time

By specifying the share of time used in the consumption of transport to be larger

than for non-transport and the rate of substitutions, V Ci , i 1, 2 , within the
composites, Ci  x , c ;V  , i
i
i
0
Ci
1, 2 , as smaller than the rate of substitution,
V D , between the composites, H10  H 20 (see Munk 2002). The CES-UT re-
presentation of household preferences thus allows transport to be more
complementary to leisure than non-transport. It also makes it possible to represent
that a decrease in congestion stimulates the labour supply (see Table 9.1).

9.4.3 Real Income and Social Welfare

We assume an additively separable, symmetric social welfare function defined on

the households real income

W w R 
hH
h
(15)
178 K.J. Munk

where w  R  is a concave function and R h the real income of the hth household
defined as

R h { Y h.0  E h  q 0 , v h (q, I h ; e, e ); e 0 , e 0   I h.0 (16)

where E
h
 q , u ; e , e  is the expenditure function evaluated at the
0 h 0 0
bench-
mark vector of household prices, free road capacity and environmental externality,
 q , e , e  , u
0 0 0 h
v h (q, I h ; e, e ) the utility function evaluated at the vector of
household prices, lump sum income, free road capacity and environmental
externality (q, I ; e, e ) and Y
h h .0
the hth households nominal income in the
benchmark situation. In the benchmark situation E
h
 q , u ; e , e 
0 h 0 0
I h . The
real income in the benchmark situation is thus by design equal to the nominal
income in the benchmark situation, Y
h .0
 I h . The changes in real income for
different households due to the implementation of a project are not affected by how
the real income in the benchmark situation is defined. The real income changes
only depend on the behaviour characteristics of the household, which in principle
can be established objectively. Given the choice of the social welfare function, the
definition of the benchmark level of the real income function has normative
significance, however. It is, in other words, of importance to the change in social
welfare associated with a project. The hth households marginal evaluation in
h wE h
monetary terms of the congestion externality is Ee and its marginal
we
wE h
evaluation of the environmental externality is Eeh { .
we
ww
The marginal social welfare of income is defined as Eh { . As rural
wR h
households, indexed R, have lower income than urban households, indexed U,
E R > E U (see Table 9.2).

9.5 The Specification of the Parameterised Model

The parameter values required for the model are share values derived from the
benchmark dataset, substitution elasticities and the benchmark marginal evaluation
of the environmental and congestion externalities. The benchmark dataset in the
 Evaluation of the Introduction of Road Pricing 179

form of a Social Accounting Matrix (SAM) as well as the other parameter values
are provided in Munk (2003).
From the parameters, the share parameters derived from the benchmark dataset
and substitution elasticities and other values of the extended CES-UT utility
function of the model, the matrix of compensated price elasticities at the level of
the three traded commodities, contingent on the level of the free road capacity, has
been calculated as they are important for understanding the behaviour of the model
(see Table 9.1). Notice that transport is more complementary to leisure than the
non-transport good.

Table 9.1. Compensated price elasticities and expansion elasticities for the reference set of
parameters in the benchmark situation

Urban household

Hij Price of Quantity of

Quantity of Transport Non-transport Labour Road capacity

Transport -0.31 0.40 -0.10 0.56
Non-transport 0.06 -0.25 0.19 -0.30
Labour 0.02 -0.30 0.28 0.01

Rural household

Hij Price of Quantity of

Quantity of Transport Non-transport Labour Road capacity

Transport -0.27 0.27 0.00 0.00
Non-transport 0.05 -0.20 0.15 0.00
Labour 0.00 -0.25 0.24 0.00

Note: The elasticities are contingent on the initial on the benchmark level of free road capacity.

For the normative analyses, the social welfare weights indicated in Table 9.2 have
been used.

Table 9.2. Social welfare weights

Household types
Urban Rural
Social welfare weights, E
h
1.10 1.00
180 K.J. Munk

9.6 Presentation and Interpretation of Simulation Results

The change from taxation of transport to road pricing involves a differentiation of

the tax on transport according to where and when transport is consumed to reflect
differences in the associated externalities. To capture this, we have represented the
introduction of road pricing as the move from a situation where the consumption of
transport by all household types is taxed at the same rate, to a situation where the
tax on transport can be differentiated between urban households and rural house-
holds, the consumption of the first being associated with congestion externalities
and that of the latter with none. We present three types of analysis. We first
calculate the consequences of two different projects based on different assumptions
about the use of the revenue generated from road pricing (Consequence analysis).
We then evaluate these two projects based on a set of supplementary value judge-
ments (Project evaluation) and finally calculate the optimal policies under three
different sets of assumptions with respect to which policy instruments are available
to the government (Optimality analysis).

9.6.1 Consequence Analysis

The political debate about the introduction of road pricing suggests that the way
the revenue generated from road pricing is used will affect the popular support for
such a reform. This is, related to the fact that reforms that provide an approximate
Pareto improvement are politically easier to implement than reforms that imply
substantial redistributions between social groups. We therefore consider different
assumptions with respect to how the tax revenue is used. We calculate the
consequences of the introduction of road pricing in the form of two alternative
projects, each with a closure corresponding to alternative assumptions about how
the revenue generated by road pricing is used. In the first case, we assume that the
revenue from road pricing is used to reduce other transport taxes such as taxes on
car ownership and on petrol. This corresponds to the view that for the introduction
of road pricing to be politically feasible, the revenue needs to be used to reduce
other taxes on transport such as taxes on petrol and car ownership. Since the tax on
transport is the sum of these taxes and the road pricing tax, the introduction of road
pricing will in this case be represented in the model as the tax on the transport for
urban households being increased and that for rural households being decreased. In
the second case, the revenue from road pricing is used to reduce the rate of income
tax. This corresponds to the view generally held by economists that such revenue
should enter into the governments budget with no strings attached.
For both projects, the tax on the urban households consumption of transport is
increased due to the introduction of road pricing from the initial level of 80% to
139%. Technically, in the case of Project 1, the tax on the rural households con-
sumption of transport is endogenous and all other tax instruments, other than the
tax on the urban households consumption of transport, are kept fixed. Conversely,
in the case of Project 2, the income tax rate is endogenous and all other tax
 Evaluation of the Introduction of Road Pricing 181

instruments, including the tax on the rural households consumption of transport,

are kept fixed.

Table 9.3a. Consequences of introduction of road pricing: Tax rates

Benchmark Project 1: Project 2:
Revenue from road Revenue from road
pricing used to reduce pricing used to reduce
other taxes on private income tax
road transport
Household taxes
Labour 60% 60% 59%

Transport in urban areas 80% 122% 139%

Transport in rural areas 80% 63% 80%

Other goods 25% 25% 25%

Table 9.3a shows the tax changes associated with Project 1 and Project 2. Project
1 involves a decrease in other transport-related taxes by 17 percentage points such
that the government revenue generated by taxes on transport remains more or less
the same. Combined with the increase in the tax on transport due to the intro-
duction of road pricing, the tax on transport thus increases from 80% to 122% for
urban households and decreases from 80% to 63% for rural households.
Project 2 involves the same increase in the tax on transport as Project 1, i.e.
the rate of tax on transport for urban households increases from 80% to 139% and
for rural households it is kept at 80%, but is not combined with reductions in other
transport-related taxes. Instead, there is a decrease in the rate of tax on labour from
60% to 59%. Project 2 thus implies that the introduction of road pricing increases
the rate of tax on the consumption of transport.
Table 9.3b shows the consequences of the two projects in terms of changes in
the consumption of transport, free road capacity and the evaluation of the externali-
ties. It also indicates the effects on the supply of labour, on the real income of the
rural and urban households and on the social welfare of society. Project 1 reduces
the urban households consumption of transport and increases that of the rural
households. As a result, the congestion externality is reduced (free road capacity
increases). The decrease in consumption of transport for the urban households is
relatively small compared to the increase for the rural household, because of the
feedback effect, i.e. because the decrease in road congestion stimulates the con-
sumption of transport. In aggregate, Project 1 results in an increase of the con-
sumption of transport and thus increases the environmental externalities. The
supply of labour increases for urban households, but it decreases for the rural
households. This reflects the assumption built into the model that transport is com-
plementary to non-market use of time. The net effect on the supply of labour is
positive, but rather small.
This contrasts with the results obtained for Project 2, where the revenue from
road pricing is used, rather than to reduce other transport related taxes, to reduce
the income tax rate. In this case, the project results in a significant increase in the
182 K.J. Munk

supply of labour and a significant increase in social welfare. The consumption of

transport declines not only as a result of the increase in the price of the transport
good, but also as a consequence of the decrease in the income tax rate, which
increases the cost of the time needed for transportation.

Table 9.3b. Consequences of introduction of road pricing: Changes in transport, externalities and
real income
Benchmark Project 1: Project 2:
Revenue used to Revenue used to reduce
reduce other taxes on income tax
private road transport

Changes compared to benchmark

Consumption of transport
Consumption of transport
70 -2.0 -2.6
by urban households
Consumption of transport
30 2.9 0.9
by rural household
Total 100 0.9 -1.7
Transport infrastructure
Free road capacity 80 1.9 2.7
Marginal evaluation 1.01 -0.14 -0.17
Externalities
Evaluation of congestion
2.0 2.2
externalities
Evaluation of environ-
-0.2 0.4
mental externalities
Total 1.8 2.5
Labour
Supply of labour by urban
1084 10.1 13.1
household
Supply of labour by rural
566 -9.8 -3.4
household
Total 1650 0.3 9.7
Real income and social
welfare
Real income of urban
813 -10.4 -6.2
households
Real income of rural
417 12.2 15.4
households
Social welfare 1311 3.0 10.8
Double dividend 1.1 8.3
Source: Own calculations based on stylised CGE model.
Note: The double dividend is calculated as the change in social welfare minus the evaluation in
the change in the externalities.

Project 1 expands the tax base much less than Project 2 due to the much smaller
expansion of the supply of labour. Project 2 is thus associated with a considerable
greater gain in efficiency (as measured by the increase in aggregate real income).
 Evaluation of the Introduction of Road Pricing 183

The marginal evaluation is in the benchmark situation 1.01. This means that
one DKK investment in transport infrastructure increases social welfare by 1.01
units (disregarding the costs of financing the investment). The introduction of road
pricing reduces the marginal evaluation of transport infrastructure (from 1.01 to
0.86 in Project 1 and to 0.83 in Project 2). The projects thus decrease the value of
investment in transport infrastructure, which reflects that the projects decrease the
consumption of transport and thus increase the amount of free road capacity,
limiting the need for extra road capacity.

9.6.2 Project Evaluation

Project evaluation may involve comparing each of the two projects with the status
quo or comparing one project with the other. Project 2 dominates Project 1 accord-
ing to the Pareto criterion, since the real income of both households is higher under
Project 2 than under Project 1, but based on the Pareto criterion neither project is
comparable with the status quo as the urban households lose while the rural house-
holds gain in both cases.
However, introducing supplementary value judgements also makes the pro-
jects comparable with the status quo. In this context, it should be emphasized that
to assume that the government attaches the same social welfare weight to the
income of all household types, i.e. that the government is inequality neutral, as
done in traditional cost-benefit analysis, naturally also implies the adoption of
supplementary value judgements. Although such value judgements are convenient
from a computational point of view, they are often not very relevant, i.e. they do
not correspond to the value judgements of the political decision-maker for whom
the analysis is prepared. On the basis of the social welfare weights in Table 9.2, the
introduction of road pricing by either project is desirable, but the increase in social
welfare is far greater when the revenue generated from road pricing is used to
reduce the tax on labour income than to reduce other transport-related taxes.
The implementation of both projects reduces, as already mentioned, the social
evaluation of free road capacity. This suggests that after the introduction of road
pricing, a project to reduce the governments expenditures on road infrastructure
would be desirable even if it had not been so prior to the reform.
Comparing the value of the change in the externalities (1.8 in the case of
Project 1 and 2.5 in the case of Project 2) with the change in social welfare (3.0
and 10.8) shows that the introduction of road pricing is associated with a
significant double dividend, i.e. that the total benefits of the introduction of road
pricing exceed the benefits of the reduction of the externalities (by 1.1 in the case
of Project 1 and by 8.3 in the case of Project 2). There are three reasons for this.
The first reason is that in the benchmark situation, the tax on transport is smaller
than its complementarity to leisure would justify, i.e. that a further increase in the
tax on transport would increase social welfare even disregarding the effect on the
externality. The second reason is that the decrease in congestion reduces the use of
non-market use of time for transportation and thus stimulates the labour supply
(although only marginally, see Table 9.3). Both effects produce an efficiency gain.
184 K.J. Munk

The third reason is that the introduction of road pricing redistributes income from
the urban to the rural households, who have a higher marginal social welfare of
income than the urban households.

9.6.3 Optimality Analysis

In order to calculate the optimal tax structure (in terms of the income tax rate and
in terms of taxes on transport and on other goods) and the optimal level of the
public good (transport infrastructure), supplementary value judgements have to be
specified as in the case of project evaluation. We assume that the government
attaches a higher social welfare weight to the real income of the rural household
than to the real income of the urban household (see Table 9.2) and on this basis we
calculate the optimal policy for the government under three different sets of
assumptions with respect to which policy instruments the government is effectively
able to use. In the first case, we consider the situation before a dramatic reduction
of the administrative costs associated with road pricing has made road pricing
feasible. We represent prohibitive administrative costs by the assumption that the
government is not able to differentiate the tax on transport between the urban and
the rural households. Taking a long-term perspective, we assume that the govern-
ment is able to adapt the transport infrastructure to the optimal tax policy. In the
second and third cases, road pricing has become feasible. The government
therefore in these cases is assumed (for simplicity at no costs) to be able to
differentiate the tax on the consumption of transport between the rural and the
urban households. In the second case, we adopt a short-term perspective assuming
that it is not possible to adapt the road infrastructure after the reduction in the
administrative costs, whereas in the third case we adopt a long-term perspective as
in the first case and assume that such adjustment is possible.
In all three cases, we assume that the value of the lump-sum transfers remains
unchanged in terms of the price of labour and therefore that the tax on labour can
be fixed as a matter of normalisation.
The optimal solutions for the three sets of assumptions are provided in Table
9.4. In Table 9.4 part a., the values of the instrument variables are indicated,
whereas part b. contains values of a number of goal variables and other endoge-
nous variables.
The optimal solution in all three cases involves taxes on transport that are
much higher than in the benchmark situation and a level of transport infrastructure
much lower than the benchmark level. This is a consequence of the choice of
parameter values chosen for the parameterised model. Since these values have been
chosen for illustrative reasons, the results should therefore not be interpreted to
imply that the Danish transport taxes necessarily are too low and investments in
transport infrastructure too high.
 Evaluation of the Introduction of Road Pricing 185

Table 9.4a. Optimal solutions: Transport infrastructure and tax rates

Benchmark OPT1 OPT2 OPT3
Transport infrastructure
Government provision of
50 31 31 21
transport infrastructure
Household taxes
Labour 60% 60% 60% 60%

Transport in urban areas 80% 202% 446% 495%

Transport in rural areas 80% 202% 118% 112%

Other goods 25% 8% 9% 8%

Table 9.4b. Optimal solutions: Changes in transport, externalities and real income
Benchmark OPT1 OPT2 OPT3
Changes Changes compared to OPT 1
compared to
benchmark
Consumption of transport
Consumption of transport by
70 -11.5 -4.2 -5.9
urban households
Consumption of transport by
30 -12.0 8.8 9.7
rural household
Total 100 -23.5 4.6 3.8
Transport infrastructure
Free road capacity 80 -26.9 4.4 -3.7
Marginal evaluation 1.01 0.2 -0.6 -0.4
Externalities
Evaluation of environmental
6.4 5.9 7.7
externalities
Evaluation of congestion
4.9 -1.0 -0.8
externalities
Total 11.3 5.0 7.0
Labour
Supply of labour by urban
1084 26.7 31.5 37.9
households
Supply of labour by rural
566 10.3 -33.4 -38.8
households
Total 1650 37.0 -1.9 -0.9
Real income and social
welfare
Real income of urban households 813 -1.0 -41.4 -50.8
Real income of rural households 417 23.1 44.5 53.4
Social welfare 1311 24.4 7.5 7.9
Double dividend 13.1 2.5 1.0
Source: Own calculations based on stylised CGE model.
Note: The double dividend is calculated as the change in social welfare minus the evaluation in
the change in the externalities.
186 K.J. Munk

Compared with the benchmark situation, the optimal solution in the first case,
OPT1, involves a considerable reduction in the consumption of transport. The
reduction is relatively smaller for urban than for rural households due to the feed-
back effect. The policy changes result in a reduction in congestion externalities
valued at 6.4. This reduction stimulates the consumption of transport of the urban
households, but does not affect the rural households. Both types of households
benefit from the reduction in environmental externalities, but in the model this has
no effect on behaviour.
The increase in the taxation of transport increases the tax base directly by
increasing the supply of labour and indirectly by decreasing congestion, which in
turn also increases the supply of labour. The policy change decreases the real
income of the urban households because they suffer disproportionately from the
reduction in the governments provision of infrastructure, but have to share the
benefit of the reduction in other taxes with the rural households. The policy change
results in a considerable increase in social welfare, in part explained by the benefits
due to redistribution of income.
The optimal solution in the second situation, OPT2, shows that the introduc-
tion of road pricing (the possibility of differentiating the tax on the consumption of
transport for the rural and for the urban households) makes it possible to increase
social welfare, not only compared with the benchmark situation, but also compared
with the optimal situation prior to the introduction of road pricing. The introduc-
tion of road pricing leads to an increase in the consumption of transport by rural
households that is greater than the reduction for urban households. This results in
an increase in the environmental externalities, but a reduction in the congestion
externalities which only depend on consumption of transport by the urban
households. Compared with the optimal solution without road pricing, OPT1, the
change in the social value of the reduction of the externalities is 5.0. The policy
change leads to a reduction in the supply of labour. The increase in urban house-
holds labour supply as a consequence of the increase in the tax on transport is, due
to the feedback effect, smaller for urban households than the corresponding
decrease in the supply of labour for rural households. The use of an extra policy
instrument results, as one would expect, in an increase in social welfare. Part of
this increase is due to the reduction in the externality and part is due to the re-
distribution from urban to rural households. There is, however, compared to OPT1,
no benefit due to an increase in the supply of labour on the contrary.
In the third case, the optimal solution, OPT3, the introduction of road pricing
by reducing the demand for transport infrastructure in urban areas, where it is
associated with congestion, reduces the optimal amount of transport infrastructure.
The possibility of adjusting the transport infrastructure justifies a further increase
in the tax on transport in urban areas compared with the optimal solution in the
previous case, OPT2. This is because the reduction of the government provision of
road infrastructure increases in the marginal evaluation of the externality.
In recent years, the so-called double dividend issue has attracted considerable
attention both among policy-makers and economists. The issue is whether re-
placing existing taxes with taxes on commodities causing environmental damage
will increase social welfare, not only by internalising the negative external effects,
 Evaluation of the Introduction of Road Pricing 187

but also by reducing the distortionary costs of the tax system as a whole. Based on
the idea that the tax revenue obtained from environmental taxes could be used to
reduce pre-existing distortionary taxes, the initial contributions to the analysis of
the issue suggested that a green tax reform in general would be associated with a
double dividend. However, it has subsequently become clear that the intuition
behind the initial suggestion was flawed by not taking into account the distortion-
ary effects of the environmental taxes. Now, it seems that the established wisdom
is that a green tax reform is unlikely to generate a significant double dividend and,
if previous policies have been economically rational, that a green tax reform cannot
generate a double dividend at all. The present analysis indicates that, in a situation
where the tax on transport is too low (according to the relevant social welfare func-
tion), a higher tax on transport increase the social welfare beyond the social value
of the decrease in the externalities associated with transport, i.e. is associated with
a double dividend.
When the initial situation is not optimal (i.e. in the benchmark situation),
adopting an optimal tax on transport (OPT1) or introducing road pricing at the
optimal level justified by the reduction of the administrative costs (OPT2 or OPT2)
associated with a substantial double dividend (by 13.1, 15,6 and 14.1, respective-
ly).
When the initial situation has been optimal given the administrative costs
initially associated with introducing road pricing (OPT1), the double dividend
associated with the introduction of road pricing is still positive, but far smaller; by
2.5 if the tax reform is not associated with an adjustment in the road infrastructure
(OPT2) and by 1 when it is (OPT3).
The theoretical model allows a double dividend to arise from three sources:
first that the change in the tax rates increases the tax base (in general by increasing
the labour supply), second that the increase in the public good (free road capacity)
has the same effect and third that the tax changes have desirable income distri-
butional effects (see Munk 2000).
The main source of the double dividend associated with the increase of the tax
on transport from the benchmark to the optimal level (OPT1) is the increase in the
supply of labour.
In the case of the introduction of road pricing leading from OPT1 to OPT2, the
double dividend is explained by the increase of the free road capacity resulting in a
greater supply of labour and the redistribution of income from the urban to the
rural households.
Finally, in the case of the introduction of road pricing leading from OPT1 to
OPT3, the double dividend is explained only by the redistribution of income from
the urban to the rural households.
Sandmo (2000) has suggested that when a green tax reform would be com-
bined with an adjustment of the level of abatement, this would be associated with a
third dividend. Comparing OPT3 with OPT2 shows that reducing the amount of
road infrastructure after the introduction of road pricing naturally has resulted in an
increase of social welfare. In this sense, Sandmos observation is naturally correct,
but notice that the larger increase in social welfare associated with OPT3 compared
188 K.J. Munk

with OPT2 (7.9 compared with 7.4), the double dividend contributes less (1.0
compared to 2.5).

9.7 Conclusion

This chapter has provided a quantitative assessment of the introduction of road

pricing within a second best framework, i.e. where raising government revenue and
redistributing income is associated with administrative and distortionary costs. The
analysis has illustrated that how the government budget is balanced has important
implications, both from an efficiency and a distributional point of view for the
assessment of whether it is desirable to introduce road pricing and at what level to
set the road pricing charge.
The analysis illustrates that the introduction of road pricing as expected will
result in a decrease in congestion, but that depending on how the revenue is spent it
may result in an increase in environmental externalities. The analysis also high-
lights that road pricing is likely to reduce the need for transport infrastructure. The
planning of the introduction of road pricing and investment in road infrastructure
should therefore be closely coordinated.
The simulation results have been based on a CGE model representing in an
innovative way the complementarity of transport and congestion with leisure, and
that different households contribute differently to congestion and are differently
affected by congestion. The analysis demonstrates that the use of CGE models
constitutes a realistic alternative to traditional cost-benefit analyses based on partial
equilibrium, which cannot account correctly for the complexities of second best
assumptions. However, the model which has been adopted for the analysis ignores
important aspects of the taxation of transport and of investment in transport
infrastructure. In order to be used in practice, the model needs to be expanded to
represent collective transport and as far as private transport is concerned not only
leisure travel, but also commuting and the use of transport as intermediate input in
production. Furthermore, before CGE models can become an operational tool for
transport policy analysis a significant investment must be made in database
construction and estimation of key model parameters.

References
Bovenberg, L.A. (1999). Green tax reform and the double dividend: a updated reader's guide.
International Tax and Public Finance, 2: 157-183.

Corlett, W.J., Hague, D.C. (1953). Complementarity and the excess burden of taxation. Review of
Economic Studies, 21: 21-30.

Dixit, A, Munk, K.J.(1977). Welfare effect of tax and price changes. A correction. Journal of
Public Economics, 8: 103-107.
 Evaluation of the Introduction of Road Pricing 189

Goulder, L.H., Parry, I.W.H., Williams, R.C., Burtraw, D. (1999). The Cost-effectiveness of
alternative instruments for environmental protection in a second-best setting. Journal of Public
Economics, 72: 329-360.

Mayeres, I., Proost, S. (1997). Optimal tax and public investment rules and the congestion type of
externalities. Scandinavian Journal of Economics, 99(22): 261-279.

Mayeres, I., Proost, S. (2001). Marginal tax reform, externalities and income distribution. Journal
of Public Economics, 79: 343-363.

Munk, K.J. (2000). Administrative costs and the double dividend. Working Paper, EPRU,
University of Copenhagen.

Munk, K.J. (2002). What determines the optimal commodity tax structure from an intuitive point
of view?, Working Paper, EPRU, University of Copenhagen.

Munk, K.J. (2003). Computable general equilibrium models and their use for transport policy
analysis. Report 4, Danish Transport Research Institute

Sandmo, A. (1975). Optimal taxation in the presence of externalities. Swedish Journal of

Economics, 77: 86-98.

Sandmo, A. (2000). Public economics and the environment. Oxford University Press, Oxford.
190 K.J. Munk

Appendix: The Theoretical Model

1 Notation

Index sets

Households: H
Produced commodities, sectors: C
Primary factors: F = (0)
Commodities FC = CF

Variables

Quantities
Production levels, outputs: Yi iC
k
v
Input demand for labour: 0 kC
h
Demand for produced commodities: x i i C, h H
h
Net demand for labour: x 0 hH
Labour endowments: Z h
0 hH
Public good non-separable (Free road capacity): e
Endowment of public good (Road capacity): Ze
Consumption of produced commodities: cih { x ih i C, h H
Consumption of leisure: c0h { Z 0h  x 0h hH
Net demand vector: x {  x , i FC 
h h
i h H
Government consumption (investment in
transport infrastructure): xG {  x iG , i FC 

Taxes
Rate of tax on produced commodities: ti iC
Rate of tax on labour: t0
Lump sum tax: L

Prices
Market prices for produced commodities: pi iC
Market price for labour: p0
 Evaluation of the Introduction of Road Pricing 191

Household prices for produced commodities: q i { pi  t i iC

Household prices for labour: q 0 { p0  t 0
Household price vector: q {  q i , i FC 
Household lump sum income: Ih hH

2 Equilibrium conditions

(1) Profit maximisation

v i0 v i0 (p i ) iC
i i i
Y Y (p ) i C

(2) Utility maximisation

x ih x ih  q,e,I h 
iC, hH
x h
0 x  q,e,I
h
0
h
 hH
I h
L hH

(3) Material balance

Yi x
hH
h
i  x iG iC

0 v
jC
j
0  x 0h  x G0
hH

(4) Government budget constraint

t x  t x
hH iC
i
h
i
hH
0
h
0  HL  pi x iG  p 0 x G0 + S i (pi )
iC iC
0

(5) Tax-price equations

Household prices for produced commodities
qi pi  t i iC
Household prices for primary factors
q0 p0  t 0

(6) Public good externality as function of the consumption of commodity 1

e e Z e , x1h , x G
hH
10 Efficiency and Equity Considerations
in Road Pricing

Harald Minken and Farideh Ramjerdi

Institute of Transport Economics, Oslo, Norway

Abstract
Equity considerations are particularly important for the appraisal of road pricing
schemes. We discuss and classify the most relevant aspects of equity in this
context, and set out inequality measures from economics that may be used as
outcome indicators with respect to these equity objectives. Road pricing is
inherently a second-best problem due to the link between work trips and the labour
market, where distortionary taxation exists. Consequently, efficiency and distribu-
tional issues both need to be considered simultaneously. To design the road pricing
scheme in this case, it is suggested to solve the constrained optimisation problem
of maximising welfare in the transport system as computed from a transport model,
subject to relevant equity indicators reaching their target levels.

10.1 Introduction

Due to increases in household car ownership rates, demographic changes and

changes in the geographical patterns of housing, work and leisure activities, urban
road networks are becoming increasingly congested in cities all over the world.
This entails not only time losses for private and business transport, but also severe
noise and pollution problems and degradation of the quality of life in the city
centre and surrounding neighbourhoods. For the last 40 years, since the work of
Walters (1961), Mohring and Harwitz (1962), Vickrey (1963, 1968) and Strotz
(1965), economists have advocated road pricing as a solution to these problems,
but somehow the idea still seems difficult to get across to the public. Singapore and
London are the only cities with a road pricing system, i.e. tolling with a view to
relieving congestion. Norwegian cities have toll rings with financing as their main
purpose (Ramjerdi et al. 2004).
Reasons for the reluctance and widespread opposition to road pricing are
surveyed in Eliasson and Lundberg (2003). Concerns about the distributional
impacts are prominent on this list. Equity reasons for opposition to the Norwegian
toll rings are analysed in Langmyhr (1997).
While some of the popular arguments against road pricing can be dismissed
out of hand, all of the equity concerns merit close attention not just to facilitate
implementation of a measure that can improve the efficiency of the transport
system, but because equity objectives are important social objectives in their own
194 H. Minken and F. Ramjerdi

right. Furthermore, it might be argued that analyses of equity impacts are more
important for road pricing decisions than for decisions about infrastructure
construction. There are three reasons for this.
First, infrastructure construction is an ongoing process where those who did
not get their new road this year might be the winners next year. Indeed, there is
evidence that such compensatory thinking is part of the informal decision criteria
of Norwegian decision-makers (Fridstrm and Elvik 1997). Road pricing is
different in this respect. It is a permanent redesign of the whole transport system,
with no chance of the losers ever getting compensated by a reverse pricing policy
next year.
Second, road pricing only achieves its efficiency objective through compara-
tively large transfers of money from individuals to the government. Model tests
indicate that the revenue from first or second-best road pricing schemes in different
cities is from one to two times the size of the net benefit of the scheme (Ramjerdi
1995, Eliasson and Lundberg 2003) or even more (Fridstrm et al. 2000). As a
rule, motorists as a group stand to lose before recycling of the revenue.
Third, since government is the winner by far before the use or recycling of the
revenue, the equity impacts depend very much on how the revenue is used. The
equity impacts are not well-defined until the use of the revenue has been decided.
But neither are the efficiency impacts: if the revenue is used to cut back dis-
tortionary taxation elsewhere in the economy, there might be an additional gain (a
double dividend). In this case, the double dividend is perhaps the main element
of the efficiency gains (Fridstrm et al. 1999, Parry and Bento 2001). This form of
recycling, however, precludes compensation to losers. On the other hand,
compensation to losers may well mean that no double dividend can be reaped,
unless of course it takes the form of investing in efficiency-enhancing projects
targeted particularly at the losers (Fridstrm et al. 1999).
Thus both equity and efficiency considerations are particularly important when
designing a road pricing scheme. Furthermore, there is a conflict between them.
With two conflicting objectives we need at least two policy instruments to achieve
targets with respect to the objectives. That is why the recycling scheme should be
an integral part of the road pricing scheme. Considering that equity has many
aspects and that there will also be environmental and traffic safety objectives, road
pricing and recycling will probably need to be parts of an even broader plan,
consisting, for instance, of infrastructure provision, traffic management and public
transport fares and service levels, to provide sufficient degrees of freedom to attain
the objectives.
The purpose of this paper is to propose an approach for addressing the equity
and efficiency considerations as a constrained optimisation problem (maximising
efficiency, subject to equity constraints). To do this, we first discuss what the
relevant aspects of equity are (section 10.2) and suggest indicators for their
measurement (section 10.3). These sections follow Minken et al. (2003). In section
10.4, we briefly discuss the concept of economic efficiency before considering the
requirements for the modelling system that we need in order to predict the equity
and efficiency impacts of road pricing. Section 10.5 sketches the optimisation
problem. Experience with this approach for the design and appraisal of road
 Efficiency and Equity Considerations in Road Pricing 195

pricing schemes is still very scant, which is why we limit ourselves in section 10.6
to a few remarks on experience with solving similar problems. Section 10.7
concludes.
The AFFORD project (Fridstrm et al. 1999, Fridstrm et al. 2000) used
optimisation with a transport model to find optimal first and second-best road
pricing and explored the equity implications of these policies. This paper is taking
the further small step of suggesting the inclusion of equity considerations as
constraints in the optimisation problem.

10.2 Aspects of Equity

Equity, like the related concepts of justice, fairness and right, is not a simple
concept. Different people have different concepts of equity. Which of the aspects
of equity that seems important will very much depend on particular contexts and
circumstances (Langmyhr 1997).
A first distinction can be made between formal equality (treating all people
equally) and outcome equality, which may imply unequal treatment. Social inclu-
sion objectives like accessibility for the mobility impaired or for those without a
car are based on the notion that the outcome of a strategy should be favourable for
the disadvantaged in the transport system, or at least meet their basic needs with
respect to accessibility. Outcome equality might also be required with respect to
different disadvantaged geographical areas and income groups. Such aspects have
proved to be very important in the opposition to road pricing (Langmyhr 1997). On
the other hand, the principle of formal equality may be invoked to make all users
pay the same and letting no one use the transport system for free while others must
pay, and to demand that the revenue is recycled to those who paid the charges. It
must be admitted that such interpretations of formal equality are virtually im-
possible to reconcile with road pricing. Other interpretations of the same principle,
such as polluter pays or the notion that everybody should pay the full costs to
society of their actions, are on the other hand perfectly compatible with road
pricing.
Thus, struggles over how to apply formal equity principles seem to lead to
either outright rejection of road pricing (a typical view of motorists organisations)
or full endorsement of it (typical of most environmentalist organisations, at least in
Norway). There seems to be little room for trade-offs, and consequently with two
exceptions our focus in the following will be on forms of the outcome equality
principle.
The first exception concerns the inequality of the geographical distribution of
the net benefits from a scheme (after recycling). While it is incompatible with road
pricing to require that everybody should pay the same, regardless of where and
when they travel, and it is virtually impossible to recycle the revenue to exactly the
same people who paid the tolls, it should not be impossible to design a strategy
with approximately the same net benefits to every geographical area.
196 H. Minken and F. Ramjerdi

This principle can be applied to districts within the urban area, and this is
particularly relevant if each of these districts is represented by its own local
government with a say in how the scheme should be designed. There must be
something in it for everybody.
The principle of equal geographical distribution of benefits could, however,
also be applied to the distribution between the urban area and the nation as a
whole. In that case, the revenue should be recycled to the inhabitants of the city,
and not be siphoned off to taxpayers or public service users elsewhere. This
principle is indeed increasingly recognised as a requirement for the introduction of
road pricing. It makes recycling in the form of cuts in distortionary taxes difficult,
since local taxes may not be the best candidates for such cuts. Consequently, it
often takes the form that the revenue should be used to improve local transport.
This is, for instance, stated in the new Norwegian law on road pricing. Parry and
Bento (2001) find that this requirement almost wipes out the whole double
dividend.
Daganzo (1995) recognises that to avoid a situation where the gains from the
scheme are spread nationwide while the losses are borne by the inhabitants of the
city, the inhabitants may prefer restrictions on car use to road pricing. While the
welfare losses may be larger, the gains will be fully reaped inside the city.
The other exception where a formal equity principle is invoked concerns car
taxes. It is claimed to be unfair that motorists pay much more to the state than they
get back, and that this situation is made even more inequitable by introducing road
pricing. This argument does not seem to rule out road pricing completely, but
requires that other car taxes be cut.
Moving on to outcome equity principles, the idea is that there is some good
which is distributed unevenly among individuals or groups even before a road
pricing scheme or a transport strategy is introduced, and that one of the objectives
of the scheme should be to redistribute this good or to compensate for its unequal
distribution. In the literature on inequality measurement, this good is of course
almost universally understood to be income. For our purposes, however, it could
equally well be accessibility.
If the concern is about unequal distribution of accessibility, we are now not
asking if accessibility gains from the scheme are distributed evenly, but if the
scheme contributes to reducing the pre-existing inequality. Instances include con-
cerns for the accessibility of those without a car, the mobility impaired, the poor,
women or those living in less accessible parts of the city area.
Avoidance of inequitable distributions of accessibility is probably a very import-
ant objective of urban transport policy. It may lie behind statements to the effect that
road pricing will hit the poor the hardest as well as requirements that public transport
should first be improved before road pricing is introduced, so that there is a real
choice of mode for everybody. If there is a real danger that accessibility for some will
become intolerably low, leading to social exclusion, poverty indicators, incorporating
a poverty line, might be more appropriate than the inequality measures of the next
section. Suitable poverty indicators are developed in Sen (1982) and Foster et al.
(1984).
 Efficiency and Equity Considerations in Road Pricing 197

If the concern is about the unequal distribution of income, we will probably

not be interested in the monetary impacts alone. Instead, we will recognise that
time gains can compensate for monetary losses and vice versa. To do this, we can
create the concept of generalised income, adding time gains and monetary gains to
income by way of the appropriate value of time in each instance. Using the concept
of generalised income, we can investigate if its distribution has become more equal
or not after the introduction of road pricing and the accompanying revenue
recycling. This can be done across income groups, household groups, gender
groups, locations, etc.
Probably the most relevant concept of income for such analyses is household
income per consumption unit. A consumption unit is defined in the following way:
each household member is assigned a weight, equal to 1 for the first adult person in
the household, 0.7 for any additional adults and 0.5 for children up to 17. With
small variations, these weights are in line with OECD recommendations for
household consumer surveys. The number of consumption units in the household is
given by the sum of the weights attached to all household members. The concept of
generalised income and this definition of household income per consumption unit
was used for equity analysis in the Fourth Framework project AFFORD (Fridstrm
et al. 2000).
Other aspects of equity are also relevant for road pricing, among them fairness
in the form that government should keep its promises, and procedural fairness (a
transparent and democratic planning process). These are, however, not properties
of a scheme or a strategy, but of the way in which it is implemented.

10.3 Indicators of Equity

Indicators of income inequality will inevitably have a normative as well as a

descriptive content. The normative content becomes clear if we consider the
properties that we want such an indicator to have. Some of them will be fairly
uncontroversial. But to arrive at a specific mathematical formulation, we will also
have to make more controversial choices. In experiments where people are asked if
they consider an income distribution to be more or less unequal than another, none
of the properties usually wins unanimous support. This is why we should be aware
of the normative choices we make when we choose a particular indicator.
Suppose we have recorded the income of the individual members of a given
population and ordered them according to income. We want to measure the
inequality of this distribution of income. The first property that we want our
measure to have is anonymity (or symmetry). It says that if two members of the
population swap incomes, the measure should be unchanged. It does not matter
who the rich and poor are. Women earning twice as much as men is equally bad as
men earning twice as much as women.
The next property is the Pigou-Dalton property (the transfer principle). It says
that if you take an amount from a richer person and give it to a poorer person,
198 H. Minken and F. Ramjerdi

inequality should diminish as long as the poorer person is still poorer than the rich
one after the transfer.
These properties seem uncontroversial. The population principle is also
perhaps uncontroversial. It says that if we replace each income earner by the same
number of clones, the inequality measure should not change. The controversial
properties, however, are mainly two. Scale invariance says that if you multiply
each income by the same positive constant, inequality is unchanged. That is often
felt to be a right-wing view. On the other hand, translation invariance says that if
you add the same amount to each income, inequality is unchanged. This is often
felt to be a left-wing view. A compromise between these principles a centrist
view is possible, but probably mathematically cumbersome.
The Gini coefficient is the most commonly used income inequality measure. It
can be explained with reference to Fig. 10.1 below. On the horizontal axis, a
population is ordered by income from the lowest to the highest. On the vertical
axis, there is the cumulative share of total income. If everybody had the same
income, any ten per cent of the population would have ten per cent of the income,
and the straight line Equality would be produced. In reality, the twenty per cent
with the lowest income has only about 3 per cent of total income, the forty per cent
with the lowest income has only about 25%, etc. This is shown by the Empirical
distribution curve. This curve is called a Lorentz curve. (In actual fact, the
depicted Lorentz curve shows the income distribution of Norwegian taxpayers in
1995.) Obviously, the area between the two curves is an indicator of income
inequality, ranging from 0 for perfectly equal distributions to 0.5 for distributions
where one person earns all income. The Gini coefficient is twice this area to get a
measure of inequality varying between 0 and 1.

A Lorentz curve
Share of income
1.0

0.9

0.8

0.7

0.6

0.5 Empirical distribution

0.4 Equality

0.3

0.2

0.1

0.0
0 0.2 0.4 0.6 0.8 1

Share of population

Fig. 10.1. Lorenz curve for the taxpayer population of Norway 1995
 Efficiency and Equity Considerations in Road Pricing 199

For our purposes, probably the most useful formulation of the Gini coefficient is:

1 n n
G | xi  x j |
2n 2 x i 1 j 1
(1)

Here we have assumed a population of n individuals with incomes x = (x1,x2,,xn).

The average income is x . Suppose, however, that there are instead n income
groups with incomes x = (x1,x2,,xn), ni members of group i, i = 1, ,n and ini
=N. Then

1 n n
G
2N 2 x i 1 j 1
ni n j | x i  x j | . (2)

The Gini coefficient complies with the first three principles and scale invariance,
and consequently does not exhibit translation invariance.
The Gini coefficient is not additively decomposable. Additive decomposability
means that if the population consists of groups, the inequality measure can be
decomposed into a term showing inequality within groups and a term showing
inequality between groups. This is obviously useful for our purposes. For instance,
if our population belongs to different zones, it might be interesting to see to what
extent the unequal distribution of benefits among income groups is due to the
unequal spatial distribution. The class of additively decomposable inequality
measures was characterised by Shorrocks (1980). It turns out that the members of
this class that exhibit the properties of symmetry, the Pigou-Dalton transfer
principle, the population principle and scale invariance are of the following form:

n c

1 xi
S c ( x)  1 for c z 0 or 1
nc(c  1) i 1 x
1 n
x
S 0 ( x)
ni1
log
xi
(3)

1 n xi x
S1 ( x)
ni1 x
log i
x

where x = (x1,x2,,xn) > 0 is the distribution of income among the n members of

the population, and x is the mean income. The constant c can take all real values.
This class of functions Sc is called the class of generalised entropy measures. For
some values of c, they behave rather oddly as measures of income inequality. For
instance, for c > 1, the measure is very sensitive to transfers of income among the
rich, while for c < 0, it is very sensitive to transfers of income among the poor.
Furthermore, only S0 will have the property that when decomposed, the weights on
200 H. Minken and F. Ramjerdi

the within-group terms are constants and sum to 1. Thus, S0 seems a very good
candidate for our inequality measure.1,2
Decomposition of S0 takes the form:

ng n
n 1 xg 1 g x
S0 B  wg S0 (x g ) B g log x g
B  log gg
g g n ng i 1 i g n i 1 xi

where (4)
1 x
B
n g
ng log
xg

Here, the groups are indexed by g, the population in group g is ng and average
income in group g is x g . B is the across-groups inequality measure, resulting from
abstracting from all income differences inside groups. (ng/n) is the weight of the
inequality inside group g in the total measure S0.
All of the measures treated so far exhibit scale invariance. For political
balance and technical reasons, we will also have a need for inequality measures
displaying translation invariance. Of course, if we are not certain which of our
inequality measures embody the norms and values of the decision-makers, there is
a third option, namely to present the distributional impacts of a strategy in a raw
form, for the decision-makers themselves to pass judgement on whether or not
inequality has decreased.
The Kolm measure (Kolm 1976) obeys the first three principles and transla-
tion invariance. It is

1 1 n
K a (x) log expa  x  xi  (5)
a n i 1

where a > 0 is a transfer sensitive parameter.

The technical reason for applying (5) is that it allows some (or all) xis to be
negative, whereas (3) does not. This is useful for measuring the distribution of
benefits, many of which will be negative in road pricing.
We need different indicators for different purposes. As explained, a Kolm
measure is technically well-suited as an indicator of the inequality of the
distribution of net benefits. A Shorrocks measure, perhaps S0, is technically suited

1
The weights on the within-group terms of S1 will also sum to 1, but will be functions of
between-group inequality. On the other hand, S1 (and all measures with c > 0) has the property
that there is an upper limit to inequality, given by log n in the case of S1. This allows for a
normalisation of the measure and is obviously convenient for expressing targets.
2
The S0 and S1 measures are originally due to Theil (1967).
 Efficiency and Equity Considerations in Road Pricing 201

for measuring inequality with respect to accessibility or generalised income. It has

the additional advantage of permitting decomposition. Thus, for instance, we can
measure inequality with respect to generalised income and decompose the income
groups by location, giving a picture of how much of it depends on income alone
and how much on the geographic distribution of income groups. Or alternatively,
we could measure inequality with respect to accessibility across space and
decompose by income group.
Equity issues involving only two groups, like the sexes or those with and
without a car, could of course be measured by simpler indicators. With respect to
the objective to retain benefits inside the city, the indicator could be government
revenue as a percentage of total net benefits in the strategy.
It is well known that welfare functions of a particular form may be derived
from many of the inequality measures (see, for instance, Myles 1995). So we might
in fact use these welfare functions instead of a utilitarian welfare function and a
separate inequality measure. There are several reasons for not doing so at the
moment. First, it might very well be the case that we are interested in several
aspects of equity and would like to use more than one indicator. Second, as long as
our models permit us to compute welfare without having to specify welfare
weights for each individual or group (i.e. a representative consumer exists), it
seems natural to keep efficiency and equity considerations apart. And third,
incorporating equity concerns into the welfare function does not make it easy for
decision-makers to interpret or discuss the results of the appraisal.

10.4 Equity, Efficiency and Modelling

Perfect road pricing is, by its nature, pricing that maximises welfare. Road pricing
in real world applications must be defined relative to a certain setting. By this we
mean that we must define the system that we are studying, and consequently the
systems outside environment. Pricing inside the system is not thought to affect
behaviour outside the system. Furthermore, a setting defines the level of detail at
which marginal costs are studied and defined, as well as the agents of the system
and the dimensions of choice open to them. Both first-best and second-best pricing
must be defined relative to such a setting.
First-best road pricing in a particular setting means that the price of any action
open to any agent considered in this setting is equal to its marginal social costs.
Thus, we use the concept of first-best pricing even for a pricing scheme where not
every conceivable dimension of choice is taken into account. It is sufficient for us
that every dimension of choice that is modelled in this setting is taken into account.
In first-best pricing, we should ideally be able to set separate charges on the
use of every link in the network, to differentiate between periods according to the
level of traffic, and to differentiate between user groups to the extent that they
perceive costs differently or their actions impose different marginal external costs.
Furthermore, if our setting is confined to the transport system, we need to assume
that prices in the outside economy are right, or else price or cost changes in the
202 H. Minken and F. Ramjerdi

transport system will have welfare implications outside transport impacts that are
not captured by computing benefits in the transport system alone (Jara-Diaz 1986).
Considering the close link between work trips and labour market supply and the
distortionary effect of labour taxes, there is really no such thing as first-best urban
road pricing, even if we would be able to charge on all links. To this can be added
the inherent difficulties in taking into account the real diversity and heterogeneity
of the travellers, such as their different values of time, in setting the link charges
(Eliasson 2000).
Second-best pricing, then, is the prices that maximise welfare subject to
constraints on the free use of the charges defined in a particular setting. These
constraints may be technological, institutional, legal or political. Second-best
solutions are defined relative to the same setting as the first-best, so they involve
the same types of costs, the same dimensions of choice, and the same exogenously
given environment as the first-best. For some reason, though, the free use of some
of the instruments available in the first-best solution is now barred.
For second-best pricing, the same inherent problems of taking account of real
heterogeneity exist, so even if we are able to derive optimal second-best charges in
our models and simplified settings, the solution does not necessarily carry over to
the real world. Thus, we should be modest in our claims and realise that real world
experience is needed.
The work of Parry and Bento (2001) clearly indicates that it is unwise to
ignore labour market effects when setting urban road prices. Taxes on travelling to
work will affect labour supply negatively, thus adding to the effects of the income
tax (remember that most motorists will experience a welfare reduction from road
pricing before recycling). If nothing can be done about the income tax, this is a
typical second-best situation. If, on the other hand, the revenue is used to reduce
the income tax, a large double-dividend is reaped in Parry and Bentos simple
model.
Thus, efficiency depends on the efficiency of the tax system. The efficiency of
the tax system is captured by the indicator called the marginal cost of funds
(MCF). If, for instance, raising an additional euro of public funds by raising all
taxes in the same proportion leads to goods and services worth 0.20 euro not being
produced and consumed, the marginal cost of funds is 0.20. This parameter (which
is difficult to estimate) cannot be taken as an exogenously given fact when we
study strategies and schemes that in fact alter the tax system. So if revenue is used
to cut distortionary taxes, the MCF has a lower value than if it is used otherwise.
Another feature of our second-best situation is of course that in practice only a
few of the links can be tolled. Sandmo (2000) states that When lump-sum taxes
are not available, issues of efficiency cannot be separated from those of
redistribution and equity, and when one considers the tax system as a source of
revenue for the public sector, Pigouvian taxes must be analysed jointly with other
aspects of the tax system (page 33). Thus, there is a need to include equity
indicators in the problem of setting second-best road prices.
Different kinds of models, reflecting different settings, have been used to
study the second-best problem. What we have said indicates a broad setting,
reaching even beyond transport and including the labour market. However, such
 Efficiency and Equity Considerations in Road Pricing 203

models will typically not be able to reflect the network and the full set of transport
choices very well. That is why we assume that a transport model with at least
modal choice and destination choice is used. The interaction with the labour
market must be reflected by an appropriate choice of the shadow cost of public
funds, reflecting how the revenue is used.

10.5 Optimal Road Pricing Subject to Equity Constraints

In the models we will be using, such as nested logit models, a representative

consumer can be said to exist and therefore welfare is well-defined even without
making stronger normative assumptions about how each individual is to count. The
fact that we do really care more about the welfare of some groups than others, is
taken care of by the equity indicators. The welfare function can be written

W UB  PS  (1  O ) PVF  EC (6)

where UB are user benefits, PS are producer surpluses, PVF are government
surpluses (present value of finance), EC are external costs and O is the marginal
cost of funds. These elements (except O) are computed from model output. All of
them are functions of the policy variables (the link charges) through their impacts
in the transport model. O is set to reflect the recycling scheme. The problem is to
set the link charges so as to maximise W. The resulting levels of the instruments
are the second-best road prices.
To reflect equity concerns, targets will have to be set for the level of the equity
indicators. Constraints of the form that the equity indicators should at least reach
their target levels can then be included in the optimisation problem, which
becomes maximisation of W subject to the constraints. This is how we propose to
analyse road pricing.
Throughout this paper, we assume that economic efficiency is measured by a
utilitarian welfare function. In the case where only one equity indicator is used as a
constraint and this indicator implies a certain other welfare function, it might well
be asked if the optimal result of the constrained optimisation problem equals the
result of maximising the unconstrained implied welfare function. The answer is
negative: while the welfare function that incorporates the equity concerns always
allows for a trade-off between utilitarian efficiency gains and less inequality, the
constrained optimisation approach makes the maximum allowable inequality an
absolute requirement.
204 H. Minken and F. Ramjerdi

10.6 Solving the Optimisation Problem

Algorithms to solve this problem exist and have been proven to work, even if a
global optimum is not guaranteed. The PROSPECTS Methodological Guidebook
(Minken et al. 2003) outline three approaches, the AMOEBA algorithm (Nelder
and Mead 1965), the regression-based method (Fowkes et al. 1995, 1998) and
general unconstrained optimisation methods (Luenberger 1984). There are limits to
the number of policy variables (the number of links on which a charge can be
levied) that may be used without requiring too many runs of the transport model,
so the problem to be solved will definitely be a second-best problem. Until now,
the location of a single toll ring has usually been pre-specified, and the tolls are
restricted to be the same on each tolled link. These restrictions may, however,
easily be modified, so that different locations of the ring and combinations of many
rings may be tested. Kilometre-based charges can also be tested.
The particular problem at hand, where only link charges are used as instru-
ments, has however not been tested, so for the moment we have no empirical
results. The right shadow price of public funds to use in each particular instance
has not been investigated. There have been some tests with constraints derived
from setting a target for an equity indicator, but in this particular case it turned out
that the constraint was not binding.
Thus, we are confident that the optimisation problem can be solved, but
experience in setting targets for the equity constraints, finding out how the solution
changes with these targets and with the shadow price of public funds is still
lacking. Consequently, experience with presenting results to decision-makers and
the public and using this to discuss and agree upon a road pricing scheme is also
lacking, which is of course essential. To gain experience, various forms of equity
indicators should be tried as constraints and results compared with respect to
acceptability and ease of interpretation.

10.7 Conclusions

We have emphasised the importance of distributional impacts and equity consider-

ations for the appraisal of road pricing schemes, charted and classified the most
relevant aspects of equity in this context, and pointed out that inequality measures
used in economics may be used as outcome indicators with respect to these equity
objectives. We have pointed out that road pricing is inherently a second-best
problem due to the link between work trips and the labour market, where
distortionary taxation exists. Consequently, efficiency and distributional issues
need to be considered simultaneously. To design the road pricing scheme in this
case, it is suggested to solve the constrained optimisation problem of maximising
welfare in the transport system as computed from a transport model, subject to
relevant equity indicators reaching their target levels. We point out that the shadow
price of public funds to be used in the objective function must be derived from a
 Efficiency and Equity Considerations in Road Pricing 205

general equilibrium model, taking into account the particular recycling scheme in
each case. Alternatively, a spatial computable general equilibrium model with a
sufficiently developed transport network may be used.
Algorithms exist to solve such problems, and some experience with their use
has been forthcoming from the Fifth Framework project PROSPECTS (Minken et
al. 2003). However, there is no experience yet with the variant of this general
problem where the policy instruments are link charges only and the shadow price
of public funds is modified to take account of the recycling scheme. Crucially,
experience in presenting results to decision-makers and the public and using this to
discuss and agree upon a road pricing scheme is also lacking.
An alternative to using an equity target as a constraint when optimising to find
the road charges might be to incorporate the equity issue in the welfare function, as
indicated in Myles (1995). The two approaches are not identical. The choice
between them should be based on whether or not decision-makers are willing to
make the equity target an absolute requirement, and which of the two approaches
they find to be more transparent and easy to interpret.

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11 Modelling the Economy, Transport and
Environment Triangle, with an Application
to Dutch Maglev Projects

Jan Oosterhaven and J. Paul Elhorst

Department of Economics and Econometrics, University of Groningen, the Netherlands

Abstract
This chapter discusses modelling the ETE triangle from the perspective of the
welfare consequences of local and regional policy measures. It argues that the
interaction between the economy and the transport system needs to be modelled
using sectors, household types, transport modes and spatial zones. For urban
agglomerations, using a land-use/transportation interaction type of model should be
weighed against using a spatial computable general equilibrium type of model. For
interregional applications, a spatial equilibrium approach is superior because it
enables the incorporation of economies of scale, substitution between inputs and
heterogeneity of outputs. Furthermore, it is argued that at the local and regional
level environmental externalities may be modelled without taking account of
feedback effects on the economy and the transport systems. The modelling philoso-
phy is applied to four Dutch magnetic levitation rail proposals showing that the
location and trajectory of new transport infrastructures have an important impact
on the size and mix of its direct transport effects, indirect economic effects and
external environmental effects.

11.1 Introduction

Modelling the interactions between the economy, the transport system and the
environment (the ETE triangle) involves a wide range of choices. We discuss these
choices from the perspective of analysing the impact of policy measures on
peoples welfare at the spatial scale of individual cities and regions. It is important
to note that the limitation of sub-national policy measures minimises the necessity
to model the impact of exogenous factors at the macro level, such as technological
breakthroughs and the growth of the world economy, since sub-national policy
models can be based on exogenously provided national or international economic
scenarios. The limitation of studying only welfare effects also constrains the
choices at hand, but less so. The reason is that although the population in a
particular country may care about the state of the environment in the rest of the
world, it probably does not care about the state of the transport system and the
economy elsewhere. This implies that only the environmental impacts need to be
208 J. Oosterhaven and J.P. Elhorst

modelled globally to be relevant to local policy decisions.1 This is not a major

complication, since the feedback effects of global environmental impacts of local
policy measures back on the local economy, transport and environment are
negligible.
In this chapter, we first compare the interactions between the elements of the
ETE triangle, which prove to be different in nature. Next, the impact of the
economy and the transport system on the environment and its consequences for
modelling at the local and regional level are discussed in more detail. Finally, the
interactions between the economy and the transport system are discussed in more
detail, along with the modelling implications of the aim to simulate the impacts of
policy interventions on the economy and the transport system. As an application of
the modelling approach, four competing proposals to install new magnetic levita-
tion (Maglev) rail projects in the Netherlands are discussed.

11.2 The Different Nature of the Three Types of Interaction

Within this chapter, decisions about the production and consumption of transport
services and of other goods and services will be treated separately. Hence, our
definition of the economy and of economic activities is exclusive to the transport
system and transport services.
At the local and regional level, possible transport policy measures relate to
such instruments as traffic tolls, the construction of new transport infrastructure,
the (subsidised) provision of public transport and parking space. In some countries,
local authorities may have additional powers such as levying fuel taxes and other
transport-related taxes, such as parking tariffs. Generally, these instruments either
have an explicit spatial dimension (i.e. location) or they have spatially strongly
different impacts on the supply and demand for transport services and thus also on
the (spatial) functioning of the economic system in the city or region in question.
In market economies, local and regional authorities generally have limited
possibilities to intervene in the economic system directly. At the local and regional
level, possible economic policy measures relate to such instruments as taxing
different types of land use, installing zoning regulations and sometimes also
providing for rental housing, office space and labour market matching. With the
exception of labour market matching, these instruments all have an explicit spatial
dimension and will thus also influence the demand for transport services in a
spatially differentiated manner.
Two conclusions follow from the above discussion and may be summarised
as follows (see also Fig. 11.1):

1
The recent guideline for social cost-benefit analyses of transport infrastructure projects in the
Netherlands (CPB/NEI, 2000), for instance, restricts the measurement of the economic impacts to
the national economy but insists on including worldwide environmental impacts, despite the
obvious inconsistency in spatial scale (cf. Oosterhaven, 1999).
 Modelling the Economy, Transport and Environment Triangle 209

1. Modelling the interactions between the economy and the transport system can
only be done sensibly when it is done spatially.
2. The interaction between the economy (i.e. production, consumption) and the
transport system, in principle, runs both ways.

Neglecting the interdependent and essentially spatial nature of the relationship

between the economy and the transport system will result in biased local and
regional policy recommendations.
To discuss the relationship between the environment on the one hand, and the
transport system and the economy on the other, a distinction must be made be-
tween global impacts and local/regional impacts. Modelling global environmental
impacts of local and regional policy measures is relatively simple, since feedback
effects at the local/regional level are empirically negligible. Modelling their local
environmental impacts is relatively complicated, since the spatial dimension (i.e.
location) of the local impacts is at the heart of any local policy model. Let us take
emissions as an example. Emissions occur at specific locations. Since their diffu-
sion is spatial, the subsequent impact on welfare may be quite different in densely
and sparsely populated neighbourhoods.
The question of whether the feedback effects of local environmental impacts
on the local economy or the local transport system are relevant is difficult to
answer. Heavily disturbed and polluted neighbourhoods may become less attractive
for households and even for firms. Consequently, location decisions and the
demand for transport services will be influenced. But just as the feedback effects of
global environmental impacts tend to be small, so are the feedback effects of local
environmental impacts on the local level.

Hence, two additional conclusions can be drawn (see also Fig. 11.1):
3. The interactions between the economy and the transport system on the one
hand, and the environment on the other, may be modelled as a one-sided
dependency of the environment on the economy and the transport system.
This implies that environmentally motivated policy interventions in both the
economic and the transport system may be treated exogenously.
4. Global environmental impacts can be specified non-spatially as opposed to
local and regional environmental impacts that need to be specified spatially.

Economy (spatial) Transport (spatial)

Environment, local (spatial) and global (non-spatial)

Technological or behavioural relationships Policy-induced relationships

Fig. 11.1. The nature of the ETE triangle at the local level
210 J. Oosterhaven and J.P. Elhorst

11.3 Modelling Environmental Impacts

Many environmental impacts of both transport and economic activities are

externalities; i.e. actors do not take account of the environmental impacts when
deciding on their production and consumption levels and mix.
Environmental impacts of decisions about the production and consumption of
transport services constitute an important subcategory of all externalities, called
transport-upon-environment externalities. Another important category of externali-
ties of transport production and consumption decisions relates to such externalities
as traffic congestion and traffic accidents. The valuation of these transport-upon-
transport externalities is psychologically different from that of environmental
externalities. The reason is that congestion and accidents are commonly viewed as
risks that people voluntarily choose to be subject to when they decide to produce or
consume transport services. By contrast, environmental externalities are commonly
viewed as involuntary risks, since they affect people that do not produce or
consume the transport services in question.
When the transport system and the economy are treated as separate entities, as
in this chapter, no significant externalities seem to exist between the two systems.
At the local and regional level, most of the economy-upon-economy externalities
tend to be pecuniary and they are probably not very significant. For example, firms
capture only a part of the direct transport benefits of new infrastructure because
competition forces them to pass some or all of these benefits on to their clients.
Non-pecuniary benefits at the local and regional level are probably restricted to
transfers of knowledge, especially through the local labour market. At the local and
regional level, transport-upon-economy and economy-upon-transport externalities
do not seem to be different in nature from the economy-upon-economy externali-
ties discussed above.
Comparable to the transport system, but with a different mix, pollution, noise
and the contribution to global warming appear to be the most important
externalities originating from the economic system, i.e. economy-upon-environ-
ment externalities.
From an environmental policy viewpoint, it is helpful to distinguish between
intermediate and final externalities. Intermediate externalities may be defined as
non-environmental externalities between actors in the transport system and the
economy, which lead to (further) location, consumption and production reactions.
These externalities must be modelled if they are significant, such as the transport-
upon-transport and economy-upon-economy externalities discussed above. Final
externalities may be defined as -upon-environment externalities, which do not
lead to further behavioural reactions of actors in the economy or the transport
system.
It is to be noted that this distinction is not necessarily related to the distinction
between direct and indirect environmental externalities, as both are final externali-
ties in the sense defined above. The importance of the direct/indirect distinction is
apparent when life-cycle analyses (LCA) of the total environmental cost of
transportation are considered. LCA is best done by combining direct process data
 Modelling the Economy, Transport and Environment Triangle 211

with more aggregate input-output data (Wilting, 1996). In an application to Dutch

freight transportation, the direct/indirect energy use in the production and
maintenance of infrastructure and means of transportation appeared to be 82/18%
of the total energy use in road freight, 55/45% in rail freight and 40/60% in inland
water transportation (Bos, 2000). Although these percentages are different and
sensitive to assumptions made, data used and, especially, effects included, the rank
order of the direct impacts did not appear to be different from the rank order of the
total impacts. Essentially the same conclusions apply to Dutch passenger
transportation (Bouwman, 2000). However, rank orders do change in applications
at a more detailed level, as in GMC/Argonne (2002, cited in Harrington and
McConnell, 2003, p.250) that studies the use of different fuels.
The recommendation to distinguish intermediate and final externalities, and
to neglect intermediate ones when estimating environmental impacts, implies that
some indirect (backward) environmental externalities may also be neglected. This
will not influence the rank order of the externalities per transport mode, as the
Dutch LCA research has shown for final externalities alone. Perhaps more
important is the problem that all of these direct/indirect calculations neglect the
spatial dimension. Although the environmental cost involved in these national
LCAs relates to the global level, the estimation of these global environmental costs
is generally based on data of (sub-)national cost structures.

11.4 Modelling Transport-Economy Interactions

There is city-level information that shows that lower population densities may be
associated with fewer car miles per capita travelled (Newnan and Kenworthy,
1989). At the micro level, however, Dunphy and Fischer (1996) found evidence of
fewer car miles and more public transport miles per capita for people living in
higher density communities. In addition, they found that demographic
characteristics determined location choice and travel behaviour simultaneously.
Kitamura et al. (1997), using travel diary data, found personal attitudes to driving,
the environment and other factors to be more important in explaining travel
behaviour than land-use variables. The extensive literature on the balance between
the number of jobs and the number of houses, following Hamiltons (1982)
provocative article on the concept of wasteful commuting, comes to a more or
less comparable conclusion. The extent of wasteful commuting diminishes when
more explanatory variables are added, such as double-earner families, different
spatial distributions of particular job qualifications and discrimination in the
housing market (White, 1999). Reviewing the literature on the relationship
between land-use and travel demand, Harrington and McDonnell (2003, p.214)
came to the following conclusions:
1. Compared with other variables, most studies find either no or only small
effects of land-use variables on travel measures, such as vehicle miles
travelled or vehicle ownership.
212 J. Oosterhaven and J.P. Elhorst

2. Urban form tends to have more impact on vehicle ownership than on miles
travelled, and the effect tends to be greater at very high densities (i.e. above
5000 people per square mile, Walls et al., 2002).
3. There are differences in land-use impacts through the effect on travel (time
and distance) cost, at least for non-work trips.

This means that, even with significant effects at very high densities, policies
directed at changing existing land-use are probably less effective in affecting travel
patterns than policies that influence (time and monetary) travel cost more directly.
This last relationship also plays a central role in theoretical models of urban
form. In the monocentric base model (Alonso, 1964), commuters trade off lot size
(i.e. density) and transportation cost. Using this model, the long-term decline in
real (time and distance related) travel cost provides a straightforward explanation
of suburbanisation and decreasing urban densities (Pickrell, 1999). In contrast,
high land prices (i.e. density), high cost of road construction, and traffic congestion
in the inner cities result in high generalised private transportation costs, which
together may open the way to public mass transit. It also offers an alternative
explanation for the decentralisation of housing and jobs (Ingram and Liu, 1999).
In addition to the relationship between urban form and travel behaviour, that
between urban form and domestic and holiday behaviour may also be of
(environmental) importance. After controlling for different household characterist-
ics, Diepen (2000) found that travel behaviour, holiday behaviour and domestic
energy use depended on the residential neighbourhood. In the inner cities of two
Dutch towns, each with about 150,000 inhabitants, total energy use per comparable
household appeared to be lower. Interestingly, she did not find total energy use to
be lower in sustainably designed neighbourhoods with sustainably designed
houses. The location of other city neighbourhoods in relation to the city centre and
the number of competing destinations appeared to be much more important.
This brief review indicates that spatially detailed models provide the only
way to adequately model the interaction between the economy and the transport
system at the local and regional levels, especially when one is interested in
environmental externalities associated with local transport and land-use regulation.
Below, we will further discuss and compare two broad classes of such models,
namely land-use/transportation interaction (LUTI) models and spatial computable
general equilibrium (SCGE) models.
LUTI models consist of linked transport models and land-use or location
models. They generally employ a system dynamics type of modelling and are
primarily developed to predict future growth and to analyse policy scenarios for large
urban conglomerations (for example, Lee et al., 1995). There is a whole series of
such models for different conglomerations. In this respect, the LINE model stands
out as it is a LUTI type of interregional model for the whole of Denmark (Madsen
and Jensen-Butler, 2003). LUTI models have a long history of gradual development
over many decades and are currently typically very disaggregated with numerous
spatial zones, sectors, household types, transport motives, modes of transport, etc.
(for overviews see DSC/ME&P, 1998; Wilson, 1998).
 Modelling the Economy, Transport and Environment Triangle 213

SCGE models are typically comparative static equilibrium models of inter-

regional trade and location based on microeconomic theory, using utility and produc-
tion functions with substitution between inputs. Firms may operate with economies
of scale in markets with monopolistic competition of the Dixit-Stiglitz (1977) type.
Empirical applications of this last approach are to be found in Venables and Gasiorek
(1996) and Brcker (1999). Interesting theoretical simulations with a SCGE model
with a land market are to be found in Fan et al. (1998). These models are part of the
new economic geography school (Krugman, 1991, Fujita et al., 1999), and have been
around for less than a decade. In other words, we are comparing a mature
methodology, possibly at the end of its life cycle, with a new methodology that is still
in its infancy.
The practical feasibility of LUTI models is wide. In particular, the transport
sub-models are known to be very adequate in estimating all kinds of transport price
and quantity impacts of policy measures in the transport sector itself. Given the
scientific uncertainty in relation to the location behaviour of firms and the decrease in
the relative cost of freight transport over time, this does not hold true to the same
degree for the impact of transport measures on the location of industrial activities.
Since the relative time cost of passenger transport has been increasing over time, due
to increased congestion and rising real incomes, the location of service activities can
be explained much better. However, as the location of most service activities
primarily follows that of people and industrial activities, the location choices of
service providers mainly play a role at the intra-urban level. Consequently, the
strength of LUTI models lies especially in estimating the impact on intra-urban
location decisions rather than in estimating the interregional locational effect of
transport measures.
Finally, most LUTI models are not well equipped to translate the impacts of
transport and infrastructure measures into estimates of consumer benefits, as is
needed in a sound cost-benefit analysis (CBA underpinned by welfare theory). At
best, consumer choices relating to transport and location decisions are modelled and
estimated by means of a discrete random utility approach. In contrast, producer
location decisions are seldom modelled by means of discrete profit maximising
behaviour, and producer production and price decisions tend to be modelled by fixed
ratios. As a consequence, most LUTI models provide reasonable estimates of direct
transport user benefits, and reasonable estimates of consumer benefits in as far as the
latter are based on discrete choice behaviour. The existing LUTI models, however,
are not able to estimate transport benefits that are based either on continuous
consumer choices or on both discrete and continuous producer choices.
SCGE models, typically, are theoretically well-suited for this evaluation task
(see Venables and Gasiorek, 1998). The SCGE modelling problem, at the moment, is
not theoretical in nature but rather empirical and computational. Consistent
estimation of all the necessary consumption and production substitution elasticities is
problematic, if only because of the lack of adequate data and the lack of a tradition of
estimating such elasticities at the regional level. Moreover, the calibration of these
models such that they reproduce recent history and simultaneously provide plausible
(that is, stable) projections is also problematic, especially because of the highly non-
linear character of the behavioural equations. Another problem is that SCGE models
214 J. Oosterhaven and J.P. Elhorst

are not easily understood, making it difficult for policymakers and other researchers
to assess the validity of the results.
Whether LUTI models can easily incorporate imperfect markets, and internal
and external economies or diseconomies of scale, is doubtful. The strength of most
LUTI models lies in their segmentation and detail, that is, they usually contain many
different zones, transport modes, household types, firm types, and so on. The benefit
of having such detail lies in the homogeneity of behaviour and the assumed stability
of relations at that level of detail. However, this detail is achieved at the cost of
mathematical and theoretical sophistication, which results in assumptions of perfect
competition, fixed ratios, linear relations and the absence of economies of scale.
The current, still young SCGE models have the opposite properties, namely a
lack of detail and sound empirical foundation, but a sophisticated theoretical
foundation and complex non-linear mathematics. The latter is precisely the reason
why SCGE models are able to model economies and diseconomies of scale, external
economies of spatial clusters of activity, continuous substitution between capital,
labour, energy and material inputs in the case of firms, and between different con-
sumption goods in the case of households. Moreover, monopolistic competition of
the Dixit-Stiglitz type allows for heterogeneous products implying variety, and
therefore allows for cross hauling of close substitutes between regions. Finally,
SCGE models lead to a direct estimation of the welfare effects, in particular of the
non-transport benefits of new infrastructure, which is absent in most LUTI models.
The modelling requirements that follow from our discussion are summarised
in Table 11.1. Whether a further piecemeal improvement of LUTI models is
preferable to the implementation of a theoretically superior but as yet untested
alternative is essentially a matter of preference and belief. DSC/ME&P (1998)
confess to the piecemeal improvement strategy. We would like to advocate the
more promising but also more risky development of empirically-based SCGE
modelling, at least when interregional as opposed to intra-urban problems are
examined, as is illustrated in the next section.

Table 11.1. Requirements for modelling the ETE triangle at the local level
Spatial economy Transportation Environment
sectors modes local, by destination zones
household types freight/passenger types global, no zones
land use by zones origin/destination zones
type of markets

11.5 An Application to Dutch Maglev Proposals

11.5.1 Introduction

Since 2001, the Dutch government has been considering two magnetic levitation
(Maglev) rail projects, each with two variants. (1) An inner ring or an outer ring
connecting the four largest cities (Amsterdam, The Hague, Rotterdam and Utrecht)
 Modelling the Economy, Transport and Environment Triangle 215

in the heavily urbanised economic core in the west of the Netherlands (the so-
called Randstad region). (2) A direct connection between Schiphol Airport in the
Randstad region and Groningen in the more peripheral, rural north, either running
along the south-east or along the north-west shore of the IJsselmeer lake in the
middle of the country (see Fig. 11.2, for the four trajectories).
The primary aim of a fast rail ring within the Randstad is to improve its
internal accessibility by public transport. In turn, this may reduce traffic congestion
and therefore also improve its internal accessibility by car. Both may strengthen
the Randstads competitive position in attracting internationally mobile economic
activities. In addition, compared to other regions in the Netherlands, the need for
space for new residential areas and industrial sites is much more pressing in the
Randstad. With new fast rail links, it might be possible to direct the urbanisation
process away from the remaining vulnerable agricultural and natural areas within
the Randstad.
The primary aim of a fast rail link between the Randstad and the north is to
stimulate the lagging northern economy. With a fast rail link, people would not
have to leave the north for jobs in the Randstad, instead they could commute to
them. This would increase demand for locally-produced goods, which would in
turn initiate a multiplier process leading to a higher level of regional production
and employment. A fast rail link would also lower the prices of services both
supplied and demanded by firms located in the north, possibly shifting the
competitive balance in favour of locations in the north in spite of the two-way
road argument (SACTRA, 1999, p.16).
Both effects are seen as a key to the further economic development of the
northern Netherlands.
The secondary objective of a fast rail link between the Randstad and the north
is to relieve the Randstads capacity constraints in transport, land and labour
markets, which result in losses of time, high transport costs, labour shortages, high
housing prices and high cost of living. As these costs are partly external to private
decision-makers, they do not fully deter the spatial concentration of people and
economic activities, as such costs are not taken into account in private location
decisions (Elhorst et al., 1999). Whether a fast rail connection to the north will
produce the desired relief in the Randstad remains to be seen, as the flow of industrial
activity away from the economic core so far has mainly been directed towards
adjacent regions and not towards the periphery.
The net present value of the investment costs of the inner and the outer Maglev
ring in the Randstad are estimated at EUR 6,835 and EUR 9,088 billion, respectively,
and that of the core-periphery Maglev along the north-west or the south-east of the
IJsselmeer at EUR 7,500 and EUR 6,666 billion, respectively. Each estimate includes
a mark-up for uncertainties and risk. It has been assumed that the construction of the
rail infrastructure would take place in the period 2010-2015 and that its use would
start after completion. Costs and benefits are calculated as net present values for 2010
(in prices of 2000), using a social discount rate of 4% over a 30-year-period (2010-
2040). Every project is evaluated in comparison with a spatially detailed baseline
scenario that is based on the moderate European Coordination macro-economic
scenario of the CPB (1997).
216 J. Oosterhaven and J.P. Elhorst

Fig. 11.2. Trajectories for the four proposed Maglev rail projects

The research concerning the four Maglev proposals was part of wider investiga-
tions considering different routes, different service levels (frequency, schedule,
 Modelling the Economy, Transport and Environment Triangle 217

waiting time), different price levels as well as different rail systems, such as
regular rail and high-speed rail services and their accompanying infrastructure
investments. In addition to direct transport effects and direct external (environ-
mental) effects, which have been studied in the usual fashion, these investigations
stand out as they also consider indirect effects. The estimated direct transport cost
and benefits include operating costs and revenues, and transport costs and time
benefits for both people and freight. The estimated indirect economic benefits
relate to the so-called forward programme or induced effects. These are defined as
the consequences of the reduction in transport cost for production, market and
location decisions of people and firms, and the subsequent interregional
redistribution effects with respect to income and employment of the population at
large.
In view of the theoretical considerations in the first part, the second part of this
chapter will discuss in particular the efforts to model the interaction between the
economy and the transport system, as well as the welfare effects of congestion and
environmental impacts. The welfare effects will be scaled by computing them as a
percentage of the investment costs.

11.5.2 Modelling the Interaction Between the Economy and the Transport
System

One of the main benefits of new infrastructure is the time benefit for people. We
are particularly interested in the time benefits by car that occur due to reduced
congestion as people substitute public transport for car transport. These time
benefits can be split into direct effects, as usually calculated under the assumption
of a fixed spatial distribution of population and employment, and indirect effects
that are due to the changes in these spatial distributions.
The direct benefits of reduced congestion are taken from NEI (2001a, 2001b)
and have been calculated using a more or less standard 4-stage transport model
(called LMS), which explains and predicts commuting flows, provided that the
marginal totals of the trip distribution matrices are given. For major transport
improvements, such as the Maglev proposals considered here, this approach is
unsatisfactory, as the spatial distribution of population and employment is not
exogenous to changes in the transport system.
To model these indirect economic effects, we additionally considered two rela-
tively independent main indirect effects and two derived interaction effects, as
shown in Fig. 11.3.
The first main effect relates to housing migration of the working population.
When travel times diminish, due to improvements in the transport network, people
may increase the quality of their housing accommodation and living environment
by increasing the length of their commuting journey without changing their
commuting journey time. This principle has been used to develop a commuter
location model that takes actual commuting behaviour as given and then projects
where people will choose to live given the location of their jobs.
218 J. Oosterhaven and J.P. Elhorst

Travel time
Commuter location model: reductions Monopolistic competition
housing migration type of spatial CGE model

Commuter location model:

labour migration
Labour Labour
supply demand
Migrants expenditures
input-output model

Fig. 11.3. Modelling scheme for calculating indirect economic effects in the Maglev application

Actual commuting behaviour is approximated by a commuting time distribution

matrix, which specifies commuter shares by mode (car, public transport and slow
transport), by time class (25 classes of 5 minutes) and by type of municipality (four
biggest cities, municipalities with a railway station and municipalities without a
railway station). The matrix is based on 70,886 observations, while potential
changes in modal shares have been modelled with the help of an almost ideal
demand system (AIDS, see Elhorst and Oosterhaven, 2006, for further details).
With this set-up, the commuter-location model transforms the spatial distribution
of employment into a spatial distribution of working population, both across 548
municipalities, dependent on the willingness to commute, and on municipality-by-
municipality travel-time matrices for the three modes of transport during peak
hours.
In addition, the transformation has been made dependent on the relative
attractiveness of each municipality as a residential area. Although the location
choice of each individual is free, the entire population is constrained by the total
housing supply in each municipality. For this reason, this variable is suitable to test
the fit of the model. It appeared that with this attractiveness variable the
working population living in the 12 NUTS-2 and the 40 NUTS-3 regions of the
Netherlands could be predicted with an average error of 7%. The amount of
available land, however, better approximates the spatial preferences of people, the
majority of whom prefer larger lots in areas that are greener (Elhorst et al., 1999;
VROM, 2000). For this reason, the amount of available land is used to simulate
longer term residential changes, assuming that the housing market has time to
adjust to the changes in the transport system and to follow these residential
preferences.
The second main effect relates to travel-cost induced employment changes. If
the transport costs of inputs and outputs change differentially in different locations,
the optimal location and production size of the firm is expected to change. New
economic geography (NEG) theory has pointed out that imperfect competition and
increasing returns to scale in transport-using sectors are reasons why traditional
location approaches may produce inaccurate estimates. There are two different
NEG types of models. In the footloose labour models pioneered by Krugman (see
 Modelling the Economy, Transport and Environment Triangle 219

Fujita et al., 1999), locations close to markets pay higher real wages than locations
away from the major markets. They consequently attract labour, which further
enlarges the market and causes a further concentration of economic activity. The
forces of concentration depend on the level of trade costs and the proportion of the
population that is mobile in response to wage differences.
In the vertically linked industries model developed by Venables (1996), the
process of cumulative causation is not driven by footloose labour but by cost and
demand linkages between industries. Firms in the downstream industry will have
lower costs if they locate close to upstream firms, they save trade costs on their
intermediate inputs, while market access considerations draw the upstream industry
to locations with relatively many downstream firms. In this study, a Venables-type
of NEG model, called RAEM, the Dutch acronym for a spatial computable general
equilibrium model, has been developed and calibrated (see Knaap and Ooster-
haven, 2000). In contrast to the footloose labour type of NEG model, the working
population in RAEM is assumed to be immobile and therefore cannot cause
agglomeration. The reason for abandoning the footloose labour model is that wages
in the Netherlands do not differ much between regions because they are determined
on a national sectoral scale by collective bargaining. Consequently, there is little
incentive to migrate between regions in order to receive a higher wage. Instead, the
wage level has been assumed equal throughout the country, while the commuter
location model is used to model the location choice of the working population.
In contrast to standard NEG models, it has been assumed that transport costs
relate to both freight and passengers (personal business travel and shopping travel
by the customers of the firm). Just as in standard NEG models, the transport cost
mark-up on f.o.b. prices for freight depends on distance, but for passengers it is
made dependent on travel time. Furthermore, it has been assumed that the travel
times related to personal business travel and shopping travel are different from
those in the commuter location model. Instead of the three modes of transport and
their corresponding travel times during peak hours in the commuter location
model, travel time in RAEM consists of the travel time by car and by public
transport during off-peak hours weighted by their modal shares in business/
shopping travel.
One of the basic problems of monopolistic competition models of the spatial
economy is the estimation of their parameters such that they reproduce recent history
and simultaneously provide plausible (in particular, stable) projections. This is a
difficult issue because of the non-linear character of the behavioural equations. To
reach maximum accuracy, 14 sectors and 548 municipalities have been identified.
Cobb-Douglas production and consumption expenditure shares have been taken from
the (coincidentally also) 14 bi-regional input-output tables of the twelve Dutch
provinces and the greater Amsterdam and greater Rotterdam regions (RUG/CBS,
1999, Eding et al., 1999). The 14 crucial elasticities of substitution, which inter alia
determine the extent of market competition, and the 4 distance parameters, have been
estimated econometrically. This is done by minimising the sum of squared residuals
of predicted and observed trade flows taken from the bi-regional input-output tables
(i.e. 588 flows of exports to, imports from and intra-regional transactions of the 14
regions, for the 14 sectors studied). The R2 of regressing the observed (log) flows of
220 J. Oosterhaven and J.P. Elhorst

trade on the (log) flows predicted by the model (without intercept) is 0.51. Although
there is room for improvement, 2 any change in the model would lead to a
compensating change in the parameters then to be re-estimated, which may have not
much influence on the outcomes of the model.
The first derived effect is the subsequent reaction of the working population to
the predicted change in production and labour demand, and is labelled labour
migration. Note that the commuter location model predicts housing migration as a
result of reduced travel times starting with a given level of employment in each
municipality, whereas this run of the commuter location model measures labour
migration as a result of changes in employment opportunities. Total migration is
the sum of housing migration and labour migration.
The second derived effect relates to consumption-induced employment changes
caused by the total migration of workers. Due to a lack of data, this effect is not
determined at the level of the 548 municipalities, as were the three previous effects,
but rather at the level of the 40 Dutch NUTS-3 regions, using a 40x40 employment
multiplier matrix of working migrants (see Oosterhaven, 2005, for details). This
matrix is again based on the 14 bi-regional input-output tables. The total labour
demand effect is the sum of the travel cost-induced and consumption-induced
employment effects.
The empirical results may be summarised as follows (see Oosterhaven and
Elhorst, 2003, for details). The primary aim of the urban-conglomeration proposals is
to strengthen the (international) competitive position of the heavily urbanised
Randstad. The results in this respect indicate that, due to the redistribution of labour
demand within the Netherlands, employment in the Randstad will increase by 2,400
jobs with the inner variant and by 2,750 jobs with the outer variant.3 When looking at
other regions and at intra-regional changes within the Randstad, it has been found
that the urban rail link would strengthen the process of suburbanisation. Within the
four big agglomerations, the central municipalities of Amsterdam, Rotterdam, The
Hague and Utrecht would experience a population decrease, whereas surrounding
municipalities close to a Maglev station would experience a population increase. This
suburbanisation process would also extend to the regions adjacent to the Randstad.
These regions would experience a decrease in the number of jobs, whereas their
populations would increase. By contrast, the more peripheral regions such as the
north of the Netherlands would hardly benefit from a fast rail link within the
Randstad, neither in terms of employment nor in terms of population.
The primary aim of the core-periphery proposals is to stimulate the peripheral
north. The results in this respect indicate that employment in the north would
increase by 3,950 jobs with the south-east variant and by 8,050 jobs with the north-
west variant. The working population would increase by 4,000 people in the south-
east variant and by 9,400 people in the north-west variant. In sum, the north would

2
RAEM is currently being further developed together with TNO Inro (Delft) and the Free
University Amsterdam.
3
From an international viewpoint, employment in the Randstad would further increase by about
1,300-1,420 jobs (BCI, 2001).
 Modelling the Economy, Transport and Environment Triangle 221

indeed catch up. Furthermore, it can be concluded that the north-west variant would
be about twice as effective in stimulating the north, than the south-east variant,
whereas the core-periphery projects would be far more effective in creating jobs in
the north than the intra-core projects.
The secondary aim of the core-periphery proposals is to relieve the (land, traffic
and labour) pressures in the Randstad. The results indicate that in the south-east
variant 7,045 people would leave the Randstad, whereas in the north-west variant the
working population in the Randstad would increase by 100 people. This implies that,
in view of this secondary aim, the south-east variant would be far more effective than
the north-west variant, whereas both intra-core projects would be counter-productive
in this respect.

11.5.3 A Welfare Evaluation of External Effects

Although the interregional redistribution of economic activities described above

provides useful information for policy purposes, it falls short of a welfare assessment
of the new infrastructure. Here, the results of a welfare evaluation of most of the
external effects are given. They are recorded in Table 11.2. The first two lines
present direct and indirect transport-upon-transport externalities. The last four lines
represent final environmental externalities.
The estimates of the direct benefits of reduced congestion are taken from NEI
(2001a, 2001b). The outcomes are derived from a large 4-stage transport model of
the Netherlands (LMS), which explains and predicts commuting flows, provided that
the marginal totals of the trip distribution matrix are given. Remarkably, the core-
periphery variants do not lead to any reduction of direct congestion, although it was
found that about 6% of the car commuters between the cities with a train station
along the north-west and south-west variant would switch to public transport. For the
Netherlands as a whole, it involves about 8,000 commuters per day. Although 6% is
relatively high, the reduction mainly occurs outside the urban core where congestion
is not a major problem.
In contrast, the congestion effects found for urban-conglomeration proposals
show that these fully meet the first objective of reducing congestion; with the inner
ring, congestion cost declines by 36% of the investment costs. The percentage found
for the inner ring is greater than that for the outer ring for two reasons. First, the inner
ring is cheaper and shorter (140 km against 170 km) as it stops at the edges of
Rotterdam and Utrecht. Second, the inner ring attracts more passengers who leave
their cars because of the relatively large time benefits, whereas the outer ring
connecting city centres attracts more new passengers and passengers who already
use other forms of public transport.
The determination of the indirect benefits of reduced congestion is based on
Elhorst et al. (1999). When the number of people and jobs decrease in the urban core
and increase in the peripheral regions, so will the amount of traffic. When the amount
of traffic decreases in the urban core and increases in the peripheral region, absolute
congestion costs decrease considerably in the core region and increase only slightly
in the peripheral regions. From Table 11.2, it is clear that all projects lead to a more
222 J. Oosterhaven and J.P. Elhorst

balanced spread of traffic over the country but that this effect is much larger for the
core-periphery projects, especially for the south-east variant. This is because in this
variant many more people leave the urban core.

Table 11.2. Welfare impacts of the external effects in percentage of investment costs
Randstad Randstad Schiphol- Schiphol-
Maglev, Maglev, Groningen, Groningen,
inner ring outer ring north-west south-east
Direct congestion benefits 36.0 16.5 0 0
Indirect congestion benefits 0.3 0.2 0.9 3.1
CO2 and NOX emission effects 1.6 0.4 -2.5 -2.5
Net open landscape benefits 0.4 0.3 1.1 3.8
Noise pollution cost -0.7 -9.9 -5.1 -6.7
Qualitative estimate of
remaining non-valued -/+ -/+ -- --
environmental effects

The final environmental externalities of a new rail link relate to the natural
environment, carbon dioxide and nitrogen oxide emissions, noise, external safety,
and land-use effects. Three different effects must be considered. First, the
construction and service of a new rail link causes direct environmental cost through
increased emissions and negative landscape impacts. Second, by contrast, the sub-
stitution of new public transport for old car transport causes environmental benefits
through reduced emissions. Third, the relocation of employment and population
may indirectly cause environmental costs or benefits in different regions, which
may lead to a net national welfare effect. Although many of these effects are
quantified, only the open landscape impacts, the CO2 and NOx emissions and the
noise impacts could be valued in monetary units.
The welfare effects of changes in CO2 and NOx emissions are taken from NEI
(2001a, 2001b, see also Wee et al., 2003). Remarkably, they are positive for the
urban-conglomeration projects and negative for the core-periphery projects. The
explanation is that the urban-conglomeration projects, especially the inner variant,
encourage far more people to leave their cars than the core-periphery projects, as
discussed above. In the case of the intra-core projects, this more than compensates
for the high energy use of the Maglev system.
Net open landscape benefits occur because of the relocation of people and jobs.
The restrictive spatial planning in the Netherlands aims at preserving open agri-
cultural and natural landscapes. These are most scarce in the urbanised western
part of the country and relatively abundant in the least urbanised northern part of
the Netherlands, which leads to considerable price differences for technically
comparable housing (Creusen, 1999). Especially in the core-periphery variants, the
relocation of housing and jobs results in less pressure on open landscapes in the
Randstad and more pressure in the north, which leads to a net increase in welfare.
Housing price differentials are used to estimate the relative valuation of open
landscapes in the different parts of the country.
 Modelling the Economy, Transport and Environment Triangle 223

Second, public investment costs for developing new residential areas and
construction costs in densely populated regions tend to be higher than in sparsely
populated regions. In addition to this, they also tend to be higher in urbanised parts
within these types of regions than in non-urbanised parts (Sievers and Keers,
1992). The total estimate of the benefits due to imperfections in the housing market
is derived from Elhorst et al. (1999). The results regarding the open landscape
benefits are comparable to those concerning the indirect benefits of reduced
congestion because they are based on the same interregional relocation figures
reported in section 11.5.2.
The welfare impact of noise pollution depends on factors such as the driving
speed of the trains, the number of train passengers and the number of people living
along the new rail tracks. It also depends on whether the new railway line is
combined with existing road or railway infrastructures. In the latter case,
annoyance hardly increases and may even remain unchanged if the noise emission
of the Maglev falls (more than 3dB) below that of road traffic (for example, if the
Maglev reduces speed when approaching a stop). The annoyance effect of the inner
variant of the urban-conglomeration project is relatively small (Gotink, 2003) as it
is almost completely combined with the existing road infrastructure. By contrast,
the annoyance effect of the outer variant of the urban-conglomeration project is ten
times higher. This is striking because it is almost completely combined with the
existing railway infrastructure. Apparently, a combination with continuous noise-
producing road infrastructure is much less disturbing than a combination with
infrequent noise-producing railway infrastructure. The annoyance effect of noise
pollution in the core-periphery projects lies midway between the two urban-
conglomeration projects because these projects are partly combined with existing
road and partly with existing railway infrastructure.
First attempts to evaluate the direct external effects on external safety and the
natural environment indicate that these effects are relatively small. The -/+ sign
in the urban-conglomeration projects is used to indicate that the non-valued
environmental effects are negative with respect to the built and natural environ-
ment and are positive with respect to safety, such that the overall effect is un-
certain.

11.6 Conclusion

This chapter has discussed modelling the ETE triangle from the perspective of the
welfare consequences of local policy measures. It has been argued that economy-
transportation interaction needs to be modelled using sectors, household types,
transport modes and spatial zones. For urban agglomerations, using a land-use/
transportation interaction type of modelling should be evaluated against using a
spatial computable general equilibrium type of model. For interregional applica-
tions, a spatial equilibrium approach is superior because it enables the incorpora-
tion of economies of scale, substitution between inputs and heterogeneity of out-
puts. Furthermore, we conclude that  at the local and regional level  environ-
224 J. Oosterhaven and J.P. Elhorst

mental externalities may be modelled without taking account of feedback effects

on the economy and the transport system.
The modelling philosophy is applied to four Dutch magnetic levitation rail
proposals. When concentrating on the welfare effects of congestion changes and
the environmental impacts, the greatest strength of the urban-conglomeration
projects is their reduction of congestion, whose valuation is up to 36% of the
investment costs when connecting the edges of cities. As this type of connection
also attracts more passengers who leave their cars, a net decrease in carbon dioxide
and nitrogen oxide emissions is possible. Noise pollution can be kept within
bounds if the new railway line is combined with the existing road infrastructure.
The greatest strength of the core-periphery projects is their reduction of congestion
and pressure on open landscapes in the urban core due to the differential growth of
employment and population from relatively overcrowded to relatively rural
regions, whose combined valuation accounts for up to 7% of the investments costs
if its route is carefully chosen.

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12 A Systems Approach to Modelling the
Regional Economic Effects of Road Pricing

Bjarne Madsen1, Chris Jensen-Butler2, Jacob Kronbak3, Steen Leleur4

1
The Centre for Regional and Tourism Research, Denmark
2
Department of Economics, University of St. Andrews, Scotland
3
Department of Maritime Research and Innovation, University of Southern Denmark
4
Centre for Traffic and Transport, Technical University of Denmark

Abstract
In Denmark, there has been a substantial debate in recent years concerning the
consequences of introducing road pricing. This chapter examines some of the
regional economic consequences of the full implementation of a GIS-based road
pricing system for all roads in Denmark. A Danish model system (MERGE)
consisting of an Interregional General Equilibrium model, LINE, a national
transport model (LTM model) and an environmental sub-model (TIC-MAP) are
presented. LINE is used to make an initial analysis of the primary regional
economic effects. In the first step, price changes as a result of road pricing are
calculated. In the second step, changes in regional competitiveness affecting
demand are calculated. In the final step, revenue from road pricing is re-entered in
order to ensure institutional balance and the effects on production, income and
employment are calculated.

12.1 Introduction

As road traffic grows rapidly in Europe, the problems which it creates become
increasingly serious. Congestion is a major problem in many European countries,
largely, though certainly not exclusively, an urban phenomenon. The costs of
congestion are considerable, perhaps in the magnitude of 2% of GDP (Gomez-
Ibaez 1997, Mayeres & Van Dender 2001). Environmental damage, both local
and global, arising from transport-related emissions also represents a substantial
and increasing cost, with potentially extremely costly though uncertain conse-
quences. Both problems involve externalities and raise issues concerning the extent
to which external costs can and should be internalised (Rothengatter 2000). A
further problem is the cost of transport infrastructure provision, which is consider-
able, whilst its net benefits are difficult to calculate in the presence of externalities
(Jansson 2000a). These issues are of course linked, as taxation of transport can
both reduce some of the negative externalities, creating a welfare improvement,

After this chapter was written Chris Jensen-Butler has died.

230 Bjarne Madsen et al.

and it can also provide revenue for the construction of more transport infrastructure
or a subsidy for public transport. Furthermore, revenues from taxation on transport
can be used to reduce taxation on earned income, giving rise to a possible double
dividend effect (Pearce 1991). Parry & Bento (2001) have recently claimed that
recycling tax revenues into transport sector subsidy is markedly less efficient than
using the tax revenues to reduce income tax.
There is growing interest in road pricing as a policy instrument directed at the
solution of congestion problems, seen as one of a set of alternative measures
(Button 1998, De Borger et al. 2001a) as well as being a measure which simul-
taneously addresses other problems. Road pricing can also be used to internalise
environmental damage costs (Johansson-Stenman & Sterner 1998) and there are a
number of important issues linking congestion pricing to road and transport
infrastructure investment (McDonald 1995, Hau 1998).
Road pricing raises a range of questions, both theoretical and practical. The
welfare implications of road pricing and the potential distortionary effects of
taxation are the subject of discussion (see, for example, Arnott et al. 1994, Jansson
2000b, Hau 1998). There are four components of welfare in the transport market:
consumer and producer surplus, tax revenues and external costs. Unlike many
other markets, time costs must be taken into account when dealing with consumer
and producer surpluses. In addition, different surpluses and costs fall typically on
different groups. Furthermore, different transport sub-markets are interdependent.
For example, reduced congestion through road pricing will increase consumer
surplus for users of road-based public transport. Alternatively, improvement of
rapid transit and metro systems will confer benefits on car users, through reduced
congestion. The welfare gains of road pricing (Proost & Van Dender 1998) seem to
be superior to most other forms of regulation of congestion. However, efficiency
issues are inextricably linked to the difficult problem of evaluation of social
marginal costs. Practical problems are related to the technology to be employed in
managing the system, particularly at the user interface, and to the problem of
traffic diversion (McDonald 1995). These problems are, in turn, closely related to
the recurrent theme of political and social acceptability (Jones 1998, Rietveld &
Verhoef 1998, Larsen & Ostmoe 2001).
The European Union and many individual countries are moving towards road
pricing as a key element in future transport policy (De Borger et al. 2001b). In
Germany, road pricing for lorries on motorways using a GPS-based system was
planned to be implemented in 2003, but it was delayed due to start-up problems of
a technical nature. It is to be expected that a number of European countries will
follow and that it will be expanded to cover all types of roads and possibly in the
longer term, all types of vehicles. The European PROGRESS project has estab-
lished experiments and demonstrations in road pricing systems in eight different
European cities, including Copenhagen (Nielsen 2003, Herslund 2003 on the
Danish AKTA sub-project). This increased political interest in road pricing is
fuelling research interest in the field. A number of studies have attempted to assess
the effects of road pricing on congestion, the environment, tax revenues and
welfare in concrete geographical contexts (see De Borger & Proost 2001 for a
number of case studies). The studies are usually ex ante, as only a few projects
 A Systems Approach to Modelling Regional Economic Effects 231

have actually been implemented and these are limited in extent and impact.
Amongst others, Proost & Van Dender (2001b) have developed an urban model
based upon a transport market equilibrium derived from the maximisation of a
social welfare function which includes the four components named above, and
which permits assessment of the effects of different policies on transport supply
and demand.
Most of these studies treat transport as an independent commodity, while in
reality it is derived demand. The spatial configuration of the economy and the
development of spatial patterns of economic activity play a substantial role in the
pattern and growth of transport activity. This means that road pricing will have
effects both on the level and distribution of economic activity and, in turn, patterns
of regional economic development will affect both the need for, and revenues
from, road pricing. There are both efficiency and distributional issues when
examining the relationship between road pricing and regional economic growth.
The relationship between transport infrastructure and regional economic
development has been examined in a number of studies (see, for example, Rietveld
& Nijkamp 2000, Jensen-Butler & Madsen 1999). Equity issues, directly related to
the distribution of economic activity and population in space, have been the subject
of some studies (for example, Richardson & Bae 1998). However, there have been
few attempts (Madsen & Jensen-Butler 2001 2002c) to include road pricing within
a regional or interregional economic model and even fewer in the context of local
economic modelling. Eliasson & Mattsson (2001) present one of the few attempts
to relate road pricing to location and transport flows, using a simulation model for
a city. They conclude that impacts on location seem to be modest, compared with
impacts on traffic. In an empirical analysis using an interregional economic model
and Danish data, Jensen-Butler & Madsen (1996) find evidence to suggest that
environmental gains from distance-related taxation of transport far outweigh
income loss.
The present paper is a contribution to the study of the regional economic
effects of the introduction of road pricing, using Denmark as an empirical example.
The two-stage approach adopted is to model the effects of road pricing on regional
economies. The paper covers only the first stage, where a local economic model is
used to forecast changes in commodity prices and household income, together with
the effects on demand, as a consequence of the introduction of road pricing. At this
stage of the modelling process, it is assumed that the underlying behavioural
relationships are constant. The second stage, which is not dealt with in the present
paper, is to incorporate changes in behavioural relations, transforming the
modelling approach in the first stage to a Computable Interregional General
Equilibrium model, permitting a more complete analysis of changes in prices on
economic activity in a regional system.
232 Bjarne Madsen et al.

12.2 A Systems Approach to Regional and Sub-Regional

Economic Modelling

At different levels, international, national and regional, complex problems of

analysis and planning of the relationships between specific sectors and the broader
economy are emerging. One example of this complexity is the relationship between
the transport sector, the broader economy and the environment. Another example is
the relationship between agriculture, the economy and the environment. There are
two fundamental issues to be examined when considering the nature of the
relationship between a specific sector and the broader economy: i) data and
accounting principles and ii) modelling approaches.

12.2.1 Data and Accounting Principles

Statistics and accounting aim to provide a picture of the complex system. At this
level, either the complex system can be represented through a system of national/
regional accounts together with satellite accounts for specific sectors, or it can be
represented by sector-specific statistics which have been extended to include the
broader economy. Principles for setting up national/regional accounts together with
satellite accounts for specific sectors are provided by the United Nations (1993)
and the European Union (Eurostat 1996). Similar activities are to be found at the
sectoral level. The main advantage of the economic system approach is uniformity
in statistical framework and, therefore, they are comparable and consistent with
constraints. However, the basic units of accounting are value, rather than physical
units, such as transport volumes and quantities of emissions. Description of
physical units, where this appears, is highly aggregated. The main advantage of
sector-specific approach is the level of detail with respect to physical components,
whereas the value-based information in these accounts is more ad hoc, less
consistent and highly aggregated.
At the regional and sub-regional levels, the statistical material available is
much less developed than is the case for the national level. The statistics relating to
the broader economy are based upon local social accounting matrices (SAMs) or
local national accounts. Satellite accounts do not exist at this spatial level, except
for tourism, where they are being developed at the present time. Sector-based
statistics exist in the form of detailed accounts for agriculture and in the form of ad
hoc data bases on transport flows in the case of the transport sector.

12.2.2 Modelling Principles

In terms of modelling, both in relation to the broader economy and individual

sectors, several trends seem to be emerging. First, there is a growing interest in the
interaction between the broader economy and specific sectors seen from the
perspective of the broader economy. Second, modelling the interactions between
 A Systems Approach to Modelling Regional Economic Effects 233

specific sectors, such as agriculture and transport, and the broader economy, seen
from the sectoral perspective, is developing. Broadly speaking, there are therefore
two alternative modelling approaches. Economic system modelling involves
modelling the economy as the core question, whilst sectors are treated as additions,
usually as a front end or back end sub-model, and sometimes as an integrated
element in the core model. In Denmark, examples are provided by models such as
ADAM (Dam 1995) and AAGE (Frandsen et al. 1995) and in relation to transport
see Fosgerau & Kveiborg (2003). Sector-specific modelling on the other hand has
as a point of departure, a partial or free-standing model for the sector in question.
This model is then usually extended to capture interactions with the broader
economy. In Denmark, examples are provided by (Stryg 1992, Hansen 2001 and
Madsen 1999).
At the regional and sub-regional levels, the same two issues arise but in an
even more complex form.

Stand-Alone Approaches
In relation to modelling activity, a number of analyses of the broader economy
have been undertaken. Starting with straightforward single region Keynesian input-
output models (Groes 1982, Madsen 1992a), interregional input-output models
were developed (Holm 1984, Madsen 1992b) followed by interregional General
Equilibrium models (Madsen et al. 2001). Regional sector-specific models have
been mainly concentrated in the agricultural and transport sectors. For agriculture,
the approaches adopted have included input-output models (Pedersen 1986), linear
programming models (Stryg et al. 1991) and econometric models (Jensen et al.
2001, Hansen 2001).
For the transport sector, a number of models have been developed (for an
overview see: Madsen 1999). There is a national transport model as well as
transport models which have been developed to analyse specific infrastructure
investment projects, for example, the Femer Belt Link (Trafikministeriet 1999,
Jensen-Butler & Madsen 1999) and the resund link (resundskonsortiet 1997)
and upgrading or extending of existing rail networks, for example the Ringsted
model (Nielsen 1998).
A traditional approach and fundamentally stand-alone approach involves the
identification of changes in transport flows and changes in direct and indirect
(time) costs for travellers. This information is then used to undertake a cost-benefit
analysis of the changes in the regulation of the transport system, involving an
evaluation of changes in direct costs, time savings and changes in other costs, such
as accidents and environmental costs. Normally, the diffusion of changes in the
costs of the transport sector to commodity prices and incomes in other sectors is
not dealt with. This means that the traditional cost-benefit approach cannot be used
for analysis of distributional questions in relation to regions, factors, sectors and
household types. In addition, as behavioural reactions from producers and con-
sumers are not included explicitly in the cost-benefit approach, determination of
the value of time for different categories of traveller is made exogenously rather
than endogenously.
234 Bjarne Madsen et al.

Different Approaches to Model Integration

Treating the general economy and the specific sector as two independent compo-
nents is theoretically less than satisfactory, as development of the individual sector
is partially dependent upon the general economic development and vice-versa.
Therefore, there is a need to develop a more integrated approach to the problem.
Four avenues in the development of integrated models at the regional and sub-
regional levels are identifiable.
Extension of sector-specific models
Extension of regional and sub-regional models
Loosely coupled models (framework approach)
Fully integrated models

The first can be illustrated by the extension of models specific to the transport
sector with regional and macroeconomic elements. An important representative of
this approach is use of the established growth factor model in forecasting total
traffic flows. For passenger transport, attempts have been made to develop
strategic models which include more developed modelling of interaction between
the transport system and the broader regional economy including migration and
commuting flows (Husted & Christensen 2001).
The second avenue is represented by the extension of regional and sub-
regional models of economic activity to include specific sectors, again typically
transport. In the case of the Great Belt Link (Jensen-Butler & Madsen 1996), the
analysis included not only the effects of the establishment of the Great Belt link on
regional economic activity (employment and GDP by region), but also an analysis
of the consequences for structural change in interregional trade patterns. In the case
of the Femer Belt link (Jensen-Butler & Madsen 1999), a simple transport model
was incorporated into the analysis to estimate the shifts in traffic flows by transport
corridor in order to estimate the redistribution of regional economic activity.
The third avenue is based upon a different modelling strategy, where eco-
nomic models and sector models are linked together in a loosely coupled frame-
work, consisting of separate and independent models linked together inside a
general framework. Loose coupling implies that the models are independent but
that output from one model constitutes a data input to another. This strategy has
developed most strongly in the agricultural sector. In an initial attempt to evaluate
the regional economic consequences of restructuring the European Unions agri-
cultural policy in 1991 (the McSharry proposal), the results emerging from an
agricultural sector model (Stryg et al. 1992), consisting of changes in gross value
added (GVA), other taxes linked to production, employment together with esti-
mates of impacts on the food industry, all by region, were taken as inputs to the
single region model EMIL (Madsen 1991a).
This contrasts with an integrated model, where the different sub-models are
solved simultaneously, constituting a fourth avenue. Here, one single model user
has an overview of the entire system.
 A Systems Approach to Modelling Regional Economic Effects 235

12.2.3 Optimal Model Structure

The optimal model structure depends on both the nature of the object of analysis
and the analytical capacity of the model users. If the focus is on a specific sector,
then the choice of a specific sector model (a partial model) should be made. Here,
it is assumed that the key parameters required for the operation of the model are
supplied unambiguously (for example, the inputs of a growth factor model to a
transport model). Alternatively, if it is assumed that there are strong interactions
between the specific sector and the general economy, then it is necessary to
integrate the models. The two basic forms of integration can, as mentioned above,
be described as loosely coupled models or fully integrated models. In the case of
transport and agriculture, loose coupling is more appropriate here, whilst in the
case of the public sector and of tourism an integrated approach is more relevant.
This is because the transport and agriculture sectors are complex, requiring a
special modelling approach, which makes it necessary to build up specific models
for each of the two sectors reflecting the complexity of the technical relations
involved. Analysis of tourism and the public sector involves lower levels of
technical specification, being more directly based on the conventional theory and
models of consumption and production.
An important requirement for the loose coupling of models is that they rest on
the same or a very similar theoretical foundation. In addition, there has to be
consistency in exogenously given assumptions and parameters. Also, practical
considerations related to the fact that single research groups only cover specific
areas and model sets promotes the use of loose coupling.

12.2.4 A Loosely Coupled Model for Transport and Agriculture

On the basis of the above discussion, a combination of a fully integrated and a

loosely coupled modelling system has been developed and used in a number of
studies of the interaction between developments in specific sectors and regional
economies in Denmark, also including interactions between international, national
and local levels. The model system is presented in Fig. 12.1. The horizontal
dimension shows in the centre general (equilibrium) models for the entire economy
whilst to the right and left at this level the specific sectoral models (for agriculture
and transport) are shown, which are loosely coupled together with the general
models. Tourism and the public sector are, however, fully integrated models to be
found in the centre of the figure.
The vertical dimension shows the different levels of spatial resolution from the
international level to the sub-municipality level. Each box represents an independ-
ent model and the arrows between the boxes represent flows of data (results)
between the models.
As can be seen from the figure, the total model system has been developed on
a top-down principle, starting with a model of the international economy, GTAP,
(Bach et al. 2000) to estimate the equilibrium values of central variables in the
international economy, for example gross output, disposable income, aggregate
236 Bjarne Madsen et al.

demand, imports and exports. On this basis, the model for the national economy,
AAGE, (Frandsen et al. 1995) determines equilibrium values for the Danish
economy, including national values for the agricultural sector. The links between
the economic model and the agricultural model and between the international,
national and local level models are documented in Hasler et al. (2002). The link
between the economic model and the transport model is documented in Kronbak &
Leleur (2003) and in this paper.

Fig. 12.1. Linking Danish models of different types and levels

 A Systems Approach to Modelling Regional Economic Effects 237

The economic model, LINE, is linked to the models for the transport sector by an
interaction model, MERGE (Kronbak 2002). MERGE not only links the models in
the general economic sector with the models in the transport sector, but also links
the models within the transport sector together. The models used in the transport
sector are the environmental impact model TicMap (Wass-Nielsen & Hviid Steen
2001), the transport model TSM and the assessment model COSIMA (Leleur
2002).

12.3 The Linking Procedures

The linking procedures are described in a bottom-up way where first the linking of
models within the transport sector is dealt with and second the linking of the
transport and the regional economic models. By giving some detailed information
about the individual model elements, the potential of comprehensive modelling on
the basis of the suggested systems approach also for other types of examination
than road pricing is more easily apprehended.

12.3.1 Linking the Models Within the Transport Sector

The models within the transport sector are connected using a geographical
information system as linkage. This GIS-based linkage has been named MERGE
(Model for Exchanging Regionalised Geographic Entities).

MERGE
The keyword in MERGE is model integration. Within the transport sector,
MERGE has to link the transport, environmental impact and assessment models
together into a decision-making tool by making procedures for transferring input
and output data between the models. Besides that, MERGE also has to make the
linkage between the models in the transport sector and the interregional economic
model (LINE).
For each type of model within the transport sector, an existing model has been
chosen for the decision-making tool:
The Transport Sketch Model, TSM, developed at the Centre for Traffic and
Transport, Technical University of Denmark.
The environmental and economic impact assessment tool TicMap, developed
at the Centre for Traffic and Transport, Technical University of Denmark.
The Composite Model for Assessment (COSIMA) developed at the Centre for
Traffic and Transport, Technical University of Denmark.

The integration of these models has addressed some questions that are not only
relevant for the specific models in question but it also has a more general applica-
tion. This means that some of the procedures developed in MERGE are quite uni-
versal for loosely coupled model integration. As for most loosely coupled models,
238 Bjarne Madsen et al.

the starting point for MERGE has been a more general approach to model integra-
tion (including data transfer) and from there on to focus on the specific models.
This approach has had the advantage that if/when other (or better) models be-
come available, they can be utilised with less effort than if MERGE was specifical-
ly designed for the models mentioned in a fully integrated model. This can be
referred to as model modularity and the principle is that other models can be snap-
ped on to MERGE and used in coherence with the total modelling framework.
Besides the modularity of MERGE, another important factor in the loosely
coupled model integration has been consistency. One of the objectives of MERGE
has been to provide data exchange between the transport, impact and assessment
models (and also to the regional economic model). All these types of models rely
to a certain extent on spatially distributed data but not necessarily on data with the
same spatial distribution or level of aggregation. When integrating the models into
a decision support system, it is important to ensure a common consistent basis so
that results and conditions are identical or at least consistent to some extent. It is
especially important to be able to reproduce results and datasets.
An example is that if a model requires 50 zones, MERGE has to be able to
generate this number of zones, preferably from any base dataset, under a number of
different conditions, e.g. equal number of inhabitants within the zone; equal area of
the zones, etc. At the same time, it has to be possible to keep track of where data
originated from and to give some estimates of the accuracy of not only the original
data, but also of the generated data. This is commonly known as metadata (or data
on data).
Generation of new datasets from an existing dataset is where GIS has proven
to be a very powerful tool. Results and input data all have some kind of spatial
attributes, e.g. population data can be on a municipal or a parish level. It is not
necessary that all the integrated models actually use the spatial reference, but the
spatial reference can be used in MERGE to generate and exchange datasets.

Transport Sketch Model (TSM)

The TSM is a more or less traditional 4-step traffic model. Some of the advantages
of this model are that it is already fully integrated in a GIS (ArcInfo) and since it is
conceptually simple, it runs fast even on large networks. Although national and
regional individual road transport are at the focus of the model, it also provides an
assessment of transport by rail, bus and ferry in Denmark.

Traffic Impact and Cost Mapping (TicMap)

The TicMap model (Wass-Nielsen & Hviid Steen 2001) is a tool for traffic impact
calculation. The basis of TicMap is four GIS-based impact models for:
1. Accidents
2. Noise
3. Emission
4. Severance and perceived risk

Each of these impact models is based on Danish impact assessment models and can
be run individually from within the geographical information system (MapInfo).
 A Systems Approach to Modelling Regional Economic Effects 239

The results from the impact models are used to make an assessment of the
impacts on each road segment in the network. For a closer description of the
impact models, see for example Wass-Nielsen & Hviid Steen (2001), Clausen et al.
(1991) or Leleur (2000).

Composite Model for Assessment (COSIMA)

The COSIMA model has been worked out to provide a more comprehensive
assessment of transport initiatives than made possible by applying a conventional
cost-benefit analysis (CBA). Thereby, COSIMA deals with a mix of CBA effects
and non-CBA effects. Typically, the non-CBA effects when seen from a
modelling viewpoint are more difficult to handle compared to the CBA effects
where handbook approaches (pricing and procedures) are available for many
transport planning problems. In brief, one can refer to the CBA effects as effects
where pricing manuals and procedures exist and to the non-CBA effects as multi-
criteria analysis (MCA) effects as this type of analysis, stemming from operations
research, becomes relevant for the extension of the conventional CBA. The idea of
COSIMA can be described briefly by the following seven steps as formulated for
the assessment of a number of alternative by-pass projects for a Danish town
currently in need of relieving the through traffic (Leleur 2001).

1. The first task is to determine the CBA effects being relevant for the concrete
appraisal study. In the by-pass example, following the Danish Road
Directorates standard model, the effects are: travelling time, vehicle operating
costs, accidents, maintenance costs, noise, air pollution and severance &
perceived risk. The investment enters the analysis denominated as the
construction costs.
2. The next task is to determine the MCA effects of relevance. These may be
measured either in some type of quantitative unit, an example could be
changes in strategic mobility see Kronbak (1998), or by judgement using a +5,
.., 0, .., -5 scale. Three possible MCA effects of relevance for many Danish
road projects are: network accessibility, urban planning and landscape.
3. With CBA and MCA effects laid down, the so-called anchoring part of the
model formulation can take place. This means determining the importance of
the MCA effects against the CBA effects and in-between each other. Several
MCA techniques are relevant here: direct weights, pairwise comparison, swing
weights, etc., see Leleur (2000). Criteria importance is denominated by
weights on the individual criteria adding up to 100%.
4. At this stage, a base case scenario is modelled and presented to the decision-
makers together with the assumed interesting assessment questions; these
concern issues that may have a principal influence on the decisions to be made
from the study. The involvement of the decision-makers may lead to revision
of both the kind of MCA impacts included and their weights in the base case
scenario. Part of this exchange with decision-makers is also to formulate
suitable additional scenarios.
5. Afterwards, COSIMA is run for all the scenarios and the assessment questions
are scrutinised and related to possible sources of uncertainty. This determin-
240 Bjarne Madsen et al.

istic run of the model and the identification of varying levels of inform-
ation give intermediate results which are examined in the following model step
as concerns their feasibility risks which indicate that a result in the deter-
ministic run may be associated with such uncertainty that precaution is
needed.
6. Next, the so-called stochastic run of COSIMA is undertaken. This in fact is
a Monte Carlo simulation where parameters and data have been replaced with
suitable probability distributions that can represent the actual information
level. In the by-pass example used as background for this overview of steps in
COSIMA, use is made of both distributions arrived at empirically by data
fitting and distributions set on the basis of reasoning. One could refer to those
as objective and subjective probability assessments.
7. At this stage, the assessment questions are addressed on the basis of the model
results and the assumptions in the background and a second exchange with the
decision-makers is carried out. With the layout of the COSIMA model as a
transparent tool box, two principal possibilities are now available. The study
may simply end here if the decision-makers are confident about the model
outcome, or the decision-makers may want to feed back into the process and
re-address some of the previous model settings to shed light on some issues.

It should be noted that COSIMA is more or less tailored dependent on the concrete
application. As should appear from the overview of methodological steps above,
features for applying both scenarios and risk examinations are available. When
incorporating COSIMA in the MERGE model software, the way the other three
model categories are set for the actual planning problem will influence the
possibilities for the assessment analyses to be carried out in the COSIMA module.

12.3.2 Linking the Transport and Regional Economic Models

The role of transport costs and the transport system are integrated into LINE,
though the integration is still incomplete. In LINE, supply and demand for
transport are modelled in a full and consistent manner, while transport in physical
terms has not yet been modelled. Transport costs and transport system changes
feed into the present version of LINE in an ad hoc way and the effects of changes
in the local and regional economy on traffic flows are not yet modelled explicitly.
In order to illustrate the division of labour between transport models and regional
economic models in a fully developed modelling framework, an idealised set of
relationships between LINE and a standard sequential transport model can be seen
in Fig. 12.2.
The linked model is simultaneous as there are linkages in both directions.
Spatial interaction forms the link from the transport model (transport costs) to the
regional economic model (to the cost-price circle) and from the regional economic
model (interregional interaction, such as trade or shopping) to the transport model
(to the real circle).
Fig. 12.2 An idealised integrated model of transport and regional economic change
Interregional and Commuting Shopping Tourist trips
Trip types international [persons] [EUR] [EUR]
(generation) trade [EUR]

Trip Trip Trip Trip Transport Demand for

Trip frequency frequency frequency the

A Systems Approach to Modelling Regional Economic Effects

frequency frequency Cost
[Trips/person] [Trips/person] [Trips/EUR] [Trips/EUR] [EUR] transport
commodity

Trade pattern Trade pattern Commuting Shopping Tourist trip

(origin-destination) [ton] Pattern [trips] pattern [trips] pattern [trips]

Modal split Modal Modal Modal Modal

split split split split
[rail/road/ [rail/road/ [rail/road/ [rail/road/
air/sea] air/sea] air/sea] air/sea]

Assignment Trade flows Commuting flows Shopping flows Tourist trip flow
[tonkm/means of [means of [means of [means of
transport] transport] transport] transport]

241
242 Bjarne Madsen et al.

Compared with a traditional free-standing regional economic model, determination

of transport costs takes place in the transport model, which replaces exogenous
estimates of transport costs. In relation to a traditional free-standing sequential
transport model (see, for example, Wilson et al. 1969), the economic model has
replaced the trip generation, attraction and distribution steps by an economic model
for interaction (trade, commuting, etc.) and a model for trip frequency.

Transport Inside LINE

A number of features of the treatment of transport inside LINE are important. First,
the model distinguishes between mobile and immobile commodities. Mobile commo-
dities are transportable commodities whilst for immobile commodities, place of
demand is by definition the same as place of production, including various forms of
private and public service, for example, hairdressing and hospitals. For immobile
commodities, the relation between demand and supply of commodities is direct as
there is no interregional trade and, therefore, there are no transport costs. In the case
of hairdressing, the problem of transport costs is related to shopping trips. This is also
the case for a number of components of consumption, for example, services related
to real estate.
Second, different price concepts are used. Commercial margins and net commo-
dity taxes enter into the full model and in relation to the transport commodity, which
means that price depends on the level of net commodity taxes (for example, fuel
taxation and road pricing).
Third, in a detailed version of LINE, the transport sector can be subdivided into
different transport sub-sectors, each having different productivity and employment
levels.

12.4 LINE: the Full Model, a Graphical Presentation

Here, a brief graphical presentation of LINE is made. The full model and its
equations are described in detail in Madsen et al. (2001a). The data used in the
model, together with the interregional SAM, are described in Madsen & Jensen-
Butler (2002b) and Madsen et al. (2001b).
LINE is based upon two interrelated circles: a real Keynesian circuit and a dual
cost-price circuit. Fig. 12.3 shows the general model structure, based upon the real
circuit employed in LINE. The horizontal dimension is spatial: place of work
(denoted R), place of residence (T) and place of demand (S). Production activity is
related to place of work. Factor rewards and income to institutions are related to
place of residence and demand for commodities is assigned to place of demand. The
vertical dimension is more detailed and follows with its five-fold division the general
structure of a SAM model. Production is related to activities; factor incomes are
related to i) activities by sector ii) factors of production with labour by sex, age and
education and iii) institutions: households; iv) demand for commodities is related to
wants (aggregates of commodities or components of final demand and intermediate
consumption); v) commodities, irrespective of use.
 A Systems Approach to Modelling Regional Economic Effects 243

Place of production (R) Place of residence (T) Place of demand (S)

Activities Gross output

(Sectors) (E) Interm. consumption
GVA
GDP at factor prices
Earned income (RE)

Factors of Earned income Earned income

Production Employment Employment
(education, Unemployment
gender, age) (G) Taxes and transfers
Disposable income
(RG) (TG)

Institutions Earned income

(households, Taxes and transfers
firms, public Disposable income
sector) (H)
(TH)

Demand Local private Intermediate

components (W) consumption consumption
Residential Local private
consumption consumption
Tourist expenditure Tourist
expenditure
Public
(TW) consumption
Investments
(SW)
Commodities (V) Local production Local demand
Exports to other Imports from
municipalities other
Exports abroad municipalities
(RV) Imports from
abroad
(SV)

Constant prices

Current prices

Fig. 12.3. Simplified version of LINE: the real circuit

The real circuit corresponds to a straightforward Keynesian model and moves

clockwise in Fig. 12.3. Starting in cell RE in the upper left corner, production
generates factor incomes in basic prices, including the part of income used to pay
commuting costs. This factor income is transformed from sectors (RE) to sex, age
and educational groups (RG). Factor income is then transformed from place of
244 Bjarne Madsen et al.

production (RG) to place of residence (TG) through a commuting model. Employ-

ment follows the same path from sectors (RE) to sex, age and educational groups
(RG) and further from place of production (RG) to place of residence (TG).
Employment and unemployment are determined at place of residence (TG).
Disposable income is calculated in a sub-model where taxes are deducted and
transfer and other incomes are added. Disposable income is distributed from
factors (TG) to households (TH). This is the basis for determination of private
consumption in market prices, by place of residence (TW). Private consumption is
assigned to place of demand (SW) using a shopping model. Private consumption,
together with intermediate consumption, public consumption and investments
constitute the total local demand for commodities (SV) in basic prices through a
use matrix. In this transformation from market prices to basic prices (from SW to
SV), commodity taxes and trade margins are subtracted. Local demand is met by
imports from other regions and abroad in addition to local production. Through a
trade model, exports to other regions and production for the region itself are
determined (from SV to RV). Adding export abroad, gross output by commodity is
determined. Through a reverse make matrix, the cycle returns to production by
sector (from RV to RE).
The stylised version of the model with the real circle illustrated, as well as the
price concepts used, is shown in Fig. 12.3, where the price level of real circle
variables (constant/current) is shown.
Again using the stylised version of the model shown in Fig. 12.3, the anti-
clockwise cost/price circuit shown in Fig. 12.4 corresponds to the dual problem. In
cell RE, sector basic prices (current prices) are determined by costs (intermediate
consumption, value added and indirect taxes, net in relation to production). Through
a make matrix, sector prices by sector are transformed into sector prices by
commodity (from RE to RV). These are then transformed from place of production
to place of demand (RV to SV) and further into market prices through inclusion of
retailing and wholesaling costs and indirect taxes (from SV to SW). This
transformation takes place using a reverse use matrix. Finally, private consumption is
transformed from place of demand to place of residence in market prices (from SW
to TW). Fig. 12.3 shows the structure of LINE in more detail.
 A Systems Approach to Modelling Regional Economic Effects 245

Place of production (R) Place of residence (T) Place of demand (S)

Activities Gross output Intermediate

(Sectors) (E) Interm. consumption consumption (SE)
GVA
GDP at factor prices
Earned income (RE)

Factors of Earned income Earned income

Production Employment Employment
(education, Unemployment
gender, age) (G) Taxes and transfers
Disposable income
(RG) (TG)
Institutions Earned income
(households, Taxes and transfers
firms, public Disposable income
sector) (H)
(TH)
Demand Local private Intermediate
components (W) consumption consumption
Residential Local private
consumption consumption
Tourist expenditure Tourist expenditure
Public consumption
(TW) Investments (SW)

Commodities (V) Local production Local demand

Exports to other Imports from other
municipalities municipalities
Exports abroad Imports from abroad

(RV) (SV)

Basic prices (exclusive transport costs)

Market prices

Basic prices (inclusive transport costs)

Fig. 12.4. Simplified version of LINE: the cost-price circle

12.4.1 The Dimensions of LINE

In the standard version of LINE, the dimensions of the axes are normally the
following:
Sectors: 12 sectors aggregated from the 133 sectors of the national accounts.
Factors: 7 age, 2 sex and 5 education groups.
Households: 4 types, based upon household composition
Needs: For private consumption and governmental individual consumption 13 com-
ponents, aggregated from the 72 components in the detailed national accounts. For
246 Bjarne Madsen et al.

governmental consumption, 8 groups. For gross fixed capital formation, 10 compo-

nents.
Commodities: 20 commodities, aggregated from 131 commodities in the national
accounts.
Regions: 277 municipalities (the lowest level of spatial disaggregation). Regions are
defined either as place of production, place of residence or as place of demand. It is
possible to aggregate the (277) municipalities into any regional unit. Standard
regions are the (16) counties and (45) labour-market districts.
In the version of the model used here, 23 sectors are used, 27 commodities and
an aggregation of factors and households has been made, so that they do not enter
the model. It uses 16 counties (regions).

org
teb
G To G

Born-
holm

Nordjyllands

Viborg

rhus

Ringkbing F
Frederiks-
borg

Vejle
E Copen-
Copenhagen M
hagen Frederiksberg M
Vestsjllands To Malm
Ribe Roskilde

B A
Fyns
Storstrms

Snderjyllands
D

C
ny
erma
To G

Fig. 12.5. Danish regions (counties and two municipalities with county status, Copenhagen M and
Frederiksberg M). Three fixed links: A: Oresund, to Malmo, Sweden, B: Great Belt, C: Femer Belt
to Germany. Four ferry routes: D: Spodsbjerg-Taars, E: Odden-Aarhus, F: Odden-Ebeltoft, G:
Frederikshavn-Gothenburg (Sweden). Other very local and international ferry routes are not shown
 A Systems Approach to Modelling Regional Economic Effects 247

12.5 Road Pricing and Modelling its Impacts

The design of road pricing systems relates to general issues concerning transport
policy and technical constraints and possibilities, in concrete social and cultural
contexts.

12.5.1 Road Pricing

Five basic dimensions underlie all road pricing systems.

1) Whether the tariff is kilometre-dependent, time dependent or flat rate
2) Whether the tariff depends on the type of road to be used (motorway, main
road, secondary road, etc.)
3) Whether the tariff depends upon type of area in which the road is used (for
example, urban, rural or simply the national territory)
4) Whether the tariff depends on time of day (rush hour, daytime, evening, night)
5) Whether the tariff depends upon behaviour (changes in speed, for example)

For example, an urban cordon is a flat-rate charge for entering a specific type of
area (as in the case of London). A motorway toll is typically kilometre and road
type dependent (as in the case of the proposed German motorway lorry charges).
Choice of system depends partly upon the dimensions chosen and partly upon
technological, administrative and political alternatives available.
In Denmark, a pilot project (AKTA, see Nielsen 2000, 2003, 2004, Herslund
2003, Herslund et al. 2001) is at present being developed involving both kilometre
and area dependent tariffs. In the future, more complex systems, which also take
account of the road hierarchy and time of day, may be developed. Technically, it is
based on GPS technology, permitting precise identification of the location of the
vehicle and thereby its road use related in turn to toll level for the road. This level
depends on road status in a road hierarchy, time of day and level of urbanisation.
Cars are fitted with receivers which function as meters registering both current
expenditure as the road is used, and cumulated expenditure for a given period. The
meter is read at periodic intervals and the user is charged.

12.6 Results from the Danish Road Pricing Toll Study

Application of LINE permits analysis of the consequences for the regional economy
of any change in the transport system which affects the costs of transport. The change
in transport costs examined in this case, the introduction of road pricing, has been
described above.
The analysis begins in the interaction components of the cost-price circle shown
in Fig. 12.4. Starting with trade in commodities (RV to SV), the prices of commodi-
ties decline. Given the point at which the analysis commences, the presentation
248 Bjarne Madsen et al.

follows the two circles, where first the effects on commodity prices are derived,
followed by the real effects on demand, production, employment and income. For
other cases, the starting point depends on the nature of the initial shock.

12.6.1 Changes in Transport Costs

Changes in transport costs are calculated using a) an interregional satellite account

for transport used to determine levels of transport costs and b) exogenously given
interregional transport costs, based on a digital road map, Vejnet DK, used to
calculate changes in transport costs.
The data in the interregional satellite accounts are estimated in four steps:
a1) Taking the national make and use tables, national transport activity is
determined by i) transport mode ii) subdivided by transport costs related to
intermediate consumption (by sector) and to private consumption (by compo-
nent) and iii) by external (transport firm based) and internal (own transport,
within a non-transport producing firm or a household) costs. Six different modes
of transport activity are used in the interregional satellite accounts, four for
passenger transport and two for goods. Passenger transport is divided into car,
rail, aeroplane and other and freight is divided into lorry and rail.
a2) In the second step, national transport activity related to passenger transport is
subdivided (using data from the National Travel Survey) by trip purpose: i)
commuting ii) shopping, iii) tourism iv) business travel and v) recreation.
a3) National transport activity is then divided by origin and destination using data on
intra and inter-regional trade (freight and business trip transport activity) and
interregional shopping, tourism and commuting (personal trip transport activity)
a4) Regional transport activity is then corrected (using regionalised National Travel
Survey data) to ensure that the data reflect regional transport activity by mode.

Changes in interregional transport activity for car transportation are estimated using
the digital road map Vejnet DK. Transport costs in Vejnet DK are based upon both
time and distance where the generalised cost has been calculated as Time costs +
Distance costs. Also included are costs (tickets, tolls) of travelling by ferry and using
fixed links. In addition, costs are calculated both with and without road pricing. The
calculations are based on assumptions shown in Table 12.1.
 A Systems Approach to Modelling Regional Economic Effects 249

Table 12.1. Maximum speeds, distance and time costs, road pricing tariffs (DKK) (DKK 7.50 =
approx. 1 Euro = approx. 1$US)
Car Lorry
Motorway 110 km/h 80 km/h
Non-urban highway 80 km/h 70 km/h
Urban 50 km/h or local restrictions taken Max 50 km/h or local restrictions
from VejnetDK if under 50 km/h
Distance cost per 1.82 DKK 2.60 DKK
kilometre
Time cost per hour 0.75 2.78 DKK.
Road pricing urban 0.60 -
Road pricing rural 0.30 -

The estimation of level of transport activity by region, mode, purpose and by type of
consumption described above reflects a basic assumption that data on transport
activity obtained from National (transport satellite) Accounts used in a top-down
procedure are superior to data on transport activity obtained from different statistical
sources used in a bottom-up approach.
In this paper, only results based upon road pricing for private cars is presented.
Table 12.2 shows the consequences of introducing road pricing. It is assumed
that all ferry routes and fixed links will continue with unchanged ticket prices. The
table shows that transport costs in general increase from 2% to 13%, outside the main
cities of Copenhagen and Aarhus least in the interregional links where use of rural
roads is important and/or where a significant part of the journey uses ferries. In
Copenhagen and Aarhus, transport costs decline as road pricing results in a reduction
of congestion, and thus, transport costs.
 250
Table 12.2. Changes in total transport costs (%) for transport between Danish regions after
road pricing for cars
(%) Cop. Cop FrC RoC VsC SsC BhC FyC SjC RbC VjC RkC rC ViC NjC
& C

Bjarne Madsen et al.

Frb
M
Copenhagen &
Frederiksberg M 0.91 0.96 1.02 1.01 1.06 1.07 1.00 1.05 1.07 1.07 1.07 1.05 1.01 1.04 1.04
Copenhagen C 0.96 1.13 1.13 1.13 1.13 1.12 1.00 1.08 1.09 1.09 1.09 1.05 1.02 1.05 1.05
Frederiksborg C 1.02 1.13 1.10 1.12 1.11 1.12 1.00 1.08 1.09 1.09 1.08 1.04 1.02 1.05 1.05
Roskilde C 1.01 1.13 1.12 1.08 1.13 1.11 1.00 1.07 1.09 1.09 1.08 1.09 1.02 1.05 1.05
Vestsjllands C 1.06 1.13 1.11 1.13 1.12 1.11 1.01 1.05 1.08 1.08 1.07 1.08 1.00 1.04 1.04
Storstrms C 1.07 1.12 1.12 1.11 1.11 1.13 1.02 1.07 1.09 1.09 1.08 1.09 1.03 1.06 1.05
Bornholms C 1.00 1.00 1.00 1.00 1.01 1.02 1.09 1.02 1.03 1.03 1.03 1.03 1.01 1.02 1.02
Fyns C 1.05 1.08 1.08 1.07 1.05 1.07 1.02 1.12 1.12 1.12 1.12 1.12 1.10 1.11 1.12
Snderjyllands C 1.07 1.09 1.09 1.09 1.08 1.09 1.03 1.12 1.15 1.12 1.12 1.11 1.10 1.11 1.12
Ribe C 1.07 1.09 1.09 1.09 1.08 1.09 1.03 1.12 1.12 1.12 1.12 1.11 1.10 1.11 1.11
Vejle C 1.07 1.09 1.08 1.08 1.07 1.08 1.03 1.12 1.12 1.12 1.12 1.11 1.07 1.11 1.11
Ringkbing C 1.05 1.05 1.04 1.09 1.08 1.09 1.03 1.12 1.11 1.11 1.11 1.11 1.11 1.11 1.11
rhus C 1.01 1.02 1.02 1.02 1.00 1.03 1.01 1.10 1.10 1.10 1.07 1.11 0.97 1.10 1.09
Viborg C 1.04 1.05 1.05 1.05 1.04 1.06 1.02 1.11 1.11 1.11 1.11 1.11 1.10 1.11 1.09
Nordjyllands C 1.04 1.05 1.05 1.05 1.04 1.05 1.02 1.12 1.12 1.11 1.11 1.11 1.09 1.09 1.12
 A Systems Approach to Modelling Regional Economic Effects 251

12.6.2 Changes in Commodity Prices and Disposable Incomes

Table 12.3, column 1, shows that prices for commodities produced domestically at
the national level increase by 0.10%. However, prices fall in Greater Copenhagen,
whilst they increase with increasing distance away from Copenhagen, except for
Bornholm, which benefits from transport via Copenhagen. Likewise, price increases
in Aarhus, the other main urban centre, are lower than elsewhere in the periphery.
Import prices (column 2) are not really affected by road pricing, for imports
on their way to the Danish market. This means that prices for the total demand
(column 3) rise by a similar, though slightly smaller percentage and the regional
distribution of price rises has the same pattern as for demand for domestic
products.
Column 4 shows that prices for intermediate consumption are similarly
affected by the reduction in transport costs, related to the fact that only service
commodities enter into the calculations. These changes affect prices of gross
output (column 5) though their effect is smaller as intermediate consumption is a
part of gross output.
Column 6 shows that export prices relative to foreign prices increase by
0.12%, again least in Greater Copenhagen and most in the industrial and peripheral
regions of Jutland. The regional pattern is similar to that in column 1 and for the
same reasons.
Column 7 shows private consumption by place of demand, and exhibits a similar
structure to the previous columns in the table. However, when private consumption
by place of residence is examined (column 8), significant changes appear because
road pricing affects the cost of trips for shopping, trips to visit family and friends,
cultural and recreational visits, as well as tourist trips. There are now substantial price
increases in the outer areas of Greater Copenhagen and Aarhus. This is because of
longer trips and higher road price tariffs.
 252
Table 12.3. Price changes for demand and supply by type, by geographical origin.
Percentage changes
(1) (2) (3) (4) (5) (6) (7) (8)

Bjarne Madsen et al.

Demand: Foreign Demand Intermediate Gross Foreign Private Private
domestic import (SV) consumption output export consumption consumption
production (RV) (RE) (RE) (RV) Place of Place of
(SV) market place residence
(SW) (TH)

Copenhagen & Fr. berg Municip. -0.10 0.00 -0.08 -0.04 -0.07 0.13 -0.04 -0.17
Copenhagen County -0.04 -0.01 -0.04 -0.02 0.00 0.39 -0.01 0.46
Frederiksborg County 0.12 -0.03 0.09 0.09 0.14 0.10 0.07 0.55
Roskilde County 0.09 -0.02 0.07 0.08 0.12 0.14 0.06 0.48
Vestsjllands County 0.18 -0.02 0.15 0.14 0.26 -0.01 0.11 0.64
Storstrms County 0.21 -0.02 0.18 0.16 0.24 0.05 0.12 0.69
Bornholms County 0.04 -0.01 0.03 0.04 0.07 0.16 0.03 0.38
Fyns County 0.19 -0.02 0.16 0.15 0.23 0.08 0.12 0.65
Snderjyllands County 0.24 -0.01 0.20 0.19 0.29 0.10 0.15 0.83
Ribe County 0.26 -0.02 0.21 0.20 0.34 -0.04 0.16 0.74
Vejle County 0.25 -0.02 0.20 0.19 0.32 0.03 0.14 0.74
Ringkbing County 0.20 -0.02 0.16 0.15 0.29 -0.01 0.11 0.63
Aarhus County 0.08 0.00 0.07 0.08 0.12 0.16 0.05 -0.03
Viborg County 0.17 -0.01 0.14 0.13 0.23 0.11 0.10 0.59
Nordjyllands County 0.17 -0.01 0.14 0.13 0.22 0.11 0.11 0.62
Outside the regions 0.06 -0.01 0.04 0.05 0.07 0.01 - -
Whole country 0.10 0.00 0.08 0.09 0.14 0.12 0.07 0.44
 A Systems Approach to Modelling Regional Economic Effects 253

12.6.3 Changes in Demand, Production and Income

In general, road pricing means that real private consumption declines markedly, as
consumer prices increase. On the other hand, export declines less because road
pricing for cars only affects export prices marginally. Total demand and total
production are therefore affected to a lesser degree than is the case for private
consumption.
Table 12.4, column 1 shows the consequences for disposable income (in
current prices) of increases in transport costs which affect commuting. As most
commuting is towards Copenhagen, then the principal increases are to be found
outside Copenhagen and Aarhus. The decrease in disposable income registered for
Aarhus arises because transport costs in Aarhus decrease, as a result of reductions
in congestion and the shorter commuting distances in Aarhus, as compared to
Copenhagen.
Column 2 shows how real disposable income changes if price reductions on
commodities are also included. The overall reduction in real disposable income is
almost 1%. The effect is almost identical to that for private consumption by place
of residence (column 3). Here again, Copenhagen and Frederiksberg municipalities
and Aarhus have small absolute gains, while all other regions have losses which
become greater with increasing distance from Copenhagen. Column 4 shows the
increase in private consumption by place of demand, reflecting the more even
spread of the effects noted in column 3 through shopping trips. Column 5 shows
the real effect on total demand, which is more than for private consumption. The
impacts are negative for all regions, though these negative effects are lowest in the
cities.
This pattern is the same for changes in real production, intermediate con-
sumption and Gross Value Added (see columns 9 and 10).
Column 8 shows the effects on exports of both the price increases for exports
noted in Table 12.4 and the regional commodity export composition, as different
commodities have different price elasticities. Correspondingly, import from abroad
is calculated as a function of changes in domestic prices, which rise, and import
prices from abroad, which in general are unchanged (see column 6 in Table 12.4).
LINE uses the national import and export price elasticities used in Statistics
Denmarks national macro-economic model, ADAM (Dam 1995).

12.6.4 Changes in Employment and Income

Table 12.5 column 1 shows that employment declines by 9,764, (by place of
production).
 254
Table 12.4. Consequences for demand, production and income. Percentage changes.
Disposable Real dis- Private Private Demand Foreign Demand Foreign Gross GDP at
income posable con- con- (SV) imports Domestic export output factor
(current income sumption sumption (SV) produc- (RV) (RE) prices

Bjarne Madsen et al.

prices) (TH) Place of Place of tion (RG)
(TH) residence demand (SV)
(TW) (SW)
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
Copenhagen &
Frederiksberg M -0.05 0.17 0.17 -0.06 -0.05 -0.03 -0.05 -0.01 -0.08 -0.07
Copenenhagen C -0.21 -0.71 -0.71 -0.68 -0.23 -0.17 -0.25 -0.15 -0.23 -0.25
Frederiksborg C -0.28 -1.24 -1.24 -1.20 -0.54 -0.56 -0.52 -0.34 -0.48 -0.49
Roskilde C -0.27 -1.03 -1.03 -0.99 -0.50 -0.50 -0.49 -0.35 -0.46 -0.47
Vestsjllands C -0.26 -1.40 -1.40 -1.37 -0.64 -0.60 -0.65 -0.57 -0.66 -0.64
Storstrms C -0.27 -1.50 -1.51 -1.47 -0.70 -0.65 -0.70 -0.48 -0.66 -0.69
Bornholms C -0.20 -0.95 -0.96 -0.97 -0.41 -0.36 -0.41 -0.18 -0.37 -0.41
Fyns C -0.25 -1.41 -1.41 -1.40 -0.62 -0.55 -0.63 -0.43 -0.59 -0.61
Snderjyllands C -0.34 -2.02 -2.03 -1.98 -0.77 -0.61 -0.77 -0.45 -0.72 -0.75
Ribe C -0.26 -1.56 -1.57 -1.56 -0.67 -0.54 -0.69 -0.60 -0.71 -0.67
Vejle C -0.28 -1.43 -1.43 -1.41 -0.61 -0.50 -0.63 -0.59 -0.66 -0.61
Ringkbing C -0.25 -1.48 -1.49 -1.48 -0.59 -0.46 -0.62 -0.50 -0.63 -0.59
Aarhus C 0.01 0.05 0.05 -0.01 -0.08 -0.03 -0.10 -0.26 -0.17 -0.11
Viborg C -0.27 -1.50 -1.51 -1.49 -0.59 -0.46 -0.61 -0.42 -0.58 -0.58
Nordjyllands C -0.26 -1.41 -1.42 -1.39 -0.57 -0.46 -0.58 -0.39 -0.56 -0.56
Outside the regions - - - - -0.04 -0.01 -0.05 0.00 -0.16 -0.13
Whole country -0.20 -0.98 -0.98 -0.98 -0.41 -0.33 -0.42 -0.33 -0.41 -0.40
Table 12.5. Impacts on employment and disposable income
(1) (2) (3) (4) (5) (6)
Employment Employment Earned Income Taxes Disposable
at place of at place of Income transfers (TG) income
production residence (TG) (TG) (TG)
(RG) (TG)

Pct Number Pct Number

A Systems Approach to Modelling Regional Economic Effects

Copenhagen & Fr.berg M -0.08 -291 -0.14 -434 -0.13 0.13 -0.09 -0.05
Copenhagen C -0.21 -787 -0.19 -604 -0.39 0.18 -0.36 -0.21
Frederiksborg C -0.41 -648 -0.32 -638 -0.52 0.39 -0.48 -0.28
Roskilde C -0.39 -376 -0.30 -389 -0.48 0.43 -0.48 -0.27
Vestsjllands C -0.52 -675 -0.46 -686 -0.57 0.39 -0.52 -0.26
Storstrms C -0.55 -598 -0.50 -623 -0.61 0.33 -0.54 -0.27
Bornholms C -0.32 -64 -0.31 -63 -0.44 0.17 -0.41 -0.20
Fyns C -0.50 -1125 -0.49 -1146 -0.56 0.33 -0.50 -0.25
Snderjyllands C -0.60 -755 -0.59 -753 -0.71 0.49 -0.65 -0.34
Ribe C -0.56 -674 -0.55 -646 -0.58 0.55 -0.50 -0.26
Vejle C -0.52 -954 -0.50 -916 -0.59 0.52 -0.53 -0.28
Ringkbing C -0.51 -757 -0.50 -735 -0.56 0.70 -0.48 -0.25
Aarhus C -0.11 -347 -0.14 -449 -0.03 0.13 0.00 0.01
Viborg C -0.47 -579 -0.46 -562 -0.57 0.46 -0.52 -0.27
Nordjyllands C -0.46 -1134 -0.45 -1120 -0.56 0.39 -0.50 -0.26
Outside the regions 0.00 0 - - - -
Whole country -0.35 -9764 -0.35 -9764 -0.43 0.33 -0.38 -0.20

255
256 Bjarne Madsen et al.

The distribution of these employment decreases closely follows the distribution of

increases in Gross Output from Table 12.4. Fyn and North Jutland have the biggest
declines in absolute terms whilst Greater Copenhagen and Aarhus have, in relative
terms, the smallest declines. By place of residence, differences are somewhat
reduced. Column 3 shows the consequences for earned income (wages and salaries
plus surplus on self employment) that decreases markedly in the areas which suffer
from higher commuting costs. These losses are modified by decreases in tax
payments, (column 5) because of the income effect. Changes in transfer incomes
(column 4) further modify the pattern of income change. Increases in transfer
incomes are, other things being equal, greatest in the regions where employment
declines faster.
Column 6 shows the net result of these changes on disposable income.
Greater Copenhagen and Aarhus are almost neutral and declines are related to
increasing distance from Copenhagen.

12.6.5 Recycling the Revenue from Road Pricing: a Balanced Budget

The revenue arising from road pricing can be used for different purposes. The
allocation of these revenues by activity will have different economic effects as well
as different effects in terms of regional distribution.
The following alternatives are examined:
1. Reduction of income tax: high rate taxation
2. Reduction of income tax: low rate taxation
3. Reduction of commodity taxes: VAT
4. Reduction of commodity taxes on fuel

Table 12.6a shows the consequences of reducing tax income by the state, whilst
Table 12.6b shows the combined effects of road pricing and reductions in taxation.
Table 12.6a shows that disposable income for households increases most if
income taxes are reduced and least if commodity taxes are reduced. This can be
explained by the fact that reductions in commodity taxes in part are transferred
abroad via exports and to other components of final demand.
There are regional differences in the different tax reduction strategies.
Reduction of income taxes benefits Greater Copenhagen marginally more than the
rest of the country. This is because the marginal tax rate in Greater Copenhagen
lies above the national average because of the progression in the tax system.
Alternatively, reduction of commodity taxes benefits the peripheral areas in Jutland
because the marginal propensity to consume is higher in these areas. Regionally,
reduction of income taxes at the lower bound provides the Greater Copenhagen
area (except for the municipalities of Copenhagen and Frederiksberg) with a
slightly greater increase in disposable income than reduction of upper bound taxes.
This is probably related to higher levels of housing consumption, which in turn
explains higher relative deductions from gross income, for tax purposes, as interest
can only be deducted at the rate corresponding to the lower bound.
Table 12.6a. Consequences for demand, production and income. Effects arising from
reductions in taxation, percentage changes.
Real disposable income at place of residence (TG) Employment at place of production (RG)
State income tax Commodity taxes State income tax Commodity taxes
Lower Transport Lower Transport
bound Top bound General commodity bound Top bound General commodity
(1) (2) (3) (4) (5) (6) (7) (8)
Copenhagen &
Fr.berg M 1.19 1.14 0.67 0.67 0.30 0.29 0.17 0.19

A Systems Approach to Modelling Regional Economic Effects

Kbenhavns C 1.25 1.17 0.67 0.67 0.34 0.33 0.17 0.23
Frederiksborg C 1.22 1.18 0.72 0.72 0.38 0.37 0.22 0.24
Roskilde C 1.18 1.17 0.72 0.72 0.43 0.43 0.21 0.27
Vestsjllands C 1.08 1.12 0.69 0.69 0.38 0.39 0.11 0.29
Storstrms C 1.07 1.11 0.74 0.74 0.40 0.41 0.21 0.31
Bornholms C 1.03 1.09 0.74 0.74 0.35 0.36 0.02 0.34
Fyns C 1.09 1.12 0.69 0.69 0.36 0.37 0.14 0.29
Snderjyllands C 1.06 1.08 0.75 0.75 0.31 0.32 0.16 0.35
Ribe C 1.07 1.09 0.70 0.70 0.33 0.34 0.04 0.32
Vejle C 1.09 1.11 0.72 0.72 0.33 0.34 0.08 0.29
Ringkbing C 1.05 1.08 0.71 0.71 0.31 0.32 0.05 0.33
Aarhus C 1.13 1.14 0.74 0.74 0.36 0.37 0.17 0.28
Viborg C 1.06 1.10 0.74 0.74 0.32 0.33 0.08 0.32
Nordjyllands C 1.06 1.11 0.74 0.74 0.33 0.35 0.08 0.31
Outside the regions - - - - 0.00 0.00 0.00 0.00
Whole country 1.13 1.13 0.71 0.70 0.34 0.35 0.14 0.27

257
 258
Table 12.6b. Consequences for demand, production and income. Net effects (gross
effects minus effects arising from tax reductions), percentage changes
Real disposable income at place of residence (TG) Employment at place of production (RG)
State income tax Commodity taxes State income tax Commodity taxes

Bjarne Madsen et al.

Lower Transport Lower Transport
bound Top bound General commodity bound Top bound General commodity
(1) (2) (3) (4) (5) (6) (7) (8)
Copenhagen &
Fr.berg M 1.36 1.31 0.84 0.84 0.22 0.21 0.09 0.11
Kbenhavns C 0.54 0.46 -0.05 -0.07 0.13 0.12 -0.04 0.02
Frederiksborg C -0.02 -0.06 -0.52 -0.62 -0.03 -0.04 -0.19 -0.17
Roskilde C 0.15 0.14 -0.31 -0.38 0.04 0.04 -0.18 -0.11
Vestsjllands C -0.32 -0.28 -0.71 -0.69 -0.14 -0.13 -0.41 -0.23
Storstrms C -0.44 -0.40 -0.76 -0.75 -0.15 -0.14 -0.34 -0.23
Bornholms C 0.08 0.14 -0.21 -0.13 0.03 0.05 -0.30 0.02
Fyns C -0.33 -0.29 -0.72 -0.69 -0.14 -0.13 -0.36 -0.21
Snderjyllands C -0.96 -0.93 -1.26 -1.22 -0.29 -0.28 -0.45 -0.25
Ribe C -0.49 -0.47 -0.86 -0.83 -0.23 -0.22 -0.52 -0.25
Vejle C -0.33 -0.31 -0.71 -0.70 -0.18 -0.18 -0.44 -0.23
Ringkbing C -0.43 -0.40 -0.78 -0.74 -0.20 -0.19 -0.46 -0.18
Aarhus C 1.17 1.19 0.78 0.73 0.26 0.27 0.06 0.17
Viborg C -0.44 -0.41 -0.76 -0.71 -0.15 -0.14 -0.40 -0.16
Nordjyllands C -0.35 -0.30 -0.67 -0.64 -0.13 -0.11 -0.38 -0.15
Outside the regions - - - - 0.00 0.00 0.00 0.00
Whole country 0.15 0.15 -0.27 0.28 -0.01 -0.01 -0.22 -0.08
 A Systems Approach to Modelling Regional Economic Effects 259

Table 12.6b shows the net effect of road pricing and tax recycling. The
principal result is that combined road pricing and tax reduction gives a small
increase in disposable income. This can be explained by the fact that even though
there is a balanced budget, the expenditure on road pricing by the individual
household is tax deductible. The other result is that recycling via commodity taxes
results in a decrease in disposable income. This can again be explained by the fact
that reductions in commodity taxes do not benefit domestic private consumption to
the full extent of the reduction, as discussed above.
Regionally, the net effects are similar to the gross effects because the regional
differences in tax reductions are very limited.

12.7 Limitations of the Model and Future Development

Strategies

A central problem faced by input-output or more general demand-side approaches to

regional economic analysis is the influence of supply side conditions on production,
this being a primary concern of CGE approaches. Another set of problems relates to
some of the central concerns of contemporary urban and regional analysis: the
existence of imperfect competition; externalities; product variety and growth in
productivity all of which in a modelling context usually involve non-linear functional
forms. In its present form, LINE builds on linear relationships. This raises the
question of the suitability of LINE to deal with such issues.
In relation to the issue of supply-side conditions, as noted above, development of
appropriate links between the real circle and the cost/price circle is the way forward.
This road pricing study illustrates the first step, where links have been established
between relevant prices and disposable income, foreign exports and imports. In
addition, the public sectors budget and finance problems have been considered. A
future strategy involves development of similar links for example, in relation to
labour participation and productivity, or relating changes in commodity prices to the
commodity composition of demand. Adjustments to changes in trade balances can
also be included. The basis for this relation is the establishment of equilibrium in
both commodity and factor markets and a steady-state equilibrium for institutional
balances.
Even though this modelling strategy is similar to mainstream CGE approaches,
the development of LINE nevertheless deviates from such CGE approaches to
regional and interregional modelling. Both approaches are consistent with established
economic theory and ensure equilibria with respect to markets and institutional
balances. However, the mathematical complexity involved in the typical CGE
approaches, which are often based upon non-linear functional forms, is attained at the
expense of detail in the treatment of the regional and local economy. Thus,
mainstream approaches, despite theoretical sophistication and complex non-linear
mathematics, face severe problems related to lack of detail and a sound empirical
foundation. They also frequently involve serious problems of calibration and
solution.
260 Bjarne Madsen et al.

One way of dealing with these reservations is to set up a model development

strategy which involves the stepwise inclusion of behavioural components requiring
non-linear functional forms. As described above, LINE can be developed in different
ways. One important direction is a further development of the links between the real
circle and the cost-price circle in order to model productivity, wage determination
and labour force participation rates in the labour market and substitution and income
effects in relation to commodity markets (private consumption, export, etc.). Another
important direction is to model in greater detail the consequences of a change in the
institutional balances, for example, changes in household savings and consumption
behaviour. These development strategies will transform LINE into a more advanced
CGE model, as these essentially non-linear relationships are included in a step-by-
step manner.
It might appear that the two modelling approaches converge towards a similar
solution, this being an ideal CGE model. However, in reality the model development
strategy employed in LINE, basically involving a linear system, represents a
fundamentally different strategy to that utilised by mainstream CGE modelling,
where there are often non-linearities in the central model equations which are solved
simultaneously. This places substantial constraints on the number of different actors,
markets and level of detail which can be incorporated in the models. In LINE, the
complexity of the regional and sub-regional economic systems, including the
possibility of choosing an appropriate model configuration, is in focus, whereas the
mathematical complexity of selected behavioural components will be introduced in a
gradual manner.

12.8 Conclusion

The requirements faced by model-builders today are very diverse, determined by the
great variety of problems faced by regions and local authorities and which are
reflected in the variety of studies which they generate. The ideal modern modelling
tool must be able to respond to this diversity of demands placed upon it. The aim of
the construction of LINE described above is to ensure a high degree of flexibility,
achieved in the basic structure which involves an interregional SAM. On this basis, it
is possible to ensure flexibility in the following areas:

1. The model can be structured as either a sub-regional model, a regional model, or

a combined model, as it includes both commodity markets and tourism, usually
treated as regional phenomena, and labour markets, commuting and shopping
which are typical sub-regional phenomena.
2. The overall model includes different types of agent which enter into a SAM,
activities, factors, institutions, needs, commodities, which means that there is a
degree of flexibility involving the option of including either all accounts or a
choice of accounts, for example, a model covering activities or commodities (a
local production environment model) or a model covering institutions and needs
(an extended shopping model).
 A Systems Approach to Modelling Regional Economic Effects 261

3. Use of three basic types of location. Place of production, place of residence and
place of demand enter into the overall model. Choice of combination of type of
locality permits the addressing of specific problems, such as a commuting model
involving place of production and place of residence and a trade model
involving place of production and place of demand.
4. The overall model involves a real circle and a cost-price circle. This permits
development of a fixed price model by using the real circle alone or a general
equilibrium model based upon links between the real circle and the cost-price
circle.

Furthermore, given the above-mentioned more strategic modelling choices, even

more flexibility can be introduced by choice of aggregation of categories of
activities, factors, institutions, etc.
The paper describes LINE and its use in a number of studies. The configuration
of the model and the aggregation of the SAM accounts used in the analysis of the
regional economic effects of road pricing are presented together with a summary of
empirical results from the analysis. The magnitudes and directions of change are all
satisfactory and theoretically defensible. The modelling system set up and demon-
strated on an application case concerning the introduction of road pricing may also be
relevant for other cases. Thus, it may be highly relevant to model the consequences
of large new transport infrastructure. Here, it would be of major interest to address
regional economic effects together with other effects relating to changes in transport
efficiency and quality. The latter are normally the main focus of such studies but
planners and decision-makers could also benefit from the new possibilities in
modelling set out with the suggested systems approach in this type of examination.

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13 External Effects and Road Charging

Jeppe Rich and Otto Anker Nielsen

Centre for Traffic and Transport, Technical University of Denmark

Abstract
Negative external costs as a result of road traffic are an important issue in the
process of developing new infrastructure and much effort has been concerned with
how to measure, valuate and internalise the various external effects in order to
establish a more efficient transport system. A flexible and increasingly popular
instrument for internalisation is road charging, in order to internalise negative
external effects and force a behavioural reaction towards a more efficient transport
system. The aim of the present chapter is to analyse how, and to what extent,
different road charging systems impact travel demand and derived external effects.
The analysis is based on a recent study from Copenhagen and experience from the
implemented toll-ring systems in Stockholm and London.

13.1 Introduction

The mechanism behind road charging is that increased costs will cause car drivers
who have the lowest willingness to pay to cancel or reduce their trip activity. As a
result, there will be a reduction in demand, which then indirectly will reduce the
negative external effects to the extent these effects are connected to transport
demand. One problem in this respect, however, is that the different external effects
are related to demand in different ways. For some effects, such as CO2, there will
be an almost proportional relationship. For example, if mileage increases by 10%,
then CO2 will increase by approximately the same per cent. For other effects, such
as traffic noise, a more complex relationship exists.
In the literature, there have been various studies on specific urban road
charging experiments. However, very few studies have been comparable with
respect to how the external effects are likely to change as a result of charging. One
reason for this might arise from the common viewpoint that since cities are
different in many respects, a quantitative comparison tends to be meaningless. We
believe this is not the case. Comparisons between models and measurement
methods are a completely integrated part of standard model building and
validation. This exchange of ideas and best practice has forced most models to
conform to certain standards and, in the case of models for external effects,
relatively simple ones. As a result, it makes good sense to evaluate the behavioural
reaction to road charging in different cities, to clarify whether people from
different cities correspond to an expected response pattern, which in turn makes
268 J. Rich and O.A. Nielsen

them suitable for the standard traffic model apparatus. And if not, what could be
the reason for this disparity?
The best source for information is from the monitoring programmes in London
and Stockholm (the latter during the trial period in the first half of 2006) found on
the respective websites1. The philosophy of this chapter is to carefully relate the
results of the two studies in order to verify similarities and differences as well as
the causes of these. Moreover, we relate these observations to a recent Danish
road-charging analysis described in Rich and Nielsen (2006) and Wrang et al.
(2006). The London charging system is described in the reports from the
monitoring programme (Transport for London, 2006) as well as in Santos and
Fraser (2006) and Knorr and Eisenkopf (2006). See also Ison and Rye (2006) for a
contribution with a more policy-oriented analysis of London, Cambridge and
Singapore. The Stockholm trial has been fully reported in Stockholm Stad (2006).
The chapter is organised in five sections. In section 13.2, we consider the
nature of the various external effects. Section 13.3 is concerned with demand
effects due to road charging in London, Stockholm and Copenhagen. The effects
on derived external effects are analysed in section 13.4 and a summary and con-
cluding remarks are offered in section 13.5.

13.2 External Effects: Background

Usually, the external costs of traffic have been divided into four cost categories
(Newberry, 1990): congestion; road damage costs; accident externalities and
environmental costs. Environmental costs can be further sub-divided into traffic
noise, climate effects and local emissions. Clearly, the importance of the different
types of effect varies with the type of region under consideration. For instance,
congestion is the dominating negative externality when considering larger cities,
whereas the contribution when looking at countries as a whole is smaller.
In a study by the Danish Environmental Protection Agency (DEPA, 2002),
total external traffic costs for Denmark were estimated at 4.4 billion EUR.
According to the study, more than 50% of all external effects were due to
accidents, whereas climate effects and local emissions accounted for approximately
30% and noise for 8%. Congestion was estimated to account for less than 6%,
which, however, seems to conflict with more recent studies2. In a congestion study
from 2004 (Nielsen and Landex, 2004), congestion costs in the Copenhagen region
alone were estimated at 0.8 billion EUR. However, although there are great
uncertainties related to the measurement of externalities, international studies seem
to indicate that among the various effects, accidents are the most important. Edlin
and Mandic (2006) estimated the Pigovian tax for internalisation of accident

1
www.tfl.gov.uk and www.stockholmsforsoket.se
2
The calculation of congestion costs was based on a German speed-flow relationship from 1997,
which makes it somewhat uncertain compared to more recent studies.
 External Effects and Road Charging 269

externalities to $66 billion in California, which at present is more than the state
taxes collected. The direct measurable costs due to accidents in EU-15 are
estimated at 45 billion EUR by the European commission (EC White Paper, 2001).
However, according to the Road Safety Action Programme (EC, 2003), indirect
costs of accidents may be as high as 160 billion EUR.
Given the enormous magnitude of traffic externalities and the fact that con-
gestion increases exponentially as a function of demand 3 , more focus has been
placed on how to internalise these costs. Road pricing is often mentioned as the
instrument to achieve this, but not all types of externalities are perfectly dealt with
in a road-charging system. Starting with congestion, road charging appears to be
the optimum method of internalisation because a price mechanism replaces the
present queuing mechanism which is allocatively inefficient. The fact that people
change their driving behaviour (reduce demand for transport) in accordance with
road pricing has been documented in the Danish AKTA experiment (Nielsen, 2004
and Chapter 6 in this book) as well as in numerous real-world charging systems in
cities like London (Transport for London, 2006), Stockholm (Stockholm Stad,
2006) and Singapore (Keong, 2002). With respect to climate effects, road pricing is
not the optimal instrument for internalisation of costs. Taxes on fuel, for instance,
charge emissions in a more direct way and are simple to design.
For local emissions, however, road pricing is the best alternative. Externalities
related to accidents also seem to be well-suited to road charging, basically because
there is a well-understood relationship between the number of accidents and the
traffic on a given type of road (Hemdorff and Greibe, 2001). Clearly, there are
great variations in the distribution of the severity of accidents for different types of
road, which translate to different valuations of external costs for different types of
road. However, this can be tackled by proper spatial price discrimination. An
interesting finding is due to Parry (2003), who indicates that a uniform mileage tax
can achieve only of the welfare gains compared to a tax differentiated on the
drivers age. For example, further price discrimination based on driver character-
istics may be needed if the marginal costs due to accidents are to be internalised.
Traffic noise has often been mentioned as a good example of an externality
that might be dealt with by road pricing. This is due to the fact that noise pollution
appears exactly where the transport activity takes place and depends on the nature
of the area where the pollution occurs. However, recent experiments seem to
indicate that the noise externality is much more complicated and that there is a
complex relationship between traffic demand and noise when looked at from the
perspective of an overall charging system. On the basis of empirical evidence from
London, Stockholm and Copenhagen, it has been shown that some reduction in
traffic noise can be expected as a reaction to road charging. However, it depends
significantly on the road-charging system and the specific location. Even for roads
with traffic reduction, noise may increase as a result of increased speed. Moreover,
road charging may produce detouring along a toll ring, which can produce
unexpected negative noise effects locally. A factor that might reduce the amount of

3
The BPR formula (Bureau of Public Roads, 1964) is the most commonly used speed-flow
relationship.
270 J. Rich and O.A. Nielsen

traffic noise is if traffic can be redistributed to roads with better coverage of noise
shields.

13.3 Demand Effects from Road Charging

Road charging has become a popular instrument for the internalisation of external
effects. This is due to the fact that the transport demand can be regulated in a
flexible manner in the space-time domain. It is clear, however, that charging
systems can be very different both in design as well as in their effect on transport.

13.3.1 Charging and Demand: Experience from London, Stockholm and

Copenhagen

Three toll rings from London, Stockholm and Copenhagen are analysed in the
following. Although London is the only active system, the two other studies
provide good insight. The Stockholm trial was a completely realistic full-scale
installation running for the first six months of 2006 (Stockholms stad, 2006),
whereas the Copenhagen study was a model simulation based on a large scale GPS
experiment with volunteer 500 drivers (Nielsen, 2004; Rich and Nielsen 2006;
Wrang et al. 2006). Table 13.1 below illustrates the charging levels for the three
systems.

Table 13.1. Charging levels for three toll-ring systems (measured in 2005 EUR)
Day Night or
weekend
All Peak Near-peak Off-peak
London 8 0
Stockholm 4.3 3.3 2.3 0
Copenhagen 8 4 0

In addition to the charging levels shown in Table 13.1, the London and Stockholm
schemes operate with a maximum daily payment of 8 and 6.7 EUR, respectively.
For the Danish experiment, no maximum was used, and lorries were charged triple
the price of cars in order to account for higher marginal costs.
Obviously, the first thing to consider when comparing different systems is the
charging level. As seen in Table 13.1, there are differences in the charging design,
which makes it somewhat difficult to compare the three charging levels directly.
However, it seems that the charging levels for London and Copenhagen are
somewhat similar; whereas the level for Stockholm is significantly lower (40-
50%).
If we look at how the charging scheme affected the transport demand in
London and Stockholm, there is an almost similar response.
 External Effects and Road Charging 271

Table 13.2. Demand effect for London and Stockholm

City Crossings Mileage within charging area
London 22% 17%
Stockholm 22% 14%

If we compare Tables 13.1 and 13.2, it can be seen that even though the charging
level in Stockholm is only half the price of London, the response level is similar.
This indicates significantly higher demand elasticity in Stockholm. There could be
several explanations for this. One explanation could be due to the difference in the
level of congestion. Normally, we would assume that the more congestion in the
pre-charge situation, the greater the effect of charging. This is true in terms of
reduced congestion; however, in terms of reduced demand, it may be the other way
round. Since the speed-flow relationship becomes steep, when approaching the
capacity limit a marginal increase in car mileage will result in an increase far more
than proportional to the mileage. Clearly, this is also true when reductions in
mileage are made. In other words, if London is in a more critical state of
congestion than Stockholm, the marginal effect of one charging unit will be higher
in London, as illustrated in Fig. 13.1.

Speed

Stockholm - after
Stockholm - before

London - after

London - before

Flow Flow Flow

Fig. 13.1. The nonlinear speed-flow relationship

So, if drivers in a high congestion regime pay double charge compared to a low
congestion regime, the corresponding reduction in congestion could outweigh
costs. We would expect London to be more heavily congested than Stockholm, but
existing observations do not provide unambiguous support for this. In fact,
congestion is measured in different ways and with different degrees of detail,
which makes a direct comparison difficult.
Another reason could be due to the shape of the demand function. Certainly, it
seems to indicate strict convexity in the sense that the marginal effect on demand
272 J. Rich and O.A. Nielsen

decreases with the cost. The fact that there is a large initial response could be due
to a pool of people with a low value-of-time (students, pensioners, low-skilled
workers), who are very sensitive to even small changes. However, for higher
charging levels the marginal effect declines rapidly. This has also been found in the
Danish AKTA study (Chapter 18 in this book). It conforms well to empirical
findings, which indicate that value-of-time and income are log-normal distributed
with long tail. A similar pattern has been found in practice in that the effect of the
charge increase from 5 to 8 in London in July 2005 (a 60% increase) only
resulted in an additional 6% decline within the charging zone.
It should be noted that other arguments could add to the differences, e.g.
difference in terms of purchasing power parity, cost of registration of a car, as well
as the state and structure of the public transport system. Moreover, it should be
noted that Stockholm experienced a fuel increase of approximately 9% during
April 2005, which is estimated to have reduced traffic across the toll ring by 3%.
The experiment from Copenhagen, although it is not based on a real road
pricing scheme, emerges with slightly lower results than the London and
Stockholm schemes, with a 10% reduction in the central part of the city and a 5.4%
reduction for the greater Copenhagen region. This points to a more general
problem with standard traffic models, in that they tend to underestimate the effects
of road charging. Presumably, part of the explanation for this is that the models are
short-term based and seem to underestimate how quickly people respond to
changes, as seen in Stockholm as well as in London.

13.4 Internalisation of External Effects Through Road Charging

When politicians argue in favour of road charging, the most prominent argument is
that a road-charging system will reduce external effects. For example, the city will
become quieter, safer and less polluted and congestion will be history. The recent
monitoring from London and Stockholm seems to indicate a more complicated
picture, however.

13.4.1 Road Safety

Accidents, one of the most important external effects when looked at from an
economic perspective, were reduced significantly in all three cities. For London,
the reduction was 18.8% between 2002 and 2004 within the charging zone, which
appears to correspond well to the reduction in traffic. However, for the rest of
London there has been an accident reduction of 15.7% due to broader road-safety
initiatives. Assuming this trend to have continued, then within the charging zone
and on the ring-road, casualties are only reduced by 4.3% as a result of charging.
This amounts to approximately 100 casualties. For Stockholm, the observation
period has been shorter and the results more uncertain. It is estimated that accidents
have declined by 5-10% within the charging area as a result of charging. The
 External Effects and Road Charging 273

experience from London suggests that traffic safety might be increased more
efficiently by other means than road charging.
In the Copenhagen model, the overall reduction in accidents has been 4%
corresponding to a 5.4% reduction in car mileage. In the charging zone, the
estimated reduction in accidents was 6-8% compared to an 8-10% reduction in
traffic. This seems to correspond reasonably well with Stockholm. In fact, the
Copenhagen case is interesting, because what partly causes the reduction is a
change of the travel pattern from city streets to bypass roads, especially the ring
motorway. The fact that cars make detours around the toll-ring boundary, on the
bypass motorways, imposes a reduction in the number of accidents4. This was seen
very clearly in a parallel experiment (Rich and Nielsen, 2006) of a small toll ring.
In this experiment, car mileage increased by 0.2% compared to the base scenario,
but with a decrease in accidents of 2.4%. In other words, the level of traffic
demand matters, but so does the distribution on road types.
Accidents (in London) involving cars have fallen the most compared to
accidents involving two-wheelers, pedal cycles and pedestrians. However, there
seems to be no evidence that accidents are more or less severe according to
experience from London.

13.4.2 Traffic Noise

Noise is an external effect, which is often used as an argument for road charging. It
has been mentioned alongside other external effects in the Danish as well as the
Swedish public debate. However, neither London nor Stockholm can identify
significant changes in noise levels as a consequence of road charging, although
there seems to be a slight overall reduction of 0-3dB. The problem with noise is a
somewhat diffuse relationship to the level of transport. Less traffic may not result
in less noise. What is often more important is the travel speed, which tends to
increase due to road charging. In other words, road charging as a means to reduce
traffic noise is not the ideal instrument.
In the Copenhagen study, however, there is an estimated overall 2% reduction
in noise exposure measured in terms of a noise annoyance index referred to as SBT
(Danish Road Directorate, 1998). Compared to the overall traffic reduction in
mileage of 5.4%, this seems a fairly large improvement compared with the findings
of London and Stockholm. There are two explanations for this. Firstly, with more
observations we believe London and Stockholm would be able to statistically
verify a small change in noise level caused by road traffic. With a high price, even
small changes of 1dB or less would be important in the valuation process. A 1dB
reduction in the A-weighted continuous sound pressure (a 24-hour sound-pressure
indicator) at the 60dB level will change the SBT by 10-20%. The second reason
why noise reductions are found to be important in Copenhagen is due to the
detouring pattern caused by the toll ring. Cars are redistributed from roads in the

4
Dickerson et al. (2000) report significant differences in the accident density across road types.
The Danish standard is described in Hemdorff and Greibe (2001).
274 J. Rich and O.A. Nielsen

inner city to bypass motorways, which are all equipped with noise shields. Hence,
in this redistribution the same positive effect observed for accidents occurs. As for
accidents, this is evidenced in the small toll-ring experiment, where increasing
mileage and decreasing noise exposure are experienced at the same time.

13.4.3 Emissions

CO2 emission is closely related to travel demand. In London and Stockholm, a

16% and 13% reduction was observed, which is slightly less than the reduction in
demand. However, CO2 also depends on the speed and thereby the congestion level
(Beevers and Carslaw, 2005). In London, half of the reduction in CO2 is estimated
to result from reduced congestion. For NOx, there has been an overall reduction of
13% in central London in 2003 and the reduction was 18% in 2005. However,
recently (Transport for London, 2006) it is estimated that a significant part of this
reduction is due to a general emission abatement programme and the fact that the
car fleet is gradually becoming more environmentally friendly. An estimate of the
true charging effect on NOx emissions is therefore only 8% and 7% for PM10 in
2003. In Stockholm, there has been a reduction in NOx by 8.5%, which is
comparable to the results in London. For PM10 it is slightly higher in Stockholm
with a 13% reduction.
For Copenhagen, the reduction in CO2 and local emissions (NOx, PM10 and
PM5) is estimated to between 1 and 3% for the whole Copenhagen region. This
seems to correspond with the findings of the two other studies considering the
lower demand effect in Copenhagen.

13.5 Summary and Conclusions

The detailed monitoring of the road charging systems in Stockholm and London
combined with model exercises for Copenhagen have been used to gather insight
into how demand and external effects are affected by toll rings.
This chapter considered the way demand has been affected. By comparing
London and Stockholm, it is evident that the response pattern for Stockholm is
more elastic per charging unit. This indicates all else being equal that there is a
relatively stronger reaction to the first units of charging and a less significant
reaction to a higher charging level. The relatively weak demand response when the
London charge was raised from 5 to 8 confirms this. The finding is in line with
other previous studies and seems to indicate a relative large pool of inexpensive
trips, which are more sensitive to charging.
It was also found that the congestion level is likely to affect the demand and
could be part of the explanation. The more congestion, the more relief that results
from a marginal reduction in traffic. Hence, if London has more congestion relative
to Stockholm, a smaller demand response in London is needed to bring about the
same reduction in generalised travel costs.
 External Effects and Road Charging 275

The impact on external effects indicates that accidents are reduced, but less
than the reduction in traffic. In London, factors other than the charging were
responsible for most of the reduction. This seems to indicate that other road-safety
initiatives may be more important or that there is a positive self-perpetuating cycle
between road charging and safety initiatives.
Based on findings from London and Stockholm, traffic noise does not seem to
change significantly. Clearly, this highlights the fact that traffic noise levels are
often more sensitive to speed than to traffic load. In other words, if charging
reduces traffic and speed therefore increases, the noise pressure may increase.
However, in the case of London and Stockholm, the insignificance of noise could
alone be due to a measurement problem. The Copenhagen model highlighted
another issue related to noise as well as accidents, namely, that a toll ring may
produce detouring around the charging boundary, which in turn will affect the way
external effects are distributed. The fact that traffic was routed from city streets to
bypass roads with better safety and a higher proportion of noise shields resulted in
a positive effect.
Emissions were reduced significantly in all studies, although less than the
decrease in traffic. For London, approximately fifty per cent of the reduction was
due to structural changes caused by new technology.

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14 Assessing the Impacts of Traffic Air Pollution
on Human Exposure and Health

Ole Hertel1, Steen Solvang Jensen1, Martin Hvidberg1, Matthias Ketzel1, Ruwim
Berkowicz1, Finn Palmgren1, Peter Whlin1, Marianne Glasius1, Steffen Loft2,
Peter Vinzents2, Ole Raaschou-Nielsen3, Mette Srensen3 and Helle Bak3
1
National Environmental Research Institute, Roskilde, Denmark
2
Institute of Public Health, University of Copenhagen, Panum Institute, Denmark
3
Institute of Cancer Epidemiology, Danish Cancer Society, Denmark

Abstract
It is well known that exposure to air pollution can be linked to adverse health
effects in the population. This has been demonstrated in various epidemiological
studies. The associations determined between pollution exposure and health effects
rely on the quality of the exposure assessment. Proper assessment of human
exposure is therefore crucial for a correct determination of the association between
the pollution load of the population and the negative health outcomes. Focus in this
chapter is on assessment of the impact of traffic generated air pollution, which is
the major source of human exposure in many countries including Denmark. Some
of the methodologies for assessing exposure to traffic-induced air pollution are
outlined and examples from Danish exposure studies are presented. To model air
pollution concentrations in streets within the Danish exposure studies, a number of
locally-developed models have been applied, including the regional scale model
DEHM, the Urban background model UBM and the street pollution model OSPM.
These models are briefly described here. However, one of the major difficulties in
exposure modelling is to obtain proper input data for the calculations. In the first
Danish exposure studies, these data were obtained manually or through use of
questionnaires sent to local authorities. In recent years, a GIS-based tool, AirGIS,
has been applied. AirGIS takes advantage of information from the unique Danish
register databases that are available together with digital maps for building images
and road network. Currently, AirGIS is being applied to exposure assessment in a
number of Danish epidemiological studies.

14.1 Introduction

Human exposure to ambient air pollution has been associated with severe health
effects. The most classical example is the London smog (smoke and fog) episode
in 1952, during which the mortality rate in the city increased dramatically
(Wilkins, 1954). During this episode, the concentrations of particulate matter and
sulphur dioxide in London were respectively 56 and 7 times above the normal level
278 O. Hertel et al.

at that time and the episode caused premature death of an estimated 12,000 people.
However, ambient air pollution may cause adverse health effects even under much
less extreme conditions. Studies of long-term exposure to air pollution (especially
particles) suggest an increased risk of chronic respiratory illness and of developing
various types of cancer, whereas higher prevalence of bronchitis, acute cardio-
vascular decease, asthma and other symptoms have been associated with short-
term exposure to increased air pollution concentrations during episodes. The popu-
lation is generally most at risk in urban areas where many people spend a
significant part of their time and where pollution levels often are high due to the
high density of pollution sources and to the poor dispersion conditions because of
the presence of obstacles such as buildings.
Over the last decades, emissions from traffic have become the major local
source of air pollution in many larger European cities. This development is the
result of legislation concerning emissions from power plants and industries, to-
gether with a steady growth in road traffic. Furthermore, these releases take place
in the streets with poor dispersion conditions and close to the population. Traffic
exhaust fumes contain pollutants such as nitrogen oxides (NOX defined as the sum
of nitrogen monoxide (NO) and nitrogen dioxide (NO2)), volatile organic com-
pounds (VOCs), carbon monoxide (CO) and particulate matter (PM). In recent
years, an increasing focus has been on determining the possible association
between adverse health effects in the population and various traffic-related air
pollutants. A significant part of this focus has been on particulate matter (Knzli et
al., 2000).

14.2 Air Pollution in Urban Areas

The urban environment constitutes the areas where the population is most at risk of
negative health outcomes in relation to air pollution. Therefore, it is useful to
describe the pollution conditions in urban areas.
Air pollution in an urban environment is the result of local emissions as well
as contributions from pollution transport from both nearby and remote sources
outside the city. The distribution between contributions from different source types
and source areas to a given site varies between pollutants. Furthermore, it varies in
time as a function of variations in releases as well as meteorological parameters
governing the dispersion conditions.
Industries, power plants and other sources with releases from tall chimneys
seldom contribute to enhanced concentrations at ground level in urban areas. The
reason is that pollution from high sources is usually transported some distance
before it is dispersed down to ground level. As a rule of thumb, the width of the
pollutant plume grows as a result of the dispersion as one tenth of the transport
distance. This means that for a 200m tall chimney, the pollution will reach the
ground at a distance of about 2 km downwind of the source. Pollution from tall
sources therefore contributes primarily to regional pollution.
 Assessing the Impacts of Traffic Air Pollution 279

Vehicle transport, local domestic heating and small-scale industrial firms have
low release heights, for which the pollution is not diluted as efficiently as for
releases from tall sources. Furthermore, these releases take place close to the
population and therefore contribute significantly to human air pollution exposures.
The emissions from traffic follow a fixed pattern through out the day and the week.
However, due to variations in meteorological conditions, this is not the case for the
resulting pollution levels. In general, the dilution increases with wind speed,
especially in urban areas where the highest concentrations appear at low wind
speeds (below 2 m/s).

14.2.1 Urban Background and Street Pollution

The urban background pollution is the result of regional pollution and contribu-
tions from the city itself. The size of the city domain and the emission density
determine the urban areas contribution to the pollution level.
Air pollution in an urban street is the result of several contributions and to a
great extent it is governed by the physical conditions around the street. The special
airflow in streets and around buildings may result in very different concentrations
at different locations in the street (Fig. 14.1). When the wind blows perpendicular-
ly to the street, the pollution concentrations may be up to 10 times higher on the
leeward side compared to the windward side.

wind
Background pollution

Recirculated pollution

Leeward Windward
Direct emission

Source: Berkowicz (1998).

Fig. 14.1. Schematic illustration of the flow and dispersion inside a street canyon. In this case
wind above roof level is blowing perpendicularly to the street. Inside the street canyon, a vortex is
created and the wind direction at street level is opposite to the wind above roof level. Pronounced
differences in air pollution concentrations on the two pavements are the result of these flows.
280 O. Hertel et al.

Street canyons have generally higher pollution concentrations than more open
street sections with similar traffic densities. Open streets are windier due to the
lack of buildings which provide a shield for the wind. In the street canyon,
pollution is circulated instead of being transported away from the street. The dis-
persion due to traffic-induced turbulence has been found to be very important for
pollution levels at low wind speeds. The higher the driving speed, the quicker the
pollution is mixed with clean air of the surroundings. This also means that the
relationship between traffic intensity and air quality is non-linear.

14.3 Air Pollution Exposure Assessment

Human exposure refers to an individuals contact with a pollutant concentration

and may be determined by application of direct as well as indirect methods
(Zartarian et al., 1997).
Direct methods are measurements made by personal portable monitors or
measurements of biological markers. The personal monitors are carried by a study
subject during a campaign period. Biomarkers may be measurements of pollutant
concentrations or their degradation products in, for example, blood samples or
urine, but they can also be measurements of parameters for the effect of pollution
exposure, for example, in terms of oxidative damage of DNA determined in blood
samples.
In the application of indirect methods, exposure is determined by combining
information about pollution concentrations with information about time spent in
the specific environments. Information about pollutant concentrations can be
obtained through measurements, application of transport-chemistry models or
using combinations of measurements and models.
In the use of the indirect method, it is common to apply the concept of micro-
environments. A microenvironment is defined as a three-dimensional space where
the pollution concentration at a specific time is spatially homogeneous or has well-
known statistical properties. Examples of microenvironments are the interior of a
car, inside a house or urban, suburban and rural areas. This concept is particularly
useful in the assessment of exposure for larger cohorts where general time-activity
patterns may be obtained. Time-activity patterns are used to describe a persons
movement between the different microenvironments in time and the associated
activity.

14.4 Direct Methods for Exposure Assessment

Personal monitoring is a direct method for exposure assessment and is especially

useful in connection with studies of smaller cohorts during shorter campaign
periods. The reason is that such measurements are highly resource-demanding and
therefore usually impossible to carry out for larger cohorts. However, data from
 Assessing the Impacts of Traffic Air Pollution 281

such studies are crucial in the evaluation of the reliability of exposure models and
also in testing the usefulness of the commonly used application of measurements
from fixed site monitoring stations as a proxy of personal exposure. The exposure
monitors may be divided into two groups of instruments:

1. Integrated samplers that over a specific period of time collect pollutants which
afterwards are analysed in the laboratory.
2. Continuous monitors that use a self-contained analytical system to measure
pollutant concentrations on location.

Both types of instrument may be based on passive as well as active monitors. The
active monitors use a pump with a portable power source in order to move sampled
air through a collector or sensor, whereas the passive monitors use diffusion to
bring the air pollutant into contact with the sensor or collector.

14.5 Indirect Methods for Exposure Assessment

Indirect methods for exposure assessment seek to estimate personal exposure by

combining information about concentrations at fixed sites with information about
time spent in specific environments.
A crude indirect method for exposure assessment is the categorical classifica-
tion of the population, based on indicators such as type of residence (e.g. rural,
urban or industrial), job classification (occupational exposure), presence of indoor
sources like gas stoves, environmental tobacco smoking, etc. This method is, how-
ever, considered inadequate for application in air pollution epidemiology.
The use of fixed site measurements is a more widely used method for obtain-
ing an indicator for population exposure, based on routine monitoring. However,
information about concentrations in the environments where people spend time
may be obtained from monitoring as well as application of models.

14.5.1 Monitoring Networks

For indirect estimation of exposure, monitoring networks with continuous samp-

ling of ambient air pollution serve as important sources of information concerning
pollution concentrations and their trends, mainly at fixed sites. Furthermore, data
from monitoring networks are crucial in connection with the development and
validation of air pollution models. However, monitoring networks are usually
established with the aims of:
x evaluating actual pollution levels against air quality standards,
x providing warnings in connection with pollution episodes,
x estimating contributions from various sources,
x following trends in pollution concentrations,
x in some cases also for conducting process studies.
282 O. Hertel et al.

Monitoring stations represent conditions at the local site, which may be consider-
ably different from nearby sites. Careful consideration is therefore needed when
these data are used in connection with exposure assessments.
Urban monitoring networks usually consist of street stations as well as urban
background stations. Urban background pollution is typically measured at roof
level or in parks and backyards, where local sources are not allowed to dominate
the measurements. Pollutant levels at street stations are dominated by emissions
from traffic, but may also to some extent be influenced by emissions from local
industry. Typical compounds included in the monitoring are nitrogen monoxide
(NO), nitrogen oxides (NOx), carbon monoxide (CO), sulphur dioxide (SO2), soot
and PM10 or TSP (total suspended particulate matter). We will return to these
compounds in the following sections.
Easily measurable indicator components may allow estimation of concentra-
tions of other compounds for which monitoring is less straightforward or expen-
sive. Therefore, even though a compound is not harmful in itself, it may turn out to
be a useful compound in the monitoring programme, as an indicator for other more
harmful compounds. An example is the use of black soot as an indicator of ultra-
fine particles.

14.5.2 Application of Models for Exposure Assessment

Models for specific use in exposure assessment include transport-chemistry models

that are based on the microenvironment approach and statistical models that relate
exposure to selected and easily determined parameters. Stochastic components
may, furthermore, be added to the physical models in order to reflect the variabili-
ty, for example, in pollutant concentrations in a given microenvironment. In the
following, we will focus on the physical models, since this type of model has been
applied in the examples shown later in this chapter.
The wide spectrum of atmospheric phenomena governing air pollution con-
centrations takes place on various temporal (from seconds to month and years) as
well as spatial scales (from a few meters to thousands of km). When modelling
human exposure, we are mainly interested in obtaining a good description of the
pollution phenomena in urban areas. However, pollution concentrations in urban
areas may arise from local sources as well as remote sources. Therefore, models
for long-range transport, pollution dispersion within the urban area, as well as for
single streets may be of interest in this context.

14.5.3 Modelling Long Range Transport of Pollution

Air pollution is a transboundary problem where pollutants may be transported over

thousands of kilometres. A wide range of different types of models (Kallos, 1998)
is currently available for describing these pollution phenomena. Such models may
have different mathematical expressions for describing the governing physical and
 Assessing the Impacts of Traffic Air Pollution 283

chemical processes (emission, dispersion, transport, transformation and dry and

wet deposition), but they all require proper input data for meteorology, emissions
and land use for the selected model domain (see Fig. 14.2).

Source: Hertel et al. (2002).

Fig. 14.2. Annual emissions of nitrogen oxides (Tonnes NO2/grid) in Europe in 1999 on a
16.67km x 16.67km grid net. Note the strong impacts of ship traffic and the impact of the road
network in central Europe.

Integrated model systems, where a hierarchy of models is combined, are being

developed at many institutes these years. The THOR system (Tilmes et al., 2002) is
an example of such an integrated model system, which has been applied to the
modelling of long-range transported pollution concentrations in the exposure
assessments presented in the next sections. Fig. 14.3 shows ground level ozone
concentrations modelled with the THOR system.
284 O. Hertel et al.

Fig. 14.3. Modelled ground level ozone concentrations (ppb) in Europe from the THOR
integrated model system

14.5.4 Modelling Pollution in the Urban Background

Several models have been developed for describing pollution levels in the urban
background (see references in Mestayer (1998)). The dispersion conditions are
strongly affected by the city structure, which may generate movements at scales as
large as the whole city area itself.
Within the Danish exposure studies, measurements from urban background
stations have been applied whenever possible. However, where observations have
not been available, a simple model for the urban background pollution (UBM;
Berkowicz, 2000a) has been applied (Fig. 14.4).
In UBM, the urban area is subdivided into a grid net of a resolution of 2km x
2km. Contributions from individual area sources are integrated along wind
direction paths. It is assumed that the dispersion increases linearly with distance
from the source. Horizontal dispersion is accounted for by averaging the calculated
concentrations over a certain wind direction dependent sector, centred on the
average wind direction.
 Assessing the Impacts of Traffic Air Pollution 285

NO2 (g/m3)
10 - 12
12 - 15
15 - 17
17 - 21
21 - 26
26 - 33

Fig. 14.4. Calculations of nitrogen dioxide using the simple UBM

14.5.5 Modelling Urban Street Pollution

Since a significant part of the exposure of the population is caused by emissions

from traffic in urban streets, street pollution models may serve as important tools in
exposure assessment. Examples of these models are STREET, CPBM, OSPM and
CAR (see references in Berkowicz, 1998). Here, we will concentrate on the OSPM
model (Berkowicz, 2000b), which has been applied to exposure assessment in a
number of studies discussed in the following sections.
In the OSPM model, concentrations of exhaust gases are calculated hour by
hour, combining a plume model for the direct impact of vehicle-emitted pollutants
with a box model for computation of the additional impact due to pollutants
recirculated within the street by the vortex flow (Fig. 14.1). OSPM makes use of a
simplified parameterisation of flow and dispersion conditions in a street canyon,
but has been found to reproduce the observed hourly mean concentrations of traffic
pollutants in urban streets well.

14.5.6 Modelling Nitrogen Oxide Chemistry in Street and Urban Background

Nitrogen oxides from traffic are mainly emitted as nitrogen monoxide (NO). The
retention time is relatively short (few minutes) and only very fast reactions take
place inside the street canyon. The distribution between the harmless NO and the
airway irritant nitrogen dioxide (NO2) is therefore to a great extent determined by
the fast reaction between NO and ozone (O3) and the similarly fast photo
dissociation of NO2 back to NO and O3 (Equation 1).
286 O. Hertel et al.

NO  O3 o NO2  O2
NO2  hQ o NO  O (1)
O  O2 o O3

The concentration of NO2 is thus strongly determined by the long range transported
O3. Model calculations are in good agreement with observations, even with this
simplification of the nitrogen oxide chemistry to include only three reactions
(Palmgren et al., 1996).

14.5.7 Determination of Emissions and Emission Factors

Emission data on an annual basis for Europe can be obtained from the European
Monitoring and Evaluation Programme (EMEP) (www.emep.int). Temporal varia-
tions on an hourly, weekly and monthly basis are estimated based on information
about the various source types.
However, when focusing on modelling pollution from traffic in a specific
street, such data are insufficient. Here, information concerning the traffic intensity
and emission factors for the current car fleet is needed. Emission factors may be
obtained from the COPERT traffic emission model, which is available at
(http://vergina.eng.auth.gr/mech/lat/copert/copert.htm). Alternatively, an emission
model can be built directly into the dispersion model for traffic pollution, as in the
case of the windows-based version of the OSPM (http://ospm.dmu.dk).
Often, emission factors for different vehicle categories are not known or the
evolution in these factors may not be well-described, e.g. for particle number
emissions or re-suspension of road dust. In these cases, inverse modelling is a
strong tool. It involves a backward calculation procedure, using street pollution
models, air quality measurements from fixed-site street and urban background
monitors, meteorological data and traffic counts, to estimate the emission factors
for the current car fleet (Palmgren et al., 1999). The emission factors obtained can
be used for calculations in other streets for which monitoring data are not available.
For particle numbers, no common emission database is yet available, but inverse
modelling has been applied to estimate the average fleet emission factors for
Danish conditions (Ketzel et al., 2003).

14.6 Particle Pollution

Ambient air contains a complex mixture of particles with different sizes and
chemical compositions. Size is crucial for effects, since it governs the particles
atmospheric processes as well as their deposition in the human respiratory system.
Particles typically appear in three rather distinct size classes (or modes) usually
 Assessing the Impacts of Traffic Air Pollution 287

termed ultrafine (diameter: 0.01-0.1Pm or 10-100nm), fine (diameter: 0.l-2.5Pm)

and coarse (diameter>2.5Pm) particles (Fig. 14.5).

Number
Mass

coarse
Condensates & Secondary particles (wear of tire & road
other primary long range transport
particles (mainly
construction work
traffic) natural sources

Soot (traffic) Dust from breaks

(traffic)

0.001 0.01 0.1 1 10 100 m

Nano particles
Ultrafine particles
PM2.5 (fine particles)
PM10

Fig. 14.5. Size distribution of particles in urban air shown in both mass and number concentra-
tions. The horizontal axis is the particle diameter in Pm. The continuous line shows mass distri-
bution dominated by the coarse and secondary particles. The broken line is the number distribu-
tion, dominated by ultrafine particles. Note that one particle with a diameter of 10Pm has the
same weight as 1 billion particles with a diameter of 0.01Pm

Only the particle mass concentration of particles <10 m in aerodynamic diameter

(PM10) is regulated in European directives and routinely measured at many
locations. Particle mass is dominated by particles >0.1 m in diameter. However,
recent health studies relate both acute and long-term health effects to ultrafine
particles (particle sizes < 0.1 m) (Wichmann and Peters, 2000). Although ultra-
fine particles represent a minor contribution to mass concentrations, they constitute
most of the particles in terms of number concentration.

14.6.1 Source of Traffic Particles and Modelling

In busy streets, a significant fraction of particle pollution originates from traffic.

The direct emissions from car exhaust contain particles formed inside the motor as
well as in the air just after the exhaust pipe. These particles are mostly in the
ultrafine particle fraction. However, traffic also contributes to mechanically formed
particles in the fine and especially the coarse fraction. The particles in the coarse
fraction are produced from wear of tyres and road material as well as resuspended
dust. Particles from brakes contribute similar amounts to the fine and the coarse
fractions.
288 O. Hertel et al.

For particle mass (PM10), long-range transport is the dominant source for
regional background levels. Less than 10% of the urban PM10 originates from local
urban sources. For particle numbers, as well as NOx, greater differences between
rural, urban and kerbside levels are observed, indicating a large contribution from
local traffic sources (Fig. 14.6).

600
Concentration relative to urban background (=100)

kerbside
500 urban background
near-city location
400 rural background

300
200

100
80
60
40
20
0
ToN ToV PM10 NOx

Source: Adopted from Ketzel et al. (2004).

Fig. 14.6. Comparison of average concentrations of total particle numbers (ToN), particle mass
(PM10) and NOx at rural, near-city, urban and kerbside stations relative to urban background
levels in the Copenhagen area. The concentration bars are stacked so that only the additional
contributions are marked with the pattern shown in the legend. Note that the scale of the vertical
axis changes at 100.

A striking feature of urban particles is the high correlation (R>0.9) between con-
centrations of NOx and total particle numbers, indicating that both compounds
originate from the same (traffic) source. They are emitted in a similar ratio particle
number/NOx by the different traffic categories, i.e. high NOx emitters (diesel
vehicles especially heavy-duty vehicles) are also high particle emitters. OSPM
calculations reproduce the observed particle numbers (Fig. 14.7) well when
treating particles as inert tracers (disregarding transformation and loss processes).
The particle emission factors depend on ambient temperature with higher emis-
sions at lower temperatures, which is accounted for in the simulations.
 Assessing the Impacts of Traffic Air Pollution 289

80000
ToN_mod
70000
ToNdiff_obs
60000

50000

40000

30000

20000

10000

-10000
18-06-2001 25-06-2001 02-07-2001 09-07-2001

Fig. 14.7. Time series of OSPM predictions (grey) and measurements (black) (difference between
street and urban background) for total particle numbers ToN [cm-3] for a three-week period in
June/July 2001. The average hourly emissions are determined by inverse modelling, treated
separately for weekdays, Saturdays and Sundays

14.6.2 Other Particle Sources

Long-range transport contributes significantly to the fine fraction particles and

leads to the main part of particulate sulphate and ammonium and a large part of
particulate nitrate. These secondary particles are formed from anthropogenic
sulphur dioxide, ammonia and nitrogen oxides emissions. Another part of the
particulate nitrate appears in the coarse fraction, which also contains contributions
from sea spray and resuspended dust (including road dust) that has a relatively
large mass and quickly deposits by gravitational settling. Coarse particles, there-
fore, have a shorter lifetime in the atmosphere compared with fine particles. Com-
bustion in wood stoves is a source of particle pollution and it contributes to about
90% of the total particle emission related to domestic heating. Road traffic and the
use of wood stoves are the biggest Danish sources of particle exposure of the popu-
lation, due to low release height and because the emissions take place where people
live. The particles emitted from wood stove combustion are soot particles with
high contents of polycyclic hydrocarbons (PAH).
People spend a significant part of their time indoors and exposure to air pollu-
tion in the home is therefore important for their overall exposure. A Danish study
in an uninhabited apartment in central Copenhagen revealed that particle pollution
inside the apartment to some extent was linked to the activity level of the
neighbouring apartments (Schneider et al., 2004).
290 O. Hertel et al.

14.7 Examples of Exposure Assessment in Danish Studies

A number of exposure assessment studies have been carried out in connection with
the Danish National Environmental Research Programme (Hertel et al., 2001). The
results from these studies are presented in the following.

14.7.1 Exposure of Bus Drivers and Postmen in Copenhagen

Some occupations are associated with high exposure to ambient air pollution.
Persons in such occupations are, thus, at higher risk of pollution-related adverse
health effects compared with the rest of the population, especially persons who
stay in the occupation for long periods of their life. Examples are bus drivers and
postmen. It has been found that Copenhagen bus drivers have a higher frequency of
several forms of cancers when compared to reference groups (Soll-Johanning et al.,
1998).
Monitoring exposure of workers in their working environment is demanding in
terms of resources and therefore there is a need for comprehensive modelling tools
for estimation of pollution exposure in epidemiological studies. This was the
background for testing exposure assessment based on the OSPM against campaign
measurements1. NO2 measurements were made using passive diffusion samplers
inside a bus, outside a bus, on a postman and on a postmans bicycle during a
three-week campaign period in Copenhagen, Denmark. Sampling was performed
for entire working days of the bus driver and for the total mail route of the
postman. Information concerning the configuration of the streets (street orientation,
street width, height of the buildings along the street, etc.) was obtained manually
on location and information about traffic was obtained from the local municipality.
Calculations with the OSPM were then undertaken for 22 selected street sections
along the bus route and the postmans mail route. Applying information from bus
schedules and diaries, the average exposures were obtained for the bus and the
postmans bicycle. The measurements showed that NO2 concentrations inside and
outside the bus were almost identical. Similarly, the NO2 concentrations on the
postman and the bicycle were similar. The OSPM reproduced the measurements
well (Fig. 14.8 and 14.9), and the study showed that such a model might serve as a
useful tool for exposure assessment in occupational epidemiology studies of bus
drivers and postmen.

1
Campaign measurements refer to monitoring during short intensive periods.
 Assessing the Impacts of Traffic Air Pollution 291

70
modelled
60
measured inside
Mixing ratio NO2 (ppb)

50 measured outside
40 measured Jagtvej

30

20
10

0
28-aug 31-aug 03-sep 06-sep 09-sep 12-sep 15-sep

Source: Hertel at al. (1996).

Fig. 14.8. Average nitrogen dioxide mixing ratios over a whole working day of the Copenhagen
bus driver (8 hours) for the campaign period 28 August-17 September 1995. The figure shows
measurements for the entire working day of the bus driver obtained inside and outside the bus and
results obtained from OSPM calculations representing the average concentrations along the bus
route. Average concentrations for the working hours at the monitoring station Jagtvej (one of the
streets on the bus route) are also shown. Arrows on the time axis indicate Sundays.

70
modelled
60
measured on postman
Mixing ratio NO2 (ppb)

50 measured on bicycle
40
30
20
10
0
28-aug 31-aug 03-sep 06-sep 09-sep 12-sep 15-sep

Source: Hertel at al. (1996).

Fig. 14.9. Average nitrogen dioxide mixing ratios on the mail route of the Copenhagen postman
(typically between 2 and 4 hours) for the campaign period 28 August 17 September 1995. The
figure shows measurements sampled for the time spent on the mail route of the postman and on
his bicycle and the results obtained from OSPM calculations representing the average
concentrations along the mail route. Arrows indicate Sundays (when no mail is delivered).
292 O. Hertel et al.

14.7.2 Exposure of Danish Children to Traffic Air Pollution

The possible link between exposure to traffic-related air pollution and childhood
cancer was investigated in the Children cancer study (Raaschou-Nielsen et al.,
2001). Exposure at the front door address was taken as an indicator of the personal
exposure of the child. Input data for the OSPM calculations (street configuration
and traffic data) were obtained from a questionnaire sent to the local authorities.
The information in the questionnaire was digitised and a programme was
developed for interpretation and subsequent generation of input files for the model.
The system was evaluated against a series of NO2 and benzene measurements
obtained from 200 addresses. A reasonably good agreement was obtained (Fig.
14.10) and the system was subsequently applied to nearly 20,000 addresses of
Danish children in the period 1960 to 1991. It has been estimated that the time
spent by the local authorities on filling out the questionnaires of all these addresses
corresponds to about 3 man-years. This illustrates clearly that such an approach to
exposure assessment is very costly.

80
70
Calculated NO2 (ppb)

60
50
40
30
20
10
0
0 10 20 30 40 50 60 70 80
Observed NO2 (ppb)

Fig. 14.10. Comparison of about 1200 observed and calculated monthly mean NO2 mixing ratios
at the address (front door) of 200 Danish children (100 in Copenhagen and 100 in rural areas).
Data are identical to those presented in Raaschou-Nielsen et al. (2002a)

14.7.3 Personal Monitoring of Air Pollution Exposure in Copenhagen

No models perform better than the quality of the available input and validation
data. A field study of exposure to air pollution in Copenhagen was carried out
during four seasons in both 1999 and 2000 (Srensen et al., 2003).
 Assessing the Impacts of Traffic Air Pollution 293

Personal exposure to PM2.5 (and black smoke analysed from the filters), NO2
and BTX (Benzene, Toluene and Xylenes) was measured for 50 students living and
studying in central Copenhagen. Measuring campaigns of 5 weeks duration took
place in autumn, winter, spring and summer. Measurements were conducted over
2-day periods for each study subject. Urban background concentrations were
measured simultaneously at rooftop level in central Copenhagen. For 30 of the
students, pollutant concentrations were measured simultaneously at the front door
of the residence building and inside the bedroom. Morning blood samples were
collected at the end of each 2-day campaign and 24-hour urine samples were
collected on the second day of the campaign. Blood and urine samples were
analysed for various biomarkers e.g. for DNA damage and the biomarker results
were compared to air pollution exposure levels measured. Detailed information
about the sampling equipment and methods of analysis is provided in Srensen et
al. (2003).
The results showed that outdoor pollution concentrations are not always a
good predictor of personal exposure. For NO2, the relationship between personal
exposure and the front door concentration was dependent upon the season, with a
stronger association in the warm season compared to the cold season, and for PM2.5
and black carbon the same tendency was observed. Time exposed to burning
candles had a significant impact on the personal exposure levels of PM2.5, black
carbon and NO2. Time exposed to environmental tobacco smoking (or passive
smoking) had a significant impact on personal exposure levels of PM2.5, but did not
affect the exposure levels of NO2 and black carbon. These findings imply that
personal exposure to PM2.5, black carbon and NO2 depends on many factors in
addition to outdoor levels and that information on the season or outdoor tempera-
ture and residence exposure improves the accuracy of personal exposure estima-
tion. The analysis of the association between biomarkers and personal exposure
suggested that even moderate exposure to concentrations of PM can induce
oxidative DNA damage and that personal PM2.5 is more important in this aspect
than is ambient PM2.5 background concentration.

14.7.4 Using GIS in Street Pollution Modelling for Exposure Assessment

Geographical Information Systems (GIS) are used for a variety of purposes

including exposure assessments. An example of a GIS-based system is the Danish
AirGIS 2 (Jensen et al., 2001) that is now applied to exposure assessment in a
number of Danish epidemiological studies.

2
See also: http://www.dmu.dk/International/Air/Models/AirGIS/.
294 O. Hertel et al.

W
id
th
of
ca
rri
a ge
wa
D y
to ista
ro nc
ad e f
ce rom
nt
re fac
lin ad

n
io
Pe e e

at
rp

nt
en

ie
dic

or
ula

et
r

re
St
Re
ce
pt
or
p oin
t

or
ct
se
d
in
W
Address point
Road centre line
Building

Fig. 14.11. Illustration of the 2 dimensional model applied for generation of street configuration
data in AirGIS. The calculation procedure is built on digital maps and data from Danish national
registers. The parameters that are determined include general building height in the area, building
height in wind sectors, width and orientation of the street and distances to street intersections

AirGIS is based on the OSPM, available technical and cadastral maps (buildings,
roads, address points, property limits) and available Danish national administrative
databases on buildings, property limit, and populations. The digital maps and
registers applied depend on the purpose of application and the approach taken to
generate the required data. The basic requirements for calculating air quality levels
at a particular address are the availability of digital maps of streets with traffic
data, buildings with building heights and addresses. Data on building heights may
be obtained in different ways: (a) object heights above sea level of buildings minus
terrain heights (b) heights obtained from the Building and Dwelling Registry using
property limits to geo-code buildings (c) heights obtained from Digital Elevation
Models. For population exposure assessment, population data can be linked to an
individual address using the Central Population Register.
Determining street configuration data from manual observations or from
questionnaires filled in by local authorities is costly, especially when a large
number of addresses is studied, for example in connection with a large cohort in an
epidemiological study. This is clearly illustrated by exposure assessments present-
ed in the two previous sections. Application of a GIS based system is a strong tool
for obtaining such data using fewer resources. In the AirGIS system, a so-called 2
dimensional landscape model determines these data. This is done by interpretation
of digital maps and information from the available databases, which leads to
generation of street configuration data for the OSPM (Fig. 14.11).
Obtaining information about traffic on the road network is one of the main
problems in generating the required input data for model calculations in AirGIS.
The administration of the Danish road network is subdivided into three levels of
 Assessing the Impacts of Traffic Air Pollution 295

government: municipalities, counties and state. Data for the county and state road
network can be obtained relatively easily, whereas many municipalities do not
have easily accessible databases for traffic. This constitutes a problem since the
municipalities administer the major part of the total road network. For the Greater
Copenhagen area, traffic information has been obtained from the Copenhagen-
Ringsted Railway project. In this project, most of the necessary data were
collected, though for an aggregated network and not a GIS network. To make the
data useful in a GIS network, a link was established to transfer traffic data from the
aggregated network to the GIS network.
The AirGIS system allows for assessment of exposure at thousands of
addresses, which would be impossible using measurements and highly resource
demanding using the previously applied methods (manually or using question-
naires) for obtaining street configuration and traffic data (see the two previous
sections).
A system for tracking study subjects using a Global Positioning System unit
(GPS) has been developed (Fig. 14.12). This system is based on GPS built into a
mobile phone and transfers of position data using SMS, as well as routes are
handled in the AirGIS (Fig. 14.13).

Fig. 14.12. Illustration of tracking an individual along a route in AirGIS

296 O. Hertel et al.

# #
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#
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#
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#
Centre
#
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#
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#####

sit ### ###

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ion # # ####
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ing #
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9

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Tracking #
#
# ##
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program #
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# ## ##
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PC and GSM modem GPS

ArcView script for visualisation

Fig. 14.13. Example on results from the system for tracking people using a Global Positioning
System (GPS). The GPS is built into a mobile telephone and SMSs are used for transferring
positions of a study subject every 20 seconds to a computer. A tracking programme collects the
GPS data. A dynamic area-tracking feature ensures that SMSs are only sent when the subject is
moving (settings may be changed on-line by telephone). The movement of a study subject can be
traced on digital maps in real time

The AirGIS system has been validated by careful comparison of model results to
observations from fixed site monitoring stations as well as to personal exposure
measurements from the field study referred to in the previous section. These
validations reveal that the 2 dimensional landscape model provides high quality
street configuration data and that the total model system is capable of reproducing
fairly well the observed concentrations and personal exposures (Jensen et al.,
2004).

14.8 Assessment of Health Effects of Air Pollution Exposure

Most of the assessments of health effects of air pollution exposure presented in the
literature are based on data from fixed site monitoring or simple methodologies are
applied for estimation of the exposure of the population and extrapolations are the
obtained for exposure/dose-effect relationships from the literature.
On the initiative of the WHO Europe, the national agencies from Austria,
France and Switzerland have assessed the public health costs of total air pollution
and traffic-related air pollution (Knzli et al., 2000). The results showed that in
Switzerland, which has a population similar to Denmark, a reduction in the popula-
tion-weighted PM10 concentrations from the present 21.4 Pg/m3 to 7.5 Pg/m3
 Assessing the Impacts of Traffic Air Pollution 297

would result in a substantial reduction in mortality and morbidity, with up to 3,300

premature deaths per year. The methodology of this study has been applied to
Denmark (Raaschou-Nielsen et al., 2002b). However, a slightly different method
for determining PM10 is used in the Danish study. Here, the urban background
concentrations in Copenhagen were calculated based on traffic data and calculated
NOx emissions were derived on the basis of the traffic data, application of
empirically-determined relationships between NOx and PM10 emissions from
traffic, meteorological data and measurements of NOx in rural areas. The con-
centrations from Copenhagen were then scaled down for smaller cities and towns
based on the city size. Using this methodology, the average population PM10
exposure was estimated to be 22 Pg/m3. Approximately one-third could be related
to natural sources. The man-made level of PM10 was estimated to cause annually
approximately 3,400 deaths, 3,700 hospital admissions, 3,300 cases of chronic
bronchitis, 12,000 cases of acute bronchitis, 150,000 asthma attacks and close to
1.8 million restricted activity days.
This type of assessment is based on transferring exposure-effect relationships
from studies abroad. Currently, exposure assessment is being added to a number of
Danish ongoing and historical epidemiological studies. When the exposure assess-
ments are ready, these data will be analysed with respect to collected health data
from various cohorts.

14.9 Perspectives

Tools such as the AirGIS have only been available for exposure assessment for a
short time. Ongoing studies where AirGIS is applied will be concluded and
published in the near future. The results from these studies will indicate how well
the methodologies behind these tools work in practice. In these applications, air
pollution exposure at the front door of the address is in most cases used as a proxy
for personal exposure. Currently, calculations are being performed for about
20,000 addresses. In later project, similar AirGIS calculations will be performed for
more than 200,000 addresses.

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Berkowicz, R. (2000a). A simple model for urban background pollution. Environmental

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Berkowicz, R. (2000b). OSPM A parameterised street pollution model. Environmental

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15 Car Use Habits: An Obstacle to the Use of
Public Transportation?

Berit Mller and John Thgersen

Aarhus School of Business, Department of Marketing and Statistics, University of Aarhus,

Denmark

Abstract
It is often claimed that many drivers use their private car rather habitually. The claim
gains credibility from the fact that travelling to many everyday destinations fulfils all
the prerequisites for habit formation: it is recurring, performed under stable
circumstances and produces rewarding consequences. Since the decision is made
quite automatically and only one choice alternative is considered (the habitually
chosen one), behaviour guided by habit is difficult to change. The implications of car
use habits for converting drivers to commuters using public transportation is analysed
based on a survey undertaken in the Copenhagen area. The study reveals that a
relatively low percentage of drivers (10-20%) consider commuting by public
transportation in the near future, which is hardly a surprise. A hierarchical analysis,
where reported use of public transportation is regressed on intentions to do so, car
use habit, and the interaction between the two, confirms the theory-derived hypothe-
sis that car use habits act as an obstacle to the transformation of intentions to
commute by public transportation into action.

15.1 Introduction

Even though the average fuel consumption per car kilometre fell by 11% during the
1990s, CO2 emissions from road transport in Denmark increased by 16%, the reason
being that the increase in kilometres driven (29%) exceeded the fall in fuel
consumption (Danmarks Statistik, 2002). This situation is not unique for Denmark,
on the contrary. Worldwide, rapid growth in car driving is a source of concern both
because of its local and global environmental impacts (Mackenzie, 1997; OECD,
1996; Trafikministeriet, 1995, 1999). Solving the traffic-related environmental
problems is not easy, however. A wide range of regulations, system changes, and
adaptations are needed, which can only be provided through the concerted effort of
many parties, including car producers, providers of public transport services, public
authorities, and users of transport products and services (Mackenzie, 1997; OECD,
1996; Sperling and Shaheen, 1995; Vlek et al., 1993; Vlek and Steg, 1996). Final
consumers, who in their private lives and for private purposes demand transport
solutions, play one of the key roles. Person transport constitutes most of total
302 B. Mller and J. Thgersen

transport, and private cars are being increasingly and dominantly used (Danmarks
Statistik, 2002; Mackenzie, 1997).
Private consumers of transport products and services are also the majority of
voters in most countries. Hence, in a democratic society, whatever solution one
proposes to relieve the environmental and societal burdens of transport, it stands or
falls with the acceptance by these individuals, either as buyers of transport
products and services or as voters (Schlag and Teubel, 1997). In this chapter, we
focus on individuals in their former capacity. Since most person transport is made
by individuals as private consumers, and since their dual capacity as consumers
and voters makes it virtually impossible effectively to force people to change their
transport behaviour, much more insight is needed into how people can be
persuaded to accept more environmentally-friendly transport solutions (Steg and
Vlek, 1997; Tertoolen, Kreveld, and Verstraten, 1998). In this book, the focus is on
road pricing as a means of persuasion.
In recent years, Dutch (Aarts, Verplanken, and Knippenberg, 1998; Ver-
planken, Aarts, Knippenberg, and Knippenberg, 1994; Verplanken, Aarts, Knip-
penberg, and Moonen, 1998) and Swedish (Grling, Boe, and Fujii, 2001)
researchers in particular, have made substantial advances in demonstrating the
importance of habits for the choice of mode of transportation. Consistent with
these findings, a recent Danish study found that past behaviour is a better predictor
of the use of public transportation than attitude towards the use of public trans-
portation, public transportations ability to cover the individuals transport needs,
and perceived social pressure to use public transportation (Thgersen, 2006). If the
travel mode is generally chosen habitually, this has a profound influence on the
effectiveness of different means of persuasion (Aarts, Verplanken, and Knippen-
berg, 1997; Assael, 1987; Ronis, Yates, and Kirscht, 1989; Thgersen and lander,
2006). In particular, it means that drivers are unlikely to search for or even
contemplate new information before choosing a travel mode. Hence, in order to
be noticed at all, persuasive information needs to be obtrusive and to be perceived
as personally relevant (Dahlstrand and Biel, 1997; Hoyer and MacInnis, 1997).
Besides usually being obtrusive themselves, economic instruments of regulation,
such as road pricing, have the advantage of catching media attention, which
increases the chances of regulation being noticed by those being targeted.
However, if the regulatory instrument obtains its personal relevance by threatening
individuals economic security and freedom, as fees and taxes usually do, there is a
risk that it produces a psychological reactance (Brehm and Brehm, 1981; Jacobs-
son, Fujii, and Grling, 2000); a motivational state directed toward re-establishing
the threatened free behaviour. Hence, although regulation based on strong eco-
nomic incentives is likely to persuade at least some drivers to change behaviour,
they may in addition produce an increased desire for the targeted behaviour
(driving) (Tertoolen et al., 1998; Van Vugt et al., 1996). The risk of resistance, as
well as political action against the regulation, is increased if the regulation is
perceived as unfair because it hits low income groups harder than high income
groups (Gardner and Stern, 1996; McClelland and Canter, 1981).
There is no doubt that commuting to work by car has the potential of
becoming habitual: it is frequently and extensively performed, in stable surround-
 Car-Use Habits: An Obstacle to the Use of Public Transportation? 303

ings, and usually the destination is reached in a timely and comfortable manner, i.e.
the experience is perceived as rewarding. These are the three prerequisites for habit
formation identified, for instance, by Ouellette and Wood (1998). Conditions such
as these facilitate a learning process, which allows the individual to reduce the
amount of cognitive effort in decision-making and to perform the behaviour with
an increasing degree of automaticity (Thgersen and lander, 2006).
Following Verplanken and Aarts (1999), we define a habit as a learned
sequence of acts that has become an automatic response to specific cues, and is
functional in obtaining certain goals or end-states. The instigation of habitual
behaviour is volitional and intentional, but subsequent acts may be unintentional
(Ouellette and Wood, 1998; Verplanken and Aarts, 1999). Ouellette and Wood
note that many established behavioural routines in daily life, such as car use, have
both volitional (planning to go somewhere) and automatic elements (taking the car,
driving).
A habit, which was functional in obtaining some goal(s) at the time when it
was formed, may lose its functionality if the goal(s) change at a later point in time
(Verplanken and Aarts, 1999). In such cases, the habit may become counter-
intentional. Counter-intentional habits are particularly prevalent when the
behaviour is based on short-term, hedonistic motives at the expense of long-term
goals (Verplanken and Faess, 1999). The impact of habits that counteract attitudes
and intentions has been studied for healthy dieting behaviour (Verplanken and
Faess, 1999), but not previously with travel mode choice.
Studies of the habit-intention-behaviour relationships regarding travel mode
choice have confirmed Triandiss theory (Triandis, 1977; Landis et al., 1978) that
behavioural intentions and habits interact in determining behaviour, implying that
the stated intention is a good predictor of behaviour only under conditions of weak
habits while intention is a bad predictor of behaviour when habits are strong (Aarts
et al., 1997; Grling et al., 2001; Verplanken et al., 1994, 1998). For instance,
Verplanken et al. (1994) found that the correlation between the attitude towards a
specific travel mode option and travel mode choice (for shopping trips to either of
two cities located approximately 5 miles away and where a realistic public
transport option existed) was significantly weaker for individuals with strong rather
than weak habits.
This study is inspired by the work of Verplanken and his associates
(Verplanken et al., 1994; Verplanken et al., 1998). However, the approach here is
slightly different. We investigate whether a habit of using one travel mode (a
private car) is an obstacle to choosing another (public transport). Our approach is
an attempt to investigate the influence of counter-intentional habits (Verplanken
and Aarts, 1999) on travel mode choice, where car use habits are perceived as
counter-intentional with respect to an intention to commute by public transport.
Specifically, we test the following hypothesis:
x H1: For commuters with a strong car use habit, there is a weak correlation
between intention and behaviour in relation to the use of public transportation
and for commuters with a weak car use habit the correlation is strong.
304 B. Mller and J. Thgersen

15.2 Method

This study is based on a survey of drivers in the Copenhagen area, the data having
been collected in October 2002. Only 37.6% of the households in the Copenhagen
area have a car (Danmarks Statistik, 2001). Hence, rather than aiming for a represent-
ative picture of the total population, this study focuses on the segment that is most
likely to have developed a habit of commuting by private car. Respondents were
screened according to the following criteria: The household has a car at its dis-
position and the respondent possesses a drivers licence, is in work or studies, has not
held a travel pass for public transport in the Copenhagen area in the last year, and
does not need a car to perform his or her job. If more than one person in the house-
hold fulfilled the criteria, the next birthday method was used to select the respondent.
Of those meeting the screening criteria, 1071 agreed to participate, resulting in
a response rate of 75%. Listwise deletion is used in the case of missing values with
the result that the sample size is reduced by 27 to 73 respondents in the following
analyses.

15.3 Data

Behaviour was measured as a frequency on a scale from 0 to 10 using the item:

On how many of the last 10 journeys have you used public transportation for the trip
between home and work/educational institution? 1

Although low, the mean (0.57) differs significantly from zero (t = 9.832, p <
0.001). A frequency analysis shows that 85% of the respondents had not commuted
by public transport on any journey out of the last ten, 8% had used public transport
on one or two journeys and 7% had used public transport more than twice in the
last ten commuting journeys.
The intention to commute by public transport was measured using two items
on 11-point scales, following the form suggested by Ajzen and Fishbein (1980)
(see Table 15.1).

1
Note that the measure of behavioural frequency is made at the same time as the measure of
behavioural intention. Hence, as always in cross-sectional analyses, the measures are not register-
ed in their assumed temporal sequence. This, of course, means that we cannot be sure of the
direction of causality between the measured variables. However, previous studies have found
travel mode choices to be quite stable over time (Bamberg and Ldemann, 1996) and even over a
period of one year (Thgersen, 2006), which indicates that using behaviour in the recent past as
an indicator for behaviour in the near future is defensible.
 Car-Use Habits: An Obstacle to the Use of Public Transportation? 305

Table 15.1. Items and descriptive statistics for intention

(n = 1052) Mean St. Cron-
Dev. bachs
Alpha
On how many of the next 10 journeys do you plan to use
public transport for the trip to work/educational institution? (0:
zero times to 10: ten times) 0.44 1.68

If you consider the next month, how often do you think you
will use public transport for the trip to work/educational
institution? (0: never to 10: every time) 0.54 1.70
SCALE intention 0.49 1.62 0.92

The intention scale is constructed by averaging the scores on the two items.
Cronbachs Alpha indicates excellent reliability (Cronbach, 1987). The scale mean is
significantly different from zero (t = 9.820, p < 0.001). A frequency analysis shows
that 89% of the respondents did not plan to commute by public transport one single
time out of the next ten and 81% did not expect to commute by public transport at all
during the following month.

Table 15.2. Items and descriptive statistics for the response frequency habit measure (RF)
I now mention some travel mode situations. Please say as fast as
possible for each of them the transport mode that springs to
mind. There are no wrong answers, but it is important that you
answer as quickly as you can, and state the transport mode that %
first comes to mind. Which mode of transport would you choose choosing
if you are car n
picking someone up at the central station? 77.4 1065
visiting someone at the other end of the capital area? 84.8 1064
going to the beach with friends for a day? 76.4 1063
going shopping in the centre of Copenhagen? 33.8 1063
going to the nearest woods for a walk? 70.6 1067
going to sports or other recreational activities? 55.3 1054
going shopping in the nearest supermarket? 43.6 1070
going to the nearest post office? 30.5 1069
going to visit someone in Jutland? 79.0 1059
going to visit a sight outside the Copenhagen area? 95.1 1068
Scale RF (mean = 6.48, St. Dev. = 2.12) 1016

Two habit measures were employed. The response frequency (RF) measure
developed by Verplanken and his associates (1994) attempts to capture mental
representations of habitual activities. It is based on the assumption that habitual
responses are guided by mental representations of past behaviour, i.e. scripts (Aarts
et al., 1997). When a habit appears in different contexts (for example, habitual car
306 B. Mller and J. Thgersen

use in shopping, recreational and/or work-related contexts), each of the contexts

may evoke its own specific scripted sequence of acts (Verplanken and Aarts,
1999). If the goal and the behavioural response are the same across different
situations, a general habit may evolve that is capable of being triggered by specific
cues in different situations. The RF measure is designed to capture such a general
habit, rather than the habit of choosing a particular travel mode in a particular
situation.
In order to reflect scripts in the semantic memory, the RF measure should
elicit automatic (as opposed to strategic) responses. Automatic responses are
facilitated by imposing time pressure and by asking about the first travel mode that
comes to mind when confronted with the choice situation (Aarts et al., 1997;
Verplanken and Aarts, 1999). The instrument contains 10 trips of short, medium or
long distance. The number of times that car is mentioned serves as a measure of
the respondents general habit of choosing the car. Hence, the RF measure can vary
from 0 to 10. Items are presented in Table 15.2.

Table 15.3. Items and descriptive statistics for the of SRHI-measure, n = 1064
Mean St. Kron-
Dev. bachs
Alpha
I often use the car as a means of transport between
home and work/educational institution 3.86 1.67

I automatically use the car as a means of transport

between home and work/educational institution 3.57 1.78

It would be difficult not to use the car as a means of

transport between home and work/educational
institution 3.07 1.76

To use the car as a means of transport between home

and work/educational institution belongs to my
routines 3.66 1.74

I would find it hard not to use the car as a means of

transport between home and work/educational
institution 3.20 1.76

To use the car as a means of transport between home

and work/educational institution is something that is
typically me 3.35 1.73

To use the car as a means of transport between home and

work/educational institution is something I have done for
a long time. 3.68 1.75
SCALE: habit (SRHI) 3.09 1.78 0.95
Note: Answers are given on a 5-point scale with the categories: totally disagree (1), partly disagree
(2), neither agree nor disagree (3), partly agree (4), totally agree (5).
 Car-Use Habits: An Obstacle to the Use of Public Transportation? 307

The other habit measure, the self-reported habit index (SRHI), has recently been
developed by Verplanken and Orbell (2003). It is designed to capture the features of
automaticity assumed to be most descriptive of a habit: uncontrollability, efficiency
and lack of awareness, in addition to a history of repetition and the degree of
reflecting identity or personal style. Verplanken and Orbell had 12 items in their
original measuring instrument. Here, the number of items was reduced after a pre-test
to 7. The items are shown in Table 15.3.
The SRHI scale is constructed by averaging the scores on the seven items.
Cronbachs Alpha indicates excellent reliability.

15.4 Results

The hypothesis is tested by means of hierarchical regression analysis. In a hierarchic-

al regression analysis, the independent variables are entered in the order that one
expects them to influence the dependent variable. In this case, it is assumed that the
intention to use public transport is the immediate antecedent of the behaviour, if it is
not blocked by car use habits. Hence, when predicting commuting by public trans-
port, the intention to use public transport is entered first, followed by a measure of
car use habits. In this second step, a possible additive effect of habit on behaviour is
captured. Finally, the hypothesised moderating effect of habit on the intention-
behaviour relationship is captured by including the interaction term (intention x
habit) into the equation. Hence, the analysis involves three steps:
1. Behaviour = f(Intention)
2. Behaviour = f(Intention, Habit)
3. Behaviour = f(Intention, Habit, Intention x Habit)

If the variable entered has a significant effect on the dependent variable not
2
accounted for by the variable(s) previously entered, the F-value of the change in R
from one step to the next is statistically significant.
In order to avoid multicollinearity, intention and habit measures must be
centred (scored as deviations from the scale mean) before conducting the analysis
(Aiken and West, 1991; Cronbach, 1987). First, we present the results of the
analysis using the SRHI measure of habit (Table 15.4).

Table 15.4. Hierarchical regression: The moderating effect of habit (SRHI) on the intention-
behaviour-relationship (n = 1044)
2 2
Adj. R ' R 'F d.f. Sig. ' F
1: B = f(I) 0.50 0.000
2: B = f(I, H) 0.50 0.000 0.346 1; 1041 0.580
3: B = f(I, H, I*H) 0.53 0.028 60.772 1; 1040 0.000
Note: H = car habit (SRHI measure), B = behaviour: use of public transport, I = intention to use
public transport.
Estimated parameters for equation 3: Behaviour = 0.58I 0.04H 0.21(I*H); parameters for I and
I*H are significant at p < .001.
308 B. Mller and J. Thgersen

Table 15.4 shows that the model predicts behaviour satisfactorily (53% of the
variation is explained). The standardised E-coefficients reveal, as expected, a sig-
nificant and positive direct effect of intention on behaviour. Also as expected, the
direct effect of car use habit on commuting by public transport (behaviour) is
negative, but it is not significant at the .05 level. As predicted, there is a significant
interaction between car use habit and intention. The coefficient of the interaction
term shows how much the effect of one of the variables depends on the level of the
other. In the presence of an interaction effect, the coefficient of a centred variable
represents its effect at the mean of the interacting variable (Aiken and West, 1991).
At one standard deviation above (below) the mean of the interacting variable, the
coefficient of the variable in focus is equal to its value at the mean of the interacting
variable plus (minus) the coefficient of the interaction term. Hence, when the car use
habit is strong (one standard deviation above its mean value), the effect of intention
on behaviour is weak, .37 (.58 + (-.21)) and when the car use habit is weak (one
standard deviation below its mean value) the effect of intention on behaviour is
strong, .79 (.58 - (-.21)), consistent with the hypothesis that car use habits act as an
obstacle to transforming intentions to commute by public transport into action.
A similar hierarchical regression analysis was made with the RF measure
representing habit. The results are shown in Table 15.5.
Again, the model predicts behaviour satisfactorily (50% of the variation is
explained), although not as well as above. The reason for this difference is that the
effect of the interaction term is weaker when the habit is represented by the RF
measure rather than the SHRI measure. However, the interaction term still has a
(marginally) significant negative effect in this case. Hence, the conclusions of the
analysis remain substantively the same; that intention to commute by public
transport is more likely to be transformed into action under conditions of weak
rather than under conditions of strong car use habits.

Table 15.5. Hierarchical regression: The moderating effect of habit (RF) on the intention-behaviour-
relation (n = 998)
2 2
Adj. R ' R 'F d.f. Sig. ' F
1: B = f(I) 0.499
2: B = f(I, H) 0.498 0.000 0.064 1; 995 0.800
3: B = f(I, H, I*H) 0.500 0.002 3.425 1; 994 0.065
Note: H = car habit (RF measure), B = behaviour: use of public transport, I = intention to use public
transport.
Estimated parameters for equation 3: Behaviour = 0.68I 0.01H 0.05(I*H); parameters for I and
I*H are significant at p < .001 and p < .07 respectively.

15.5 Summary and Implications

Based on reasoning, suggesting that it is likely that car users develop a habit of
commuting by car and on previous research suggesting that travel mode choices are
strongly influenced by habits, this study sets out to investigate whether a habit of
 Car-Use Habits: An Obstacle to the Use of Public Transportation? 309

driving may be an obstacle to transforming an intention to commute by public

transport into action. In this perspective, a car use habit may be conceived as counter-
intentional. The study is based on a survey of car users in the Copenhagen area.
Behaviour is operationalised as behaviour frequency. Behavioural intention is
operationalised as a plan for the near future. Habits are operationalised as either a
general, cross-situational script linking transport goals to a travel mode (the response
frequency measure) or as a more specific self-descriptive measure for commuting by
car that captures features of automaticity, a history of repetition, and the degree to
which commuting by car reflects identity or personal style (the self-reported habit
index).

Two results of the analyses are particularly important:

1. Descriptive statistics show that only 10-20% of the interviewed car users have
any intention of commuting by public transport in the near future and that few
have done so in the recent past, which should come as no surprise. Many
drivers commute by car because there are no alternatives that fulfil their spe-
cific needs and probably an even larger number do so because they perceive
the car as the best among the available alternatives. Some of them may be
wrong, they may be ill-informed about the options available. However, our
focus is not on the ill-informed, but on the minority of drivers who have
formed a conscious intention to commute by public transport. A car use habit
seems to be an obstacle to transforming such an intention into action.
2. Hierarchical regression analysis shows that intentions and behaviour regarding
commuting by public transportation are strongly correlated. However, as
predicted by the proposition that car use habits form an obstacle to trans-
forming an intention to commute by public transport into action, the intention-
behaviour correlation depends on the strength of the habit of driving by car.
When the habit is weak, the intention-behaviour correlation is strong, and
when the habit is strong, the intention-behaviour correlation is weak(er). This
is the result regardless of which of the two habit measures included is used,
but the strength of the moderating effect varies between the two measures. The
SRHI measure is a considerably stronger moderator than the RF measure.

We cannot be sure why the two habit measures are not equally strong moderators
of the commuting by public transport intention-behaviour relationship. Evidence
presented in Table 15.2 suggests that the most likely reason is that few drivers have
developed a cross-situational habit of driving by car that is as general as suggested
by the RF measure. Table 15.2 shows that the percentage of drivers choosing the
car as their mode of transportation to the ten destinations varies considerably (from
30.5 to 95.1%). Hence, it seems likely that the RF instrument contains situations
not covered by most of the drivers car habits. This could explain why the RF
measure is a weaker moderator than the SRHI measure, which focuses specifically
on car use for commuting2 (remembering the discussion about the correspondence
principle in attitude theory, Ajzen and Fishbein, 1980). If this is the explanation,
2
In fact, commuting is not even included among the situations covered by the RF measure.
310 B. Mller and J. Thgersen

the RF measure should become a stronger moderator of the intention-behaviour

relationship if items diverging from the general pattern were removed. In the
calculations reported in Table 15.6, we removed the three situations where fewer
than 50% responded that they would use the car. This leads to an increase in the
numerical value of the regression coefficient of the interaction term .05 to .08.
Also, the inclusion of the interaction term now leads to a highly significant
increase in R2. This obviously lends support to our proposed explanation for the
weakness of the RF measure.

Table 15.6. Hierarchical regression: The moderating effect of habit (revised RF scale) on the
intention-behaviour-relation (n = 998)
2 2
Adj. R ' R 'F d.f. Sig. ' F
1: B = f(I) 0.499
2: B = f(I, H) 0.499 0.000 0.588 1; 995 0.444
3: B = f(I, H, I*H) 0.503 0.005 9.116 1; 994 0.003
Note: H = car habit (revised RF measure), B = behaviour: use of public transport, I = intention to use
public transport.
Estimated parameters for equation 3: Behaviour = 0.67I 0.01H 0.08(I*H); parameters for I and
I*H are significant at p < .001 and p < .003 respectively.

Previous research and reasoning about the nature of decision-making regarding

habitual behaviour suggests that information about opportunities to use and the
benefits of public transport has limited chances of breaking a habit of commuting by
car (Verplanken et al., 1998). Instead, we suggest that there is a need to explore the
possibilities for implementing structural changes that are both strong enough to
persuade or entice car users at least to try available public transport options and be
acceptable for car users (voters) as well as for politicians. Road pricing could be a
means to this end, although preliminary results indicate that it is not easy to gain
public acceptance (Jacobsson et al., 2000). If it is possible to create an economic
incentive, which is perceived as a carrot rather than as a stick, acceptance is more
easily obtained (Barde and Opschoor, 1994; Gardner and Stern, 1996). In our current
research, we test the effectiveness of the opportunity to use public transport free of
charge for one month (an instrument that also has been tested in Japan with
promising results, see Fujii and Kitamura, 2003), but there are other possibilities that
should be pursued.

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16 Road Pricing in Denmark User Attitudes
and User Reactions

Mai-Britt Herslund

Centre for Traffic and Transport, Technical University of Denmark

Abstract
Road pricing is often considered an appropriate way in which traffic can be better
regulated. At the Technical University of Denmark, two research programmes on
this topic have been carried out. The pre-study FORTRIN (a feasibility study) has
been followed by a real life test, namely the AKTA Road Pricing Experiment in
Copenhagen. Here, the city was equipped with virtual cordon rings and pricing
zones and 500 test drivers had a GPS-based device installed in their cars testing
different road-pricing schemes. This paper describes the technology as well as
attitudes and reactions of road users in both studies.

16.1 Introduction

The FORTRIN programme defined and specified a variable road-pricing system

based on car type, number of kilometres driven, time and place. Furthermore, a
prototype based on GPS technology was developed. Different tariff structures were
analysed statistically and optimal structures pointed out. User attitudes and user
reactions were studied using a tariff scenario based on traffic planning considera-
tions. And traffic effects of the road-pricing system were analysed by means of
model predictions. The FORTRIN programme was finished in May 2001 (Hers-
lund et al., 2001; Herslund, 2001).
The FORTRIN programme has now been followed by a large-scale field test,
namely the AKTA Road Pricing Experiment in Greater Copenhagen. Here, car
drivers were exposed to different road pricing schemes using a GPS-based
technique by which trips are charged and logged (Herslund, 2003; Nielsen and
Jovicic, 2003; Nielsen et al., 2003; Herslund. 2004).
AKTA is the Danish part of the PROGRESS project (www.progress-
project.org), which again is part of EUs 5th Framework programme, The Growth
Programme on Sustainable Mobility and Intermodality, which supports several
projects concerning pricing (http://www.transport-pricing.net/). In PROGRESS,
eight European cities assess in different ways impacts of different urban pricing
schemes. The cities are Bristol and Edinburgh (UK), Genoa and Rome (I), Helsinki
(SF), Trondheim (N), Gothenburg (S) and Copenhagen (DK).
In the following, results from FORTRIN and AKTA will be presented
focusing on user attitudes and user reactions towards road pricing. The methods
316 M.B. Herslund

used in the studies are different kinds of interviews, questionnaires, plus analyses
of diaries and log-data.

16.2 User Studies of the FORTRIN Project

The FORTRIN research programme on traffic informatics investigated the

possibilities of better regulating traffic by means of a GPS-based road pricing
system focused on car type, number of kilometres driven, time and place. Users'
attitudes and reactions towards such a system were investigated by the following
methods:
x Focus-group discussions
x Analyses by questionnaire
x Calculation and modelling of specific trips entered in diary logs.

16.2.1 Pricing Strategy

A Goal orientation Scenario was used in which the tariff structure was designed to
reduce the traffic load in areas and at times of day where and when the driving has
the most adverse consequences. The scheme operated with three road classes
(primary traffic roads, secondary traffic roads and local roads) as well as three
zones (rural area, city area and dense city area). This equalled a price structure with
nine levels. Furthermore, a peak hour charge was added to the city and dense city
zones (during the period 07.00-09.00 and 15.00-17.00 hours). The kilometre rates
of the scenario varied from DKK 0.20 (0.03 EUR) to DKK 1.45 (0.20 EUR) per
km. The scenario assumed that the Danish registration tax would remain while the
annual weight duty/the green owners duty would be abolished (on average 2,900
DKK ~ 392 EUR per year, dependent on vehicle type). It should be mentioned here
that the existing tax system in Denmark is structured with a lump sum tax when the
car is acquired (only first owner) followed by an annual tax. Table 16.1 shows
what car users in Denmark have to pay for a typical family car like a Ford Focus
and the table also shows the annual tax and the price of one litre of petrol.

Table 16.1. Price of new car plus annual tax and petrol price in Denmark
Purchase DKK EUR
Net price incl. duty 99.154 13.339
Registration tax 142.476 19.167
VAT (25%) 60.408 8.126
Sales price 302.038 40.632

Annual tax 2.900 392

Petrol price (1 litre) 8 1
 Road Pricing in Denmark User Attitudes and User Reactions 317

16.2.2 Test Population

The selection criterion for participants of the FORTRIN study was that they owned
a private car and had certain transport needs. The population was divided into six
groups, based on the desire to study variations as regards attitude and choice of
mode of transport that were dependent on where the respondents lived. The six
groups were organised in pairs so that:
x Two groups lived in a city area with ample access to public transport (Copen-
hagen, 0.6 million inhabitants, and rhus, 0.2 million inhabitants),
x Two groups lived in a provincial towns (Nstved, 30,000 inhabitants and Her-
ning, 35,000 inhabitants)
x Two groups lived in a rural area with poor public transport coverage (Lolland
and West Jutland).

The test population matched the national average overall with respect to distri-
bution by age and marital status.

16.2.3 Focus-Group Meetings

A focus group can be defined as a group interview, centred on a specific topic and
facilitated by a moderator (interviewer/facilitator). During the focus-group discus-
sion, the interaction that occurs within the group generates qualitative data. The
method is often used when new topics are to be studied especially due to its
opportunity for individual expression (Morgan, 1988; Kitzinger, 1995; Kvale,
1997).
The focus-group meetings of FORTRIN took place ultimo year 2000. A
question outline ensured that the focus of the group discussion was mildly con-
trolled and that all the groups touched upon the same subjects, namely attitudes and
possible reactions towards road pricing in their area. After the discussion, each
participant was to weight some characteristic statements from the discussion. This
weighting indicates the focus of the group in relation to the subject discussed.
The material revealed both differences and similarities among the groups.
Among the similarities can be mentioned that the principles behind road pricing
were understandable enough for everyone and that most respondents considered
the price differentiation between city and rural area as reasonable, whereas the
same agreement on introducing a peak hour surcharge was not available. The price
differentiation by road type was difficult to understand and accept for most
participants. The uncertainty felt concerning the GPS technology was not generally
as great as was the uncertainty connected with the possibility for the politicians to
turn road pricing into a tax spiral. The difference between the six groups was most
obvious when comparing the statements, which each respondent had weighted after
the discussions. The three statements from each group, which were given the
highest priority, appear in Table 16.2.
318 M.B. Herslund

Table 16.2. Statements in order of priority at the focus-group discussions (Nielsen and Herslund,
2002)
City Type of area Statement with Statement with Statement with
1st priority 2nd priority 3rd priority

Metropolitan Variable road Tolls are prefer- Variable road

area. Significant pricing will turn able to variable user charges will
Copenhagen

congestion in into an extra tax charges redistribute traffic

peak hours. spread traffic
Efficient buses more in time
and urban rail for
some journeys
Urban, with little The price The system of It is a new tax
congestion. becomes variable road element
rhus

Mainly bus as confusing pricing will not

public transport induce any
change in
behaviour
Provincial town. Road pricing will Families with Fixed road user
ing

No congestion. be an extra tax small children charges are prefer-

Hernin

Poor bus system mechanism for are hit hard able to variable
the Government ones
Town. No conges- Cheap and The number of Variable charges
tion. Poor bus efficient transport cars will not be should be viewed
Nstved

system. Some will change reduced by intro- in addition to the

commuters to people's transport ducing variable present ones in
Copenhagen habits road user charges order to shift
traffic
Rural area. No The principle of It is commend- Environmental
land

congestion. Slow paying for using a able to pay for considerations

West Jutla

inefficient rural car is fair using the car require action

buses rather than a
fixed charge
Rural area. No The principle of It is commend- Environmental
congestion. Slow paying for using a able to pay for considerations
Lolllland

inefficient rural car is fair using the car require action

buses rather than a
fixed charge

All the weighted statements from the focus-group discussions can be roughly divided
into three main categories (one category for statements on tax, one category dealing
with behavioural statements and a third category dealing with all other statements).
Fig. 16.1 illustrates the share of statements within each of the three categories.
 Road Pricing in Denmark User Attitudes and User Reactions 319

100%
80%
60%
40%
20%
0%
rhus Kbenhavn Herning Nstved Vestjylland Lolland

Fig. 16.1. Shares of statements within each category by city (black = statements on tax, grey =
statements on behaviour and white = all other statements)

This analysis clearly illustrates that the tax/duty dimension generally had been
focused on the least during the group discussions, while the group "other" (dealing,
for instance, with security/surveillance/fairness/clarity as well as management) had
been focused on the most.
The difference in focus during the discussions revealed that the groups from the
rural areas were most interested in fairness and environmental problems in relation to
variable road pricing, while the groups from the big cities were most interested in the
tax dimension of the duty system. The respondents from rhus appeared overall to
be the group which was most negative towards variable road pricing, which is also
seen in Table 16.2.

16.2.4 The Study by Questionnaires

All respondents in the focus groups also answered questionnaires. Again, it

appeared that price differentiation by zone and time was assumed to be the most
powerful element in the Goal orientation Scenario. The greatest effect would be
expected from price differentiation by zone, where it becomes expensive to drive
in dense city areas with a lot of traffic and cheap to drive in the open countryside
with little traffic. However, there was a tendency to expect that an extra charge on
private driving would influence others more than oneself (Table 16.3). This finding
is consistent with the general finding that people perceive themselves to be less
able, but more motivated than the general population to act in a pro-social way, i.e.
that others pro-social behaviour is primarily restricted by lack of motivation, but
own behaviour is primarily restricted by lack of ability (Herslund et al., 2001;
Herslund, 2004).

Table 16.3. Expectation of others and own behaviour in relation to price differentiation by zone
Will taxes on driving in big Will taxes on driving in big
city areas reduce private city areas make you drive less
driving in the big cities? in the big cities?
Yes 47% Yes 34%
No 36% No 50%
Indifferent 17% Indifferent 16%
320 M.B. Herslund

As regards the effect of a peak hour surcharge, Table 16.4 shows the same
tendency, other drivers were expected to be more influenced by the pricing scheme
than the one being asked.

Table 16.4. Expectation of others and own behaviour in respect of peak hour charging
Will a high duty in rush Will a high duty in rush hours
hours make drivers move the make you drive at other times
trips to other times of the of the day?
day?
Yes 44% Yes 36%
No 48% No 59%
Indifferent 8% Indifferent 5%

16.2.5 Trip Logs

Thirty-one of the participants registered 113 trips in private logs with up to nine
trips a day. Each trip had a specific starting and end point. Thus, transport to and
from work was to be logged as two trips. The trips were mainly made outside peak
hours (57%) and mainly with destinations such as home (44%), workplace (24%),
or leisure activity (11%).
The individual trips were then priced in relation to the tariffs of the Goal
orientation Scenario and the logs were returned to the individual respondent with
an indication of the price of each trip, total price for all trips of the day and price if
the trip was made at some other time of the day (in the peak hour or outside the
peak hour).
The respondents then filled in a comprehensive questionnaire about each trip
in relation to the price level experienced, prioritisation of trips and the possibility
of shifting the trip in time. The answers show that if the road pricing of the trips
was as calculated then:
x Expenses for private driving would increase
x 11% of the trips would be shifted to cheaper routes
x 2% of the trips would be shifted in time
x 4% of the trips would be cancelled
x Road pricing would have only little impact on private driving to and from
workplace.

16.2.6 Conclusions of the FORTRIN Study

Five main conclusions have been drawn from the FORTRIN study:
x Road pricing was regarded as being more fair than the present tax system in
Denmark, where the fixed charges are up to 180% registration tax and 25%
VAT when you buy a new car. On top of that, you pay an annual tax of an
average of 2,900 DKK (~ 392 EUR) varying by car type and energy use (see
Table 16.1)
 Road Pricing in Denmark User Attitudes and User Reactions 321

x The GPS system provoked no great fear of surveillance. The greatest fear of
the participants was that politicians will turn variable road pricing into a tax
spiral
x There seemed to be differences in attitudes towards road pricing depending on
where the respondents reside or rather depending on the experienced conges-
tion
x There was the greatest effect on the driving pattern when the price differentia-
tion was based on zones and time. But road pricing was believed to influence
other drivers more than oneself
x Participants found that the tariffs of the road-pricing scenario would increase
expenses, but still it had only little impact on private driving in the short run,
because the price level was too low to significantly change behaviour.

16.3 AKTA the Road Pricing Study of Copenhagen

As opposed to the FORTRIN pre-study, AKTA made a real life test of whether
road user taxes will change travel behaviour.

16.3.1 Design of the Study

The city of Copenhagen was equipped with virtual cordon rings and pricing zones
from October 2001 to May 2003. Five hundred voluntary test drivers had a vehicle
position system installed in their own car, making it possible for them to read the
virtual pricing systems on a display. All car movements were logged in the system
and a price calculated for every trip. At the end of the experiment, the test drivers
got paid according to the difference in driving behaviour between the control
period (which in some cases was estimated) and the test period.
The selection of test drivers was based on a stratified factorial design.
However, it turned out to be far more complicated to recruit the participants than
anticipated: A total of nearly 26,000 people had to be contacted in order to get a
proper sample of 2x200 and 1x100 households (1/3 of those who initially agreed to
participate).
The participants were distributed in a factorial design among income groups,
commuting patterns (residence of home and work) and pricing schemes. All
participants belonged to one-car families, all participants resided and/or had their
workplace within the road pricing zones and all had a daily need for transport,
(Nielsen and Herslund, 2002; Nielsen and Jovicic, 2003).

16.3.2 Different User Studies

The participants filled out a questionnaire before the test drive and afterwards they
filled out another questionnaire. In addition, they participated in a telephone inter-
322 M.B. Herslund

view which, among other things, was designed to test whether they changed
attitudes towards road pricing during the test drive. Furthermore, before the test
drive 300 participants had participated in a stated preference experiment consisting
of questions concerning valuation of cost and length of different trips, stated pre-
ference on derivation of value of time, stated preference on time-of-day decisions
and stated preference on route changes. And selected test drivers also participated
in qualitative focus-group interviews.
For comparison, a telephone interview with 1015 respondents living in the
road pricing area was carried out before the field test in order to get a benchmark
of ordinary peoples awareness and attitudes towards road pricing.
All qualitative and quantitative data have now been processed and selected
results are presented in the following.

16.3.3 Results from Telephone Interviews

A survey based on 1015 telephone interviews was conducted in the autumn of

2001 (before starting the field test) of randomly selected residents in the capital
area (Srensen, 2003; Srensen, 2004). The interview was structured as 20
questions related to socioeconomics and 28 questions related to non-socio-
economics (attitudes towards road pricing, tax, etc.).
The respondents can be described as being geographically distributed over the
capital area with one-quarter in the suburbs and the majority in the central city
area. The distance to public transport was below 500 metres for most of the
respondents (nine out of 10) and the public transport service level was at least three
connections per hour for virtually all respondents. Half of the respondents were
aged between 20 and 40 and one-quarter of the residents had a gross household
income in the uppermost income category. Half of the respondents were car
owners; most of these were one-car owners (45%), 8% owned two or more cars.
Half of the respondents were aware of road pricing systems dominated by
female respondents (60%, 40% for male) and dominated by car ownership (60%,
40% for non-owners) and increasing by age. The rate of awareness also increased
by income level, though it was not separated from education level.
The understanding of road pricing systems was mainly segregated between
payment for specific roads/time of day (50%), specific roads (20%) and entering a
city (10%). However, it was explained to half of the population who were not
aware of road user charging that road pricing is payment for use of specific
roads/time of day.
22% of the interviewed persons had heard of the AKTA road pricing project in
Copenhagen. The awareness of the project was slightly higher among males than
females, but independent of income.
Four out of five respondents had actual experience with toll payment; the
fraction rising with income level.
The tax system in Denmark with fixed car tax (see Table 16.1) was
appreciated by 38% of the respondents and disliked by 43%, where females were
 Road Pricing in Denmark User Attitudes and User Reactions 323

slightly more in favour of the system while car owners slightly more disfavoured
the system.
The variable road pricing system was favoured by two-thirds (65%) of the
respondents irrespective of gender, but car owners were less in favour (58%) than
non-owners (72%). The favouring declined by age, but increased by frequency of
the public transport service. The assessment is unaffected by mileage and income.
The enthusiasm for road pricing was not fully maintained when an additional
peak hour fee was in question; the fee was not further quantified. Half of the
respondents supported this idea, again dominated by non-car owners (60%) over
car owners (45%). Interestingly, respondents with and without flexible working
hours are equally supportive. However, more respondents with flexible working
hours (45%) are against than respondents without flexible working hours (38%)!
As for the variable road pricing, the enthusiasm declined with income level.
The belief in the effect of a peak hour fee on other car users is 40% though
only 35% expect they may change their own behaviour the latter covers
geographical differences. The figures were unaffected by whether the respondent
had flexible working hours.
Questioned on the peak hour kilometre rate for change of travel time, one in
four respondents answered the lowest option (1 DKK/km) and one in three the
highest rate (5+DKK/km) without variation by gender (rate ranging from 0.13-0.67
EUR).
The peak hour kilometre rate before mode change is on average higher, which
covers that 20% of the respondents intended to change by 1 DKK/km, 35% do not
intend to switch mode before the cost is over 5 DKK/km.
Of the respondents, 53% believed that a zone-based fee is good. Car owners
are more in opposition (45%) than non-owners. There are only minor deviances by
gender.
Of the respondents, 57% believed that a zone-based system would reduce the
car use though only 46% believed they would reduce their own driving. Again,
there were only minor deviances by gender.
28% of the respondents would alter their time of travel if a cordon fee of 4
DKK (lowest level) to the central city was introduced, 35% stated the cordon fee
should be at least 12 DKK (highest rate). This is largely independent of gender.
The pattern is similar for change of mode (fee ranging from 0.54 to 1.61 EUR).
The general opinion is that the revenue from road user charging should be
used to improve the public transport (extend service and reduce prices) whereas
improvements of the road network have lowest priority.
The majority of the respondents (58%) is not willing to accept higher taxes for
road use than today; males (65%) are more in opposition than females (52%).
The respondents did largely agree that the variable road pricing will diminish
the traffic in city areas (62%), that road pricing is fairer than the existing system
(68%) and that the environment will benefit from it (57%).
A fairly high fraction of the same respondents did also agree that car users in
general would have to pay more than today for car use (52%), that prices will be
less transparent (58%) and an additional level of bureaucracy will emerge (63%) if
a road pricing system is introduced.
324 M.B. Herslund

More than 50% of the respondents believed that variable road pricing will
reduce traffic in Copenhagen and reduce the pollution related to traffic.
The respondents are generally sceptical with regard to the public spending of
the revenue from road pricing, as only one-third believed the revenue would be
used to improve the public transport service.
Hence, the general trends based on telephone interviews with 1015 respond-
ents are that more than half of the respondents are in favour of variable road
pricing as an alternative to the existing tax system. Two out of three were suppor-
tive of road pricing and slightly more than half supportive of peak hour fee and
zone-based fee. Females were generally more supportive than males. However (as
seen in the FORTRIN study), road pricing is thought to influence other car drivers
more than oneself.

16.3.4 Pricing Schemes

Three different pricing schemes were tested in the three rounds of the AKTA field
study: Two of the schemes were zone-based with four different levels per km, with
the most expensive in the inner city and the cheapest in the suburbs. The third
scheme was a toll-based system with payment for zone crossings. The pricing
varied between the peak and non-peak hours in all scenarios (see Fig. 16.2).

Fig. 16.2. The AKTA zone structure. 1 DKK = 0.13 EUR (Nielsen and Herslund, 2002)
 Road Pricing in Denmark User Attitudes and User Reactions 325

The GPS device calculated dynamically the pricing level. And for a given trip, the
participant could see the pricing level (zone), be notified about zonal-crossing (at
the cordon scheme) and read the accumulated cost of the trip (see Fig. 16.3).

Fig. 16.3. On Board Unit in a private car (Herslund, 2003)

Selected results from the field test are presented in the following.
The high km-based pricing level (0.07 0.67 EUR) clearly made an impres-
sion on the participants. Even if they could not change behaviour, they examined
alternative travel options before rejecting them. The participants considered
changing route, mode and occasional trips. About 50% of the test drivers
changed behaviour in some way. The main changes were new routes and for
occasional trips new destinations, time of day (to non-peak) and to some extent
fewer trips. Commuting trips were supposed to be difficult to change, e.g. shifting
away from the peak hour, working at home (telecommuting) or using another mode
(bicycle or public transport).
The low km-based pricing level (0.07 0.34 EUR) was in general not
sufficiently high to change behaviour, although a few participants did some minor
changes when it was easy. Most participants believed that it was by chance if they
travelled more or less in the low pricing period than the control period, e.g. that
they had more visits to Central Copenhagen or a vacation in one of the two periods
than the other.
The km-based schemes were in general considered more fair than the cordon-
based (from 0.13 to 1.61 EUR per crossing). The participants had nonetheless more
difficulties understanding these than the cordon-based system. It is interesting to
note that the more fair and economically justified the schemes, the more difficul-
ties are experienced understanding it. Nonetheless, the km-based scheme turned
326 M.B. Herslund

out to be the most effective in terms of behavioural changes. Hence it can be

concluded that
x drivers testing the high km-tolls made the most changes in travel behaviour,
while drivers testing the low tolls made very few changes.

About 50% of the test drivers changed behaviour in some way and the main
changes were:
x Choice of different (cheaper) routes mostly for non-commuting trips
x Increased use of Kiss-and-ride facilities (more passengers in the test cars,
these passengers choosing private and not public transport)
x Changes in destination and time of day for non-commuting trips.

But log data from the test period show almost no changes regarding:
x Cancelling of trips
x Mode choice in favour of public transport
x Commuting
x Shifting from peak to non-peak hours.

So commuting seems to be difficult to change and there is some inertia in

changing route, mode and time for the trip.

16.3.5 Focus Groups

Two focus-group interviews were carried out after the experimental rounds in
AKTA. The focus-group participants were selected among drivers after the test
drive. It turned out to be a little difficult to recruit participants, since the test
drivers had already spent a lot of time on the experiment (Nielsen and Herslund,
2002). Ten households were represented from the second experimental round and
13 households from the third round. Both focus-group meetings were structured
like the ones of FORTRIN (see table 16.2) based on a list of questions with
sufficient time for free discussion and any comment from the participants.
During the discussion, the moderator noticed the most characteristic subjects
that were discussed and 16 of these statements were selected. Each participant was
then asked to rank the five most important of these on a scale from five to one,
based on how much he/she felt they had marked the discussion.
The main findings of the focus-group interviews were:
x The high km-based pricing scheme made a strong impression on the particip-
ants, whereas the low level did not lead to changes.
x Road pricing is felt to be able to change route, mode and leisure trips, but not
lead to drastic decisions (to move, sell the car, etc.).
x Road pricing is regarded fairer than the present tax system in Denmark.
However, it was feared that road pricing would just be an additional tax and
that the revenue would not be used to improve the infrastructure.
 Road Pricing in Denmark User Attitudes and User Reactions 327

x Participants felt that revenues should be used for infrastructure improvements

in the Copenhagen region, especially to improve public transport in the areas
with poor services.
x The GPS system provoked no great fear of surveillance. The greatest fear of
the participants was that politicians would turn variable road pricing into a tax
spiral.
x There seemed to be differences in attitudes towards road pricing dependent on
where the respondents reside.
x The greatest effect on the driving was found when the price differentiation is
based on zones and time, but road pricing was believed to influence other
drivers more than the one being asked.
x Participants found that the tariffs of the road-pricing scenario will increase
expenses, but still only have only little impact on private driving, because the
price level is too low to significantly change behaviour.

It is interesting to note that the participants focussed mainly on the changes in

traffic behaviour, rather than political issues. Even with the high charging level, the
participants stated that they would not consider drastic decisions such as selling the
car, using public transport to work, moving to another address or changing job.
They were aware that they could be forced to take such decisions with a sufficient-
ly high level of pricing, but it should be higher than in the AKTA project. As fixed
car taxes are extremely high in Denmark, the marginal costs are relatively less
important even at the high pricing level.
Surveillance was not really a big issue some of the participants even stated
that one can be followed by mobile telephone, bank account, video cameras on the
streets, etc. and that a GPS-based system is no worse. This is quite the opposite to
what role surveillance has in the press and by politicians, which, however, does not
seem in line with the view of the population.

16.3.6 Key Results from Questionnaires

All test drivers participated in ex-ante and ex-post questionnaires. In line with the
results from focus-group interviews, these questionnaires show that road pricing in
some way does affect behaviour; it is not considered as another fixed cost, but as a
marginal cost that drivers respond to. The responses are even higher than if they
are only considered as a marginal cost with the same willingness to pay.
Again, in this part-study the participants' attitudes to road pricing were less
emotional than expected (especially considering the debate in the Danish press).
Half of the respondents found that the existing tax system in Denmark should be
replaced by a system where you pay for the use of the car. Most participants did
not consider surveillance as a problem (that the cars can be tracked by the logged
co-ordinates). The possibility to control speed violations was neither considered
important. The participants disagreed on whether road pricing is fair or not,
including whether society becomes more class-divided between people that can
pay or not and for people who cannot change behaviour (e.g. with fixed meeting
328 M.B. Herslund

hours or with children in school and day care). Preferred use of revenue seems to
be improving public transport (better coverage and cheaper fares, stated by 65% of
the respondents) and traffic safety (stated by 55%).
Participants were asked about whether they thought they changed their
attitudes towards road pricing just as changes were tracked by comparisons of
before and after responses to identical questions. Almost half of the participants
acknowledged they did change attitude to some extent.
Approximately one-third of the participants changed attitude towards either
the existing tax structure or the principle of road pricing, every fifth changed
attitude towards both.
Close to two-thirds changed attitude to the road pricing principle or the effect
of a peak hour factor on general traffic. More than every fifth participant was
indifferent towards variable road pricing though positive towards the effect of a
peak hour factor.
A similar pattern can be seen for the participants expectations on their own
driving behaviour. More than every fifth participant expects it to have an impact on
his own driving combined with indifferent attitude towards the existing system.
Crossing the changes for the two peak hour factors, it can be seen that as many
as 65% changed their attitude in the same direction for both. More than every
fourth changes attitudes such that he/she was more positive towards the effect on
traffic in general than on his/her own driving. Only 6% of the participants did not
change attitude towards either of the tax structures.
After the trial, more than half of the participants thought the present tax
system was bad, irrespective of which toll schemes they tested. Furthermore, one-
third of the participants thought of the present system as a bad system and of
variable road pricing as a good system. Only one in 20 thought the present system
was good and road pricing bad.
Positive expectations of a peak hour factor on traffic in general are most
outspoken for participants considering the present system as bad (about every
fourth participant).
Close to half of the respondents thought of the variable road pricing system as
good combined with their belief of that a peak hour factor would affect traffic in
general.
Close to every third participant thought the road pricing system was good and
expected to reduce his/her own driving provided it was implemented. One-third of
the opponents expected to alter his/her driving if implemented.
There seemed to be a connection between participants expecting to change
behaviour themselves and expectations to changes in general if a peak hour factor
was implemented. Three of five expected changed behaviour by themselves and in
general. More than one in four expected no change by themselves nor in general.
Furthermore, there seems to be some correlation between expectations for a peak
hour factor and whether the participant expects his/her own driving to be affected.
More than one in four responded to some or full extent to both, while two in five
responded negatively to both.
 Road Pricing in Denmark User Attitudes and User Reactions 329

16.4 Overall Conclusions of the Two User Studies

The pricing level needs to be high if road users are to change behaviour (between 1
and 5 DKK/km in the peak hours and half price in off-peak hours. 1 DKK equals
0.13 EUR). But still only few car drivers are ready to change behaviour. Road
pricing is expected to influence others the most and time plus route for commuting
trips are difficult to change.
Congestion pricing seems to be the most unpopular part of the road-pricing
concept. High pricing of private cars in city centres is ok, but an additional rush
hour charge is less acceptable. And pricing should be nationwide, not only a
variable tax for driving private cars in big cities.
Interesting findings of both the FORTRIN and AKTA studies are that attitudes
towards road pricing seem less emotional than expected. Fear of surveillance is not
a big problem and the possibility to control speed violations by the GPS-based
system is not considered important. Road users greatest fear seems to be that the
government will turn road pricing into a hidden tax and that the revenue will be
used for something other than to improve traffic conditions.
The two Danish programmes demonstrate that it is possible to develop a road
pricing system which charges a kilometre rate based on time, place and distance
driven. It is also demonstrated that road user charging can, to some extent, affect
the driving pattern. The GPS-based system was widely understood and accepted
and a majority of road users in Denmark finds variable taxes on car driving more
acceptable than fixed ones. Yet payment, security and control functions have not
been described in such detail that it is assured that this is practicable, (Nielsen et
al., 2003). A test of the technical design of these systems was not contained in the
programmes. As these functions are vital to the feasibility of a road pricing system,
there is a need for further technical development.

References
Herslund, M.B. (2001). A Distance Dependant Road pricing Scheme. Concept and User
Reactions. Paper presented at the 8th World Congress on Intelligent Transport Systems: ITS Based
Travel Demand Management, Sydney, Australia, 30 September 04 October.

Herslund, M.B. (2003). Road pricing in Denmark. User Attitudes and User Reactions. Paper
presented at the 10th. World Congress on Intelligent Transport Systems. Madrid, Spain, 16 20
November, paper No. 2140T.

Herslund, M.B. (2004). Road User Charging in Denmark acceptance and impact of three
different charging schemes. Paper presented at the ITS Congress in Europe, Budapest, May 2004,
paper no.2821.

Herslund, M.B., Ildensborg-Hansen, J., Jrgensen L., Kildebogaard, J. (2001). The FORTRIN
Programme. A Distance Dependent Road Pricing System Main Report. Centre for Traffic and
Transport, Technical University of Denmark, Lyngby.
330 M.B. Herslund

Kitzinger, J. (1995). Introducing Focus Groups. British Medical Journal, 311: 299-302.

Kvale, S. (1997). Interview (In Danish). Hans Reitzels Forlag a/s, Copenhagen.

Morgan, D.L. (1998). Focus Groups as Qualitative Research. Qualitative Research Series, vol. 16,
Sage Publications.

Nielsen, O.A. and Herslund, M.B. (2002). The AKTA Road Pricing Experiment in Copenhagen.
European Transport Conference (PTRC). Seminar on Investment in Roads. CDROM with
proceedings, PTRC. Cambridge, September.

Nielsen, O.A., Jovicic, G (2003). The AKTA road pricing experiment in Copenhagen. Conference
paper. Session II: Valuation/Pricing. Moving through nets: The physical and social dimensions of
travel. 10th International Conference on Travel Behaviour Research. Lucerne, 10-15. August
2003.

Nielsen, O.A., Kristensen, J.P., Wrtz, C. (2003). Using GPS for road pricing experiences from
Copenhagen. Paper presented at the 10th. World Congress on Intelligent Transport Systems.
Madrid, Spain, 16 20 November, paper No. 2131T.

Srensen, M.V. (2003). The Greater Copenhagen Area. Technical University of Denmark, Centre
for Traffic and Transport.

Srensen, M.V. (2004). Summary of Telephone Interviews on Variable Road Pricing in

Copenhagen. Technical University of Denmark, Centre for Traffic and Transport.
17 A Cost-Minimisation Principle of Adaptation
of Private Car Use in Response to Road
Pricing Schemes

Peter Loukopoulos1, Tommy Grling2, Cecilia Jakobsson3 and Satoshi Fujii4

1
The Swedish National Road and Transport Research Institute, Linkping
2
Gteborg University, Sweden
3
Gteborg University, Sweden
4
The Tokyo Institute of Technology, Japan

Abstract
In this chapter, a theoretical framework is proposed with the aim of understanding
reduction or changes in private car use in response to road pricing. It is argued that
economic disincentives may activate car-use reduction or change goals in individu-
als and households. However, for car-use reduction or change goals to occur, other
travel demand management measures are needed that make alternative travel
options attractive. A review and classification of these other measures is provided
followed by an assessment of their potential effectiveness.

17.1 Introduction

Substantial environmental and societal costs of private car use such as congestion,
noise, air pollution and depletion of energy resources, are expected future cones-
quences of the worldwide increasing trend in car ownership and use (Goodwin,
1996; Greene and Wegener, 1997). In many urban areas, these consequences are in
fact already urgent problems that need to be solved. This has resulted in proposals
for a number of policy measures targeted at reducing or changing private car use.
These will be referred to as travel demand management (TDM) measures (Kita-
mura et al., 1997; Pas, 1995), although other terms are often used such as transport
system management or transportation control measures (Pendyala et al., 1997),
transportation demand management (Litman, 2003) and mobility management
(Kristensen and Marshall, 1999; Litman, 2003; Rye, 2002).
In the next section, we briefly discuss market-based TDM measures including
the focus of this chapter, road pricing. We then discuss other types of TDM
measures for reducing private car use. Our argument is that an evaluation of the
effectiveness of road pricing should be made relative to other TDM measures.
Furthermore, evaluation of the effectiveness of TDM measures in reducing private
car use need to be based on realistic behavioural assumptions. In the third section,
we propose a theoretical framework drawing on such assumptions.
332 Peter Loukopoulos et al.

17.2 Market-Based Travel Demand Management (TDM)

Measures

Examples of market-based TDM measures include road and congestion pricing

(Banister, 2003; Foo, 1997, 1998, 2000; Goh, 2002), kilometre charges (Ubbels et
al., 2002), fuel taxes, parking charges (Meyer, 1999), and public transport
discounts and travel vouchers (Root, 2001). Three main purposes have been
identified (Lindberg, 1995): (1) finance of maintenance of old infrastructure and
investment in new; (2) abatement of adverse environmental effects by reducing car
use; and (3) reduction of congestion in urban areas.
Market-based TDM measures are theoretically founded in classical
economics: behaviour is regulated by the principle of supply-and-demand and
explicit cost-benefit analysis, such that if the price of a product (i.e. transportation)
increases, the demand for this product will decrease, and vice versa. Using
congestion pricing as an example, by raising the price level, the congestion
externality is internalised (Emmerink et al., 1995; Rothengatter, 2003). Market-
based measures have become increasingly popular in recent years, particularly
amongst politicians who appear to have embraced a new competition paradigm
emphasising less governmental control. In line with this, many types of regulation
have been abandoned as being outdated or unnecessarily restrictive. Although there
are reasons to regulate transportation to maintain quality, reliability and safety, it is
believed that unnecessary regulation can be reduced, and regulation objectives can
be changed to address specific problems while encouraging competition, innova-
tion and diversity (Klein et al., 1996, 1997).
Increasing popularity amongst politicians has, however, been matched by an
increasing scepticism amongst researchers. For road pricing to be viewed as a first-
best instrument for tackling the problems of car use, certain requirements must be
fulfilled, two of which are that (i) households and individuals maximise utility, and
(ii) full information is available on all costs involved (Emmerink et al., 1995). Yet,
as discussed below, the habitual nature of car use with the consequence of limiting
predecisional information search renders the second assumption suspect. The
assumption of (expected) utility maximisation has also been found to be violated in
numerous studies (Dawes, 1998; McFadden, 1999). This particular issue will also
be addressed below. Furthermore, independent lines of empirical research have
revealed low price elasticities to be associated with various pricing policies (at
least in the short term, although some higher elasticities have been identified in the
long term) (Hensher and King, 2001; Schuitema, 2003; Sipes and Mendelsohn,
2001). Jakobsson (2004) summarises the mainly negative outcomes of a limited
number of field experiments conducted with the purpose of evaluating the
effectiveness of road pricing.
The popularity of market-based measures such as road pricing nevertheless
continues to grow amongst politicians who also see the potential for such measures
to yield additional revenues, which can be used for other environmentally-friendly
transport modes or for other services such as health and education (Johansson et
al., 2003; Odeck and Brthen, 2002; Raj, 2003).
 A Cost-Minimisation Principle of Adaptation of Private Car Use 333

In this chapter, we are primarily concerned with policy measures targeting the
reduction of car use. Market-based TDM measures may accomplish this, though
they are not the only measures, and perhaps not the most effective. There is also a
need for mixing different policy measures.

17.3 Classification of Travel Demand Management (TDM)

Measures

There are, in fact, many other measures that may reduce the levels of car-use
related congestion, noise and air pollution in urban areas. Some of them (e.g.
increased capacity of road infrastructure or cleaner cars) do not involve a reduction
in car use. A general assessment of the current situation is, however, that measures
that manage car-use demand must be implemented (e.g. Hensher, 1998). According
to this assessment, it is necessary to both reduce car use and to change it with
respect to when and where car owners drive, particularly on major commuter
routes during peak hours and in city centres.
Litman (2003, p. 245) notes that TDM is a general term for strategies and
programmes that encourage more efficient use of transport resources (road and
parking space, vehicle capacity, funding, energy, etc). This broad definition
reflects the historical progression in TDM measures away from merely forcing
people to reduce their use of the private car by changing modes of transport or by
driving less. As Taylor and Ampt (2003) note, TDM measures now encompass any
initiative with the objective of reducing the negative impact of the car. The
definition also reflects the broader evolutionary changes in policy measures, which
have progressed from the 1960s when increasing infrastructure capacity to alleviate
traffic problems such as congestion was commonplace, to the 1970s where the
emphasis was on improving the management of the existing infrastructure, to the
1980s and beyond when policies began to target altering travel behaviour (Bovy
and Salomon, 2002; Pas, 1995). An even more recent manifestation is the attempt
to change human values and mobility culture, as has occurred in, for example,
some parts of Switzerland with local administrations marketing a slower lifestyle
and better image for public transport (City of Zurich, 2002).
There are several classifications of TDM measures. Litman (2003) dis-
tinguishes five classes: improvements in transport options; provision of incentives
to switch mode; land-use management; policy and planning reforms; and support
programmes. A partly overlapping set is proposed by May et al. (2003) as land use
policies, infrastructure provision (for modes other than the private car), manage-
ment and regulation, information provision, attitudinal and behavioural change
measures and pricing. Vlek and Michon (1992) suggest that the following TDM
measures are feasible ways of implementing car-use reduction policies: physical
changes such as, for instance, closure for car traffic and/or providing alternative
transportation; legislation; economic incentives and disincentives; information,
education and persuasion; socialisation and social modelling targeted at changing
social norms; and institutional and organisational changes such as, for instance,
334 Peter Loukopoulos et al.

flexible working hours, telecommuting, or flexplaces. Louw et al. (1998) argue

that car use is influenced by policies encouraging mode switching, destination
switching, changing time of travel, linking trips, substitution of trips with
technology (e.g. teleworking), and substitution of trips through trip modification
(e.g. a single goods delivery instead of a series of shoppers trips). Gatersleben
(2003) distinguishes between measures aimed at changing behavioural opportuni-
ties and measures aimed at changing norms, motivations and perceptions.
Partly based on the different systems of classification listed above and partly
on the basis of relevance to the theoretical framework presented in the next section,
we propose that TDM measures vary on a number of important dimensions includ-
ing coerciveness, top-down vs. bottom-up processes, spatial scale, time scale,
market-based vs. regulatory mechanisms, and impacting latent or manifest travel
demand.

17.3.1 Coerciveness

TDM measures vary in terms of whether the change is voluntary and within the
control of car users or whether the change is forced upon them. For instance, public
transport improvements or information campaigns are non-coercive TDM
measures since the decision to reduce car use is left to the individual. On the other
hand, TDM measures such as road closures and prohibition within city centres are
highly coercive as households have no choice but to reduce car use within the
designated areas. The degree of coerciveness of other TDM measures such as road
pricing or parking fees depends on household income.
Jones (2003), Schuitema (2003), Steg and Vlek, (1997), Stradling et al. (2000)
and Thorpe et al. (2000) make a distinction between push and pull measures. Push
measures discourage car use (or car ownership) by making it less attractive.
Coercive measures tend to be classified as push measures. Pull measures encourage
the use of alternative modes to the car by making such modes more attractive.
Non-coercive measures such as cheaper public transport, new cycle lanes, or even
car pooling subsidies are classified as pull measures. There is a close correspond-
ence between push and pull measures and between TDM measures encouraging
attitude change 1 and those forcing behavioural change. For example, the idea
underpinning the Individualised Marketing Program (see Chapter 14) is that a lot
of opposition to public transport is due to a lack of information and motivation. By
bringing such information to the individual and by showing when public transport
is beneficial, the expectation is that attitudes will change such that individuals
become more willing to reduce the use of the car for certain trips and purposes.
Forced change of behaviour, on the other hand, disregards attitudes and imposes
restrictions.
Forced changes may have negative side effects outweighing the expected
benefits (Grling et al., 2002b), such as costs or sacrifices that households will not

1
See Eagly and Chaiken (1993, 1998) for comprehensive reviews of research on attitude
formation and change.
 A Cost-Minimisation Principle of Adaptation of Private Car Use 335

accept as well as potential negative health impacts arising from increases in time
pressure and stress. Additionally, the non-coercive strategies (attitude change or
pull measures) may be based on untenable assumptions about how much house-
holds are willing and able to change their car use, particularly in the light of the
fact that car use is frequently habitual (see Chapter 13). Such habits interfere with
information search and processing of information, so that alternatives to the car
remain unknown. There appears to be a consensus that a mix of measures needs to
be introduced consisting of coercive measures that break habits (for example, by
making car use no longer possible or prohibitively expensive) and non-coercive
measures (such as increased public transport services or new routes) encouraging
the use of other modes (Meyer, 1999).

17.3.2 Top-Down vs. Bottom-Up Processes

Taylor and Ampt (2003) distinguish traditional top-down approaches telling people
what to do from bottom-up approaches allowing people freedom in choosing to
change their car use. Bottom-up approaches are referred to as voluntary travel
change. Although the distinction between these and pull measures is not clear-cut,
the goal of the former is to empower people to change as opposed to expecting or
forcing a response to external stimuli or pressures (coercive or otherwise). A key
principle is that each individual in a household defines his or her own goals in
accordance with his or her own needs and existing lifestyle. This is why change
must be initiated as part of a bottom-up process with households deciding whether
or not they wish to participate (Rose and Ampt, 2001; Taylor and Ampt, 2003).

17.3.3 Time Scale

A somewhat forgotten aspect is the variation in time scale required for both the
implementation of TDM measures and for responses to various TDM measures.
Goodwin (1998) notes that while many effects can be realised immediately the
cumulative effects of policies may not be felt for many years. For example,
prioritising public transport and new fares policies have impacts on demand within
the first year of implementation, with longer-term elasticities being twice as great
after 5-10 years. Road pricing schemes and changes in the costs of petrol are
argued to yield small responses within the first year with a build-up of effects on
car use (and car ownership) over the next 5-10 years or more. Perhaps the most
obvious example of a TDM measure with long-term consequences is that of land
use planning. Short-term effects of land use planning to reduce travel distances are
small, with larger cumulative effects being felt only after 20 years. Related to land
use planning, pedestrianisation is claimed to have an immediate effect on car
traffic, but pedestrians and retailers on the other hand, are likely to require several
years to adjust to changes in the situation (Goodwin, 1998).
The temporal nature of a TDM measure also relates to its operational specific-
ations. Congestion pricing, for example, typically operates during peak periods or
336 Peter Loukopoulos et al.

during the day, but not in the evening or at the weekend. Prohibition measures can
also operate in a similar fashion (Cambridgeshire County Council, 2005), although
most road closures tend to be permanent. Furthermore, TDM measures may affect
the temporal nature of the activity per se. For example, work hour management
strategies attempt to influence vehicle trip demand by reducing it or by shifting it
to less-congested time periods (e.g. flexible working hours, staggered working
hours, modified work schedules such as a four-day week, and telecommuting
services) (Golob, 2001). Such strategies have been shown to be effective, but it is
also known that any savings often generate new, longer trips for non-commuting
purposes such as leisure activities or shopping/maintenance activities, many of
which were previously linked via trip chains to the commuting trip.

17.3.4 Spatial Scale

The scope of influence of TDM measures varies from the local to the national.
Differentiated road pricing or congestion charging, for example, is a local initiative
aimed at easing traffic flows in urban areas and improving local air pollution
levels, as well as improving the quality of life in urban areas (Banister, 2003; Foo,
1997, 1998, 2000; Goh, 2002). Road closures and pedestrianisation measures are
also local initiatives. An example of a TDM measure with a large spatial sphere of
influence is a proposed kilometre charge (Ubbels et al., 2002). A further example is
that of public transport discounts for certain groups such as pensioners or the
unemployed.
TDM measures may be initiated nationally but have local impacts. An
example is legislation requiring employers to implement strategies to reduce trans-
portation impacts of employees, suppliers, visitors and customers (Enoch and
Potter, 2003; Rye, 2002). Such strategies vary from employer to employer and may
include car-pooling schemes, coordination of specific transport routes with local
public transport providers, and parking restrictions.
An alternative conception of the spatial reach of TDM measures is whether or
not they target the origin or destination of trips. For example, it is possible in a
monocentric city to make car use less attractive by means of traffic calming and
access restrictions in both the city centre (a common destination) and residential
areas (the typical origin) (Louw and Maat, 1999).

17.3.5 Market-Based vs. Regulatory Mechanisms

TDM measures also vary in terms of whether they can be classified as market-
based (e.g. road pricing based on pricing mechanisms) or regulatory (based on
legislation, standards and legal principles). Examples of the latter include road
closures, maximum parking ratios, enforced speed limits, and mandatory employer
trip reduction programmes. Violations of such TDM measures are met with some
form of punishment, and the assumption is that such regulations or laws are
internalised under the threat of punishment. These policy measures are also
 A Cost-Minimisation Principle of Adaptation of Private Car Use 337

referred to as command-and-control measures (Johansson-Stenman, 1999) since an

authority assumes responsibility for the management of a transport system and
exercises control so that, in principle, it functions effectively.

17.3.6 Impacting Latent vs. Manifest Travel Demand

Variations in TDM measures in terms of the nature of the demand which they
manage are seldom taken into consideration. Latent demand can be defined as the
demand for services or resources that goes unsatisfied for various reasons (e.g.
congestion). Road construction has historically been driven by a predict-and-
provide approach (Vigar, 2002; Whitelegg and Low, 2003), where the argument
was that latent demand should be satisfied because better and more roads were
required as a matter of individual freedom (the right to use the car) and economic
competitiveness (the need for efficient road links for business). However, as
reviewed by Mogridge (1997), increases in road capacity do not necessarily yield
faster or more efficient travel but, paradoxically, may make congestion worse. The
reasons for this are argued by Downs (1992) to be due to the fact that free road
space created by marginal reductions in commuting time is consumed quickly by
those travelling just outside of the peak time period who shift back in; those
driving on less optimal routes who take advantage of lowered congestion on the
most popular main roads; and those on slower public transit modes who prefer
driving if there is any more space on the road. Latent demand induced by increased
road capacity also includes new vehicle trips by people who would not have
otherwise made the trip or trips by drivers who select an alternate destination (i.e.
shoppers who prefer a new shopping centre over the city centre). In other words,
road infrastructure expansion is self-defeating, a point clearly made by Hansen and
Huang (1997) who estimate that in California the five-year elasticity of vehicle
travel with respect to highway lane miles is 0.6-0.7 at the county level and 0.9 at
the metropolitan level. The implications are that most of the trips on new roads are
trips that would not have occurred had the roads not been built.
In contrast to influencing latent travel demand, many TDM measures influence
manifest travel demand (i.e. actual travel). Road or congestion pricing or
kilometre-based charges attempt to change the actual driving behaviour of many
people by increasing the cost (Banister, 2003; Foo, 1997, 1998, 2000; Goh, 2002;
Ubbels et al., 2002), or by decreasing the costs of alternative modes (Root, 2001).
Road closures or prohibition make it impossible for travel demand to manifest
itself in certain areas or at certain times (Cambridgeshire County Council, 2005).
The initial waves of TDM measures focused on better management of existing
resources (Bovy and Salomon, 2002), and thus were aimed at changes in manifest
travel demand.
Many recent TDM measures have also begun to influence specifically latent
travel demand. One example is the attempt to alter human values and change
mobility culture so that a less mobile society is not viewed as negative (City of
Zurich, 2002). Another example of such a TDM measure is land use planning.
Research has demonstrated that intensities and mixtures of land use significantly
338 Peter Loukopoulos et al.

influence decisions to drive alone, car pool, or use public transport (Cervero,
2002). The assumptions made by proponents of such measures are that land-use
patterns influence the time cost of travel and that the variations in time cost due to
land use is of sufficient size to induce changes in car use (Boarnet and Crane,
2001; Boarnet and Sarmiento, 1998). In summary, whereas the construction of road
infrastructure assisted the satiation of latent travel demand by allowing it to be
manifested in actual car use so that individuals could drive to their activities, land
use policies promoting, for example, mixed zoning, satiate latent travel demand by
bringing the activities to the individual.

17.4 Theoretical Framework

The potential effectiveness of TDM measures for reducing private car use depends
on how car users respond to them. In conceptualising such responses, it is
important to take into account that private car use primarily results from needs,
desires, or obligations to participate in out-of-home activities (e.g. Axhausen and
Grling, 1992; Jones et al., 1983; Grling et al., 1994; Root and Recker, 1983;
Vilhelmson, 1999). Therefore, as has been noted (Grling et al., 2000; Grling et
al., 2002b; Kitamura and Fujii, 1998; Pendyala et al., 1997; Pendyala et al., 1998),
car-use reduction should be viewed broadly as an adaptation by car owners to
changes in travel options that potentially have consequences for their engagement
in different activities and the satisfaction they experience from this. In the
following, we describe a theoretical framework (Grling et al., 2002a) that was
proposed with the aim of analysing the multi-facetted nature of car users
responses to TDM measures. We will apply the theoretical framework here as an
alternative to demand theory for understanding car users responses to road-user
charges.
Based on the assumptions that (i) individuals and households are fully
informed of the costs and (ii) make optimal tradeoffs between benefits and costs,
demand theory predicts that increasing costs for car use will lead to a reduction of
manifest travel demand or behaviour. Deviations from this prediction are, however,
frequently observed (Goodwin, 1998). In order to understand inaccurate predic-
tions of the degree of change as well as the existence of thresholds (dis-
continuities), delayed effects and unexpected effects on other behaviour, the
process of change needs to be specified in more detail.
Fig. 17.1 is a simplified illustration of the theoretical framework. Travel options
are defined as bundles of attributes describing trip chains (including purposes, de-
parture and arrival times, travel times, monetary costs, uncertainty and inconveni-
ence). Choices of travel options are influenced by these bundles of attributes.
Another determinant is the goals individuals and households have set. In self-
regulation theory in social psychology (Carver and Scheier, 1998), such goals are
assumed to form a hierarchy from concrete (programmes) to abstract levels (prin-
ciples) that function as reference values in negative feedback loops regulating
ongoing behaviour or changes in behaviour. If a discrepancy between the present
 A Cost-Minimisation Principle of Adaptation of Private Car Use 339

state and the goal is detected, some action is carried out with the aim of minimising
it. After implementing a road pricing scheme, a car-use reduction goal may be set if
households experience increased monetary travel costs (Loukopoulos et al., 2005).
On the other hand, if other changes are encountered such as decreased travel times
(due to less congestion) or concomitant decreased living costs (e.g. children moving
out, salary increases), no such goal may be set. In effect, a simple relationship does
not exist between increasing the cost of driving and setting car-use reduction goals. A
similar line of reasoning can be applied to changes in destinations, departure times or
routes.
INDIVIDUAL FACTORS
x Family structure
x Income
x Work situation
x Attitudes
x Activity/travel pattern

ADAPTATION GOAL/
IMPLEMENTATION PLAN

TRAVEL CHOICE
TRIP CHAIN x Stay at home
ATTRIBUTES x Use electronic
TDM MEASURESS
x Purposes communication
x Road pricing
x Departure times x Car pooling
x Physical
x Travel times x Change attributes of trip
restrictions
x Cost chain concerning:
x Improved
x Uncertainty o Purposes
alternatives
x Convenience o Modes
o Departure times
o Destinations

SITUATIONAL FACTORS
x Family logistics
x Time pressure
x Weather
x Time of day
x Day of week

Fig. 17.1. Theoretical framework (after Grling et al., 2002a)

340 Peter Loukopoulos et al.

Needs, desires, attitudes and values that people acquire, influence the goals which
people set and strive to attain (Austin and Vancouver, 1996). Such goals vary in
content and intensity (Locke and Latham, 1984, 1990). Content is related to difficulty
or lack of skill required to attain the goal, specificity, complexity (the number of
outcome dimensions) and the degree of conflict with other goals at the same or
higher levels. Intensity refers to perceived importance and degree of commitment.
Research in other areas on goal setting and attainment (e.g. Lee et al., 1989) has
shown that specific and more difficult goals increase the likelihood that they are
attained provided that the difficulty is not beyond peoples skills. Commitment to the
goal and immediate clear feedback about goal attainment are moderating factors.
After having set a car-use reduction goal, individuals and households are
assumed to form a plan for how to achieve this goal and to make commitments to
execute the set plan. In social psychological research, this process is referred to as
the formation of implementation intentions (Grling and Fujii, 2002; Gollwitzer,
1993). The plan that is formed consists of predetermined choices contingent on
specified conditions (Hayes-Roth and Hayes-Roth, 1979). In making plans for how
to reduce car use, households may consider a wide range of options such as staying
at home, suppressing trips and activities, using electronic means of communication
instead of driving, car pooling or changing the effective choice set of travel options
with respect to purposes, destinations, modes or departure times. Households may
also consider longer-term strategic changes such as moving to another residence or
changing work place or hours.
It is hypothesised that individuals and households seek and select options that
lead to the achievement of the goal they have set. We do not assume, however, that
this process necessarily entails a simultaneous optimal choice among all options.
Consistent with the notion of satisficing (Gigerenzer et al., 1999; Simon, 1990), it
is instead assumed that options are chosen and evaluated sequentially. Experiment-
al laboratory-based research (Payne et al., 1993) has shown that people make
tradeoffs between accuracy and (mental and tangible) costs, and that these
tradeoffs are frequently optimal. A vital difference in relation to microeconomic
utility-maximisation theories (McFadden, 2001) is that it is not assumed that
people invariably invest the required degree of effort. Whether they do so or not is,
in our theoretical framework, dependent on properties of the set goal (for example,
if it is vague or specific). Furthermore, if the cost of an effective adaptation is too
high, even a small and specific reduction goal to which a household is committed
may be abandoned or further reduced.
A second important difference to utility-maximisation theories is that choices
are made sequentially over time. This implies that the process of change is pro-
longed and fails to result instantaneously in outcomes beneficial to society.
Furthermore, in the theoretical framework it is asserted that benefits (effectiveness)
as well as costs of chosen alternatives are evaluated. If such evaluations indicate a
discrepancy with the goal, more costly changes are chosen. Even though it has
been shown that people make optimal accuracy-effort tradeoffs in laboratory
experiments, we do not know whether they do so in real life when making complex
travel choices. In fact, many things suggest that they do not. As has been noted, it
is documented (Chapter 13) that habitual car use and other daily habits and
 A Cost-Minimisation Principle of Adaptation of Private Car Use 341

routines cause inertia. Research has also demonstrated that a bias exists such that
the current state is overvalued (e.g. Samuelson and Zeckhausen, 1988), thus
making changes less attractive. In particular, if the car-use reduction goal is vague,
evaluating whether or not a change option is effective may possibly be biased
toward confirming the expectation that it is (e.g. Einhorn and Hogarth, 1978;
Klayman and Ha, 1987). Furthermore, previous research has demonstrated that
immediate and clear feedback is essential (Brehmer, 1995). A system for charging
car use that does not provide this is likely to fail.
On the basis of our theoretical framework, we posit the existence of a
hierarchy of change options that vary in effectiveness and costs. In Table 17.1, we
operationalise this hypothesis by specifying three different classes of potential
change options together with their associated costs. We further assume that an
inverse relationship exists between effectiveness and costs for these change
options.
As indicated in Table 17.1, the first stage involves making car use more
efficient by chaining trips, car pooling or choosing closer destinations. The cost is
an increased need to plan ahead. The resulting change in car use may, however, not
be sufficient to achieve the car-use reduction goal.
In a second stage, trips may also be suppressed in order to achieve greater
reduction in car use. In addition to increased planning, trip suppression implies
changes in activities. Although in extreme cases this would necessitate changes in
lifestyles, the required changes are in general likely to be minor, perhaps solely
involving the suppression of isolated shopping trips. Leisure activities are next
most likely to be removed from the activity agenda or substituted by in-home
activities. Least likely are more consequential changes in working hours or changes
of job.

Table 17.1. Proposed adaptations to road pricing schemes

Choice options Possible costs
More efficient car use
x Trip chaining Additional planning
x Car pooling
x Choosing closer destinations
More efficient car use Additional planning
Trip suppression Activity suppression
More efficient car use Additional planning
Trip suppression Activity suppression
Mode switching Increased time pressure
Inconvenience

The car-use reduction goal may still not be attained unless other modes are chosen.
For instance, since work cannot easily be suppressed, public transport may be
chosen for such trips. Additional planning, increased time pressure and
inconvenience are possible costs associated with switching mode. In addition, in
order to alleviate a potentially harmful increased time pressure (Grling et al.,
342 Peter Loukopoulos et al.

1999; Koslovsky, 1997; Novaco et al., 1991; Novaco et al., 1990), suppression of
minor leisure activities and shopping would still be necessary.
It should be noted that Table 17.1 only describes one possible operationalisa-
tion of the principle of sequential cost-minimisation of choices of change options.
In fact, survey results (Grling et al., 2000; Loukopoulos et al., 2004) suggest that
the hypothesised hierarchy varies with trip purpose and household or individual
characteristics. Furthermore, it is not necessarily the case that cost varies inversely
with effectiveness. TDM measures may be applied or other changes (for example,
residential relocation) may occur that singly or in combination facilitate less costly
changes that are effective.

17.5 Implications for the Effectiveness of TDM Measures

In order to understand how road pricing affects car use, our theoretical framework
asserts that two processes need to be examined further. First, how do type and size
of the increased costs caused by road pricing affect the size and type of car-use
reduction goals set by individuals and households with different characteristics?
How does road pricing compare to other TDM measures in these respects? Which
of the properties listed in the previous section for describing TDM measures, if
any, are related to the goal-setting process? One may speculate that coercive
measures may work better than increased monetary costs in making people set car-
use reduction or change goals as it is only for less wealthy individuals or house-
holds (i.e. those who experience road pricing to be coercive) that the effect would
be the same.
Second, even if car use is reduced or changed goals are set, it may, however,
still not have the intended effect. This follows from the likely fallibility of the
second process that needs to be examined: the formation and implementation of a
plan to achieve the car-use reduction or change goals. It is well documented that
attitudes and intentions may have a weak correspondence with actual behaviour
(Eagly and Chaiken, 1993; Fujii and Grling, 2003; Grling et al., 1998). Several
reasons for this have been identified and in this chapter we have alluded to some of
them. Self-regulation theory (Carver and Scheier, 1998) highlights yet others. In
particular, we assume that the principle of cost-minimisation (where cost is broadly
defined) is important for understanding how households and individuals try to
attain set car-use reduction goals. If the cost is too high for its given strength and
size, the goal may be abandoned or changed. Evaluation of feedback about
effectiveness (goal attainment) is another element. If it is delayed and vague,
suboptimal adaptation alternatives may continue to be chosen.
Coercive measures including road-user charges probably only affect the
motivation to change. Additional TDM measures need to be implemented to reduce
the cost of effective alternatives for change so that they are made more attractive.
These measures include those focusing on latent demand, that is, increased
accessibility without use of the car. Choice of appropriate spatial and time scales
may also be important.
 A Cost-Minimisation Principle of Adaptation of Private Car Use 343

17.6 Summary and Discussion

In this chapter, we propose that car users respond to travel demand management
(TDM) measures by car-use reduction or change goals. Setting larger goals is more
likely with the more coercive TDM measures. Market-based TDM measures such
as road pricing are considered to fall somewhere in between coercive command-
and-control measures and non-coercive voluntary-change measures depending on
individual and household wealth.
We further propose that goal attainment entails that choices be made between
available change options following a cost-minimising principle. In addition, we
speculate about the nature of these costs. The principle implies a sequential
satisficing choice process that may never achieve an optimal cost-benefit trade-off.
Whether it does or not may depend on effective change options being made less
costly and on immediate and clear feedback about goal attainment. Coercive TDM
measures (and for some individuals and households, road pricing) do not help car
users attain their car-use reduction aims or change goals. Other TDM measures
targeting changed latent demand are needed for this.
Any implementation of TDM measures would benefit from forecasts of their
likely effects. With the proposed theoretical framework as a basis, mathematical-
statistical models of the goal-setting and adaptation process need to be developed.
Such developments may draw on previous research on the Activity-Mobility
Simulator or AMOS (Kitamura and Fujii, 1998; Pendyala et al., 1997; Pendyala et
al., 1998). AMOS reproduces how travellers modify their activity/travel choices in
response to specified TDM measures. It uses as input an observed daily activity/
travel pattern to sequentially generate adaptation options, then computes and
evaluates each new activity/travel pattern.

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18 Car Users Trade-Offs Between Time, Trip
Length, Cost and Road Pricing in Behavioural
Models

Otto Anker Nielsen1 and Goran Vuk2

1
Centre for Traffic and Transport, Technical University of Denmark
2
Danish Transport Research Institute

Abstract
Stated Preference (SP) experiments are the obvious choice in order to forecast
travellers responses to alternatives that do not exist today. SP experiments can in
addition change the variables in a controlled factorial design, whilst Revealed
Preference surveys (RP) have to rely on measured observations. Preferences
concerning correlated explanatory variables such as travel time and travel length
can therefore often be estimated more easily by SP experiments than by RP
surveys. However, respondents may not act as they claim in the interview and the
design may affect the results.
The chapter illustrates, based on an SP experiment compared with the AKTA
data (Chapter 6), how the definition of variables can influence the results obtained.
Value of travel time, VoT, (both free flow and congestion travel time), choice of
time-of-day of travel and route choice are considered both without and with road
pricing. It is shown that the design of the experiment seriously affects the result
especially with respect to VoT. It is then shown how the income variable and
distributed coefficients (taste variation) can improve the model fit and its
behavioural accuracy. The model structure obtained corresponded well to the best
models from the field experiment (RP) in AKTA, although the size of coefficients
differed somewhat.
It appears that (marginal) cost is a problematic variable compared to trip
distance as the respondents had serious difficulties in estimating the cost per
kilometre. Road pricing was considered a bit worse than a pure marginal driving

Mai-Britt Herslund is thanked for the work on SP design and the interviews, Christian Wrtz on
work collecting and processing the GPS data, Paolo Menegazzo on work regarding the route choice
model estimator and data processing and Majken Vildrik Srensen is thanked for work on the SP and
model estimation, including work reported in Nielsen and Srensen (2004) upon which section 18.4.3
is based.
The AKTA project was primarily financed by the EUs 5th Framework Programme and the
municipality of Copenhagen, with co-funding of the research part by the Technical University of
Denmark (DTU). Principle contractor of AKTA was the City of Copenhagen, from which Poul
Sulkjr is thanked. DTU, the Danish Road Directorate and the Ministry of Transport were assist-
ant contractors. The AKTA SP was funded by the Danish Transport Council and the remaining
work on this was allowed to be finalised by self-funding from the DTU and the Danish Transport
Research Institutes (DTF).
352 O.A. Nielsen and G. Vuk

cost in the road pricing situation, i.e. car users preferred paying for fuel than
paying road pricing. But the total cost after road pricing was introduced was
weighted less than before road pricing compared to travel time or in other words
travelling time was weighted higher. This can be explained by the fact that
travellers have restrictions and inertia in their possibilities of changing behaviour
as well as the fact that the car-users who still use the car are the ones with the
higher willingness to pay and the travellers who change behaviour have the lower
willingness to pay.

18.1 Introduction

This chapter describes how the definition of cost and trip length variables in a Stated
Preference (SP) experiment affects the results. The models ability to describe car
users valuation of cost compared to other variables is a core issue in any transport
model of road pricing as road pricing is an extra cost. This issue was examined 1) by
testing different definitions of costs in a systematic way within an applied SP
experiment, 2) by examining the sensibility of different estimation methods and model
assumptions, among others cost-definitions, Nested Logit (NL) versus Mixed Logit
(ML) and different assumptions on the random coefficients in the ML and 3) by
comparison with the results from a Revealed Preference (RP) experiment, where the
same persons cars were followed over a 4-6 month period. Some of the initial results
have been presented earlier in Nielsen and Jovicic (2003).
Section 18.2 presents the experimental design and section 18.3 presents some
more general results. Section 18.4 presents and discusses the SP model and section
18.5 the RP model with focus on route choice, followed by a comparison of the two in
section 18.6; conclusions are drawn in section 18.7.

18.2 SP Design

The Technical University of Denmark and the Danish Transport Research Institute
(DTF) carried out a research project concerning SP methods in parallel with the main
AKTA road pricing experiment (see Chapter 6). The purpose was to evaluate SP as a
method, since AKTA provides an excellent RP data survey for comparison. 200 car
drivers from the second and 100 from the third round of AKTA (Chapter 6) were
interviewed while they waited for a GPS unit to be installed in their cars at a garage.
The SP data were accordingly collected prior to the start of the main trial period of
AKTA. This reduced the cost of the SP survey and ensured that most of the 300
participants in AKTA followed the SP experiment as well. 279 interviews were
successfully completed and processed. 3,388 SP records passed the data quality
control.
The SP questionnaire collected information about a typical trip, for example the
journey to work, about which the respondent was expected to have sound knowledge.
 Car Users Trade-Off Between Time, Length, Cost and Road Pricing 353

The chosen trip was described by including origin and destination addresses, departure
and arrival times as well as travel purpose. If the respondent undertook an extra
activity on the way (e.g. shopping, visiting a bank) these activities were also noted.
The departure time defined the trip as being peak or off-peak.
The experiments considered 1) the trade off between travel time and cost; 2)
choice of time-of-day travel (peak vs. off peak) and 3) road pricing scenarios. The
respondents were presented to the different trade off situations in separate sections of
the experiment. The travel cost was measured in monetary units as is usual in most
value of travel time SP studies. For half of the respondents, the travel cost was
measured in monetary units as is usual in most value of travel time SP studies, for the
other half, the cost was measured in distances (kilometres).
The pricing levels in the SP experiment for each respondent were the same as
those which the same respondent would face in the main AKTA (RP) experiment. The
SP experiments were carried out prior to the RP experiment in order to avoid the
possibility that answers were influenced by the experiments. Each respondent then
undertook three SP experiments before answering socio-economics questions:
The first SP experiment focused on the Value of Time (VoT). Traditional
experiments examine trade offs between time and cost. However, prior experi-
ence in Denmark (Nielsen et al., 2002) suggests that some car users are not
aware of costs and that most travellers consider only marginal costs (fuel). To
investigate this issue further, some of the respondents were asked about their
trade-off between time and cost (referred to as SP1a in the following) and
some were asked about their trade-off between time and trip length (SP1b).
The second SP experiment focused on time-of-day (ToD) decisions and
congestion1. The trade-off context in this respect was between travel cost and
travel time, time being affected because of congestion, and time-of-day.
Travellers in peak hours may choose to travel outside the peak because of
lower costs and congestion. Travellers presently travelling outside the peak
may choose to travel in the peak hours if the additional costs make this faster.
This experiment also had either a trade-off between time and cost (SP2a), or
between time and trip length (SP2b). Some respondents followed the SP2a
design and some respondents followed the SP2b design.
The third SP experiment evaluated the choice between an existing trip, where
road pricing had been added, and a possible alternative route, which was found
together with the respondent. The trade-off was then investigated between
cost, pricing, free time and congestion time, in a binary choice context where
the four explanatory variables were varied.

1
It is noted that the definition of congestion time followed the definition in Nielsen et al, (2002),
i.e. that congestion time is the extra expected travel time caused by congestion compared to the
situation without congestion. The respondents were asked how much time their usual trip took
and how much time they expected it would have taken without congestion. The difference was
then interpreted as the extra time caused by congestion.
354 O.A. Nielsen and G. Vuk

18.3 Awareness of Travel Distance and Travel Time

An important issue when attempting to measure the effect of road pricing schemes on
user behaviour is the validity of the measured impact of the travel cost on car usage.
Users may consider the cost of travel differently and thereby have a different trade off
between the road pricing charge and travel cost. To discover whether any such
problems exist, respondents were questioned on their awareness of actual costs for a
particular trip. The questionnaire was coupled with an underlying route choice model
so that the zone-to-zone distance of the trip could be calculated. Further, the total cost
was calculated by a constant cost per km multiplied by the distance.
The respondents were prompted to verify or correct the cost provided either in
monetary units or kilometres. The rate of accepted to suggested cost is shown in Fig.
18.1, where it can be seen that the respondents frequently corrected the suggested cost
and trip length. Trip lengths were corrected more often than costs (43% corrected the
trip length, 18% the cost). This may be interpreted as respondents greater awareness
of travel lengths than travel costs for their typical trip.

Fig. 18.1. Respondents correction of SP estimates of cost and time based on zonal data

Looking more into the corrections, it appears that the correction of length had the
same average size independent of the trip length. This can be explained by how the
distances and costs were generated in the underlying assignment model. Distances
were calculated between zones (the error is related to the zonal connector in the
from-and-to zones, respectively); hence the aggregation error was independent of
the distance between the zones.
The respondents were then asked what they would normally consider the cost
of driving per kilometre. The typical answers were rounded values (0.5, 1 and 2
DKK were the most frequent answers), which can be seen in Fig. 18.2. The interval
between 0.5 and 1 DKK equals reasonably well the marginal driving cost (about
 Car Users Trade-Off Between Time, Length, Cost and Road Pricing 355

45% of the answers) and values around 2 DKK equal average cost including
capital cost, etc. (about 45% of the answers).

100,0
(%)

90,0
80,0 Percent
70,0 Percent, cumulative
60,0
50,0
40,0
30,0
20,0
10,0
0,0
0,00 1,00 2,00 3,00 4,00 DKK 5,00

Fig. 18.2. Accepted cost per km shown as a cumulative and a density distribution

As respondents may consider different cost components to be included in their cost

per kilometre, respondents were asked about what the cost included (Fig. 18.3). Only
very few respondents claimed that fixed costs were included. There seems to be an
inconsistency between the stated cost and the respondents' assumptions behind them.
6% of the participants even stated 0 (zero) DKK per km, since their cost of driving
was paid for by other persons (employer, partner, friend, parents, etc.). About 4% of
the answers in Fig. 18.3 were outside a reasonable cost range. About 48% stated a cost
that was at a level which would include fixed costs, but only 10% stated that they had
included fixed costs in their cost per kilometre estimates.
Fig. 18.4 shows large disagreements between the answers provided by each
person. As can be seen, as many as 40% of the respondents answered cost per
kilometre deviated by more than 100% above the ratio of their accepted total cost
and travel length. In addition to this, the 6% of the participants who did not pay
their costs themselves did not answer this in the cost/km question due to the way
this question was formulated.
The main conclusion is that it was difficult for the respondents to measure their
costs of driving in monetary units and that their answers differed, largely depending
upon how the questions were presented and how they were assisted during the
interview and/or survey.
356 O.A. Nielsen and G. Vuk

%)
100
Mentioned last
90
Mentioned second
80 Mentioned first
70
60
50
40
30
20
10
0
Fuel Tyres and oil Repairs Insurance Provision Other

Fig. 18.3. Participants stated components in their cost calculations. The answers from the
respondents who stated their cost per kilometre could easily be compared to their a priori
accepted trip length and cost for the specific trip (i.e. the ratio between the two)
Acumulated (%)

100
90
80
70
60
50
40
30
20
10
0
-100 0 100 200 300 400 500 600 700 800 900 1000 1100 1200 1300 1400 1500 1600

Deviation %

Fig. 18.4. Comparison between accepted costs (e.g. 10 DKK) divided by accepted trip length (e.g.
10 km) i.e. accepted total values with stated cost per kilometre (e.g. 2 DKK/km which gives
an inconsistence of the answer equal to 100%). Cumulative distribution in %
 Car Users Trade-Off Between Time, Length, Cost and Road Pricing 357

18.4 SP Model Estimation

As a first step, a Multinomial Logit Model (MNL) was applied to the data in order to
identify variables that could explain the variation in the data. The model included
separate coefficients for costs and road pricing charges, travel time, split into free flow
time and extra time use related to congestion, a coefficient for trip distance for the
experiment where travel distances were presented instead of monetary costs and
dummies for time period (in or off-peak), gender and alternative specific constants.
Several different strategies for model building were followed including mixed
logit formulation (normal and log-normal distributions of the coefficients), income-
dependent model formulations and combinations with mixed logit and income
dependencies.

18.4.1 Model Formulation (Utility Functions)

Several different utility functions were used in the estimation. It was assumed that the
road users chose the alternative i with the highest utility Ui . The utility was assumed to
consist of a utility function Vi and an error term Hi which describe unexplained
variation in the data. The error term is assumed to be Identical Independent Gumbel
Distributed (iid) over alternatives (1), whereby a logit model is obtained (Ben-Akiva
and Lerman, 1985). The independent variables were cost c (cost measured in
monetary units or as length of the journey multiplied by a fixed cost per kilometre),
road pricing r, free flow time tff, extra travel time due to congestion tcng and a vector S
of socio-economic attributes s. Each variable where multiplied a coefficient , which
was estimated for this variable specifically;

U i Vi  H i c c  E r r  tff t ff  tcng tcng  E s S s  H i (1)

In the second step of the work, a mixed logit formulation was applied (see Ben-Akiva
et al., 1993), whereby some of the coefficients were allowed to vary around their
mean; this corresponds to substitution of coefficients k in equation (2) for k in
equation (1), where k refers to the specific coefficient. Mixed models were estimated
based on both normal and log-normal distributions assumed a priori as the mixing
distributions. For distributed terms, both the mean of and the standard deviation
were estimated (from these, the parameters for the log-normal distribution can be
calculated).

Ek ' Ek  [ ( 2)

The best MNL and EC models are presented in Table 18.1. Models 1 and 2 are MNL
models while models 3, 4 and 5 are mixed logit formulations. In model 1, one cost
coefficient corresponds to converting travel distances to cost by a fixed cost of driving
358 O.A. Nielsen and G. Vuk

(DKK/km) and assuming the behavioural impact of road pricing to be of the same
scale as the cost of driving. Model 2 deals with three cost coefficients; one related to
driving costs, one related to driving distances (rescaled into driving costs) and one
related to road pricing. For the rescaling of distance to driving cost, a fixed cost of
0.55 DKK/km was used.
Models 3 to 5 include one or more error components in their structure. The
only difference between model 2 and 3 is that a random error was defined in model
3 linked to all time and cost coefficients. This is a hypothetical situation, but a
useful test of whether heterogeneity exists in data. A dramatic improvement is
observed in model 3, showing considerable variation in taste. Further disaggrega-
tion of the error components in models 4 and 5 gave even better results as all
proved to be significantly different from zero. The best model was model 5 where
error components were placed in relation to different cost coefficients, free flow
travel time and congested travel time, i.e. six error components in total.

Table 18.1. Estimation results from the best MNL and EC models based on the SP
data
File model 1 model 2 model 3 model 4 model 5
Observations 3388 3388 3388 3388 3388
Final log (L) -1662.6 -1645.7 -1571.1 -1561.3 -1538.1
D.O.F. 8 10 11 14 16
Rho(0) 0.292 0.299 0.331

0.343

drvcost -0.300 (-14.1)

-0.976 (-4.3) -0.997 (-3.4) -1.50 (-2.9)

cngtime -0.299 (-19.9) -0.296 (-19.1) -1.530 (-4.5) -1.48 (-3.4) -2.25 (-3.0)
rdprice -0.350 (-16.0) -0.358 (-15.7) -2.08 (-4.3) -2.38 (-3.0) -3.09 (-2.9)
inpeak
.10 (3.4) 1.17 (3.6) 2.63 (2.4) 2.49 (2.2) 3.37 (2.0)
t_malep -0.674 (-2.5) -0.705 (-2.6) -1.86 (-2.5) -1.93 (-2.2) -3.28 (-2.1)
asc51 0.188 (2.4) 0.189 (2.4) 0.355 (1.5) 0.329 (1.3) 0.436 (1.5)
costdst -0.157 (-4.7) -1.09 (-3.9) -1.18 (-2.9) -1.65 (-2.1)
costSP3 -0.346 (-9.4) -1.96 (-4.0) -2.38 (-2.9) -2.59 (-2.8)

ercmp -1.16 (-4.0)

cost1_e -2.00 (-2.7) -6.21 (-2.7)
fftime_e -1.12 (-3.1) -1.74 (-2.7)
cngtime_e 0.904 (2.9) 1.16 (2.7)
cost4_e -1.48 (-2.3) -1.96 (-2.7)
cost2_e 7.33 (2.3)
cost3_e 0.924 (1.8)

The variables in the models are defined as:

drvcost; driving cost coefficient in the SP1a (VoT experiment) and SP2a (time
of day experiment, ToD).
fftime; free flow time coefficient.
 Car Users Trade-Off Between Time, Length, Cost and Road Pricing 359

cngtime; congested time coefficient (extra time due to congestion compared to

fftime).
rdprice; coefficient for road pricing in the road pricing experiment (SP3).
inpeak; dummy variable from ToD experiments (SP2) saying that if the
respondent originally travelled in peak hours, then when presented with an off-
peak alternative he or she might (or might not) prefer to switch. A positive
value means that the original time of travel (which is peak) is preferred.
offpeak; dummy variable from ToD experiments (SP2) saying that if the
respondent originally travelled in off-peak hour, then when presented with a
peak alternative he or she might (or might not) prefer to switch. A positive
value means that the original time of travel (which is off-peak) is preferred.
t_malep; in the ToD experiments (SP2), dummy considering that men who
travel originally in the peak are more willing to stay in the peak than women.
asc51; alternative specific constant in the SP3 placed on the original (typical)
route. A positive value means that when everything else is equal, the
respondents prefer the original route.
costdst; cost coefficient calculated using distances in SP1b and SP2b.
costSP3; cost coefficient in the SP3.
ercmp; error component coefficient applied only in model 3. The coefficient
was applied for all cost and time coefficients in all SP experiments. The
purpose of model 3 was to discover if the error components significantly
improve the model estimations (which was the case).
cost1_e; cost error component coefficient applied to all cost coefficients in
model 4 and to cost coefficients in the SP1a and SP2a in model 5.
fftime_e; free flow error component coefficient applied to all SP experiments.
cngtime_e; congested time error component coefficient applied to all SP
experiments.
cost4_e; road pricing error component cost coefficient in models 4 and 5.
cost2_e; error component cost coefficient in model 5 applied to SP3.
cost3_e; error component cost coefficient (where costs are calculated on
distances) in model 5. It was applied to SP1b and SP2b.

Table 18.2 shows the VoT for model 2, which is a MNL model, and Table 18.3
VoT for EC model 5. The VoT in the EC models are often calculated as the ratio
between the time and cost coefficient (first rows in Table 18.3). However, the
distribution of the VoT is more correctly described as the distribution of the time
coefficient divided by the distribution of the cost coefficient. The mean of the joint
distribution is not the same as the ratio of the means for each distribution. The ratio
of two normally distributed terms is Cauchy distributed, for which no estimator for
360 O.A. Nielsen and G. Vuk

the mean exists. The interpretation of this is that when the denominator (the tail of
the distribution of the cost coefficient) approaches zero, then the VoT limit is
infinite. If the distribution contains negative values, then the VoT is negative,
which is of course illogical. Nonetheless, due to software limitations the present
study assumed normally distributed VoT.
The second row of VoT in Table 18.3 was first simulated with the denominator
(cost distribution) truncated at zero. However, as this skewed the cost distribution too
much, the distribution was then truncated symmetrically around the mean with the left
truncation at zero and the right at twice the mean. Nevertheless, when the numbers
drawn at random approach zero, the VoT still approaches infinitely. Accordingly, a
second truncation was done on free flow VoT over 250 DKK and congestion VoT
over 400 DKK. The same truncation was used in the AKTA RP study to deal with
participants who showed lexicographic behaviour concerning time, i.e. that they
minimised time with no consideration of cost whatsoever. The cut-off values were
determined at the point which was twice the maximum of the VoT for the non-
lexicographic participant with the highest VoT in the RP experiment. The numerator
(the time coefficient distribution) is assumed to have a central mean, which is why
truncation or simulation should not be necessary. This was validated by simulation,
after which the mean value was used. The simulated values from this approach were
in general larger compared to the traditional estimation (Table 18.3). It should be
expected that the larger the variation of the random coefficient, the larger the
difference on the VoT estimates. However, this also increases the likelihood of
truncation and the cut-off of maximum VoT values. Hence, it is not certain that the
VoT would increase (the congestion time in the road pricing SP decreases).

Table 18.2. Value of Time (VoT) in DKK/hour in model 2 (MNL model)

Time Cost/time SP Length/time SP Road pricing

component 0.55 DKK/km 0.7 DKK/km SP
SP RP
Free flow time 27.3 70.3 89.5 31.9
Congested time 43.9 113 144 51.3

Table 18.3. Value of Time (VoT) in DKK/hour in model 5 (EC model)

Calculation Time Cost/time Length/time SP Road
method component SP 0.55 DKK/ 0.7 DKK/ pricing SP
km SP km RP
Ratio of Free flow time 20.2 54.5 69.4 34.7
coefficients Congested time 30.3 81.8 104 52.1
Simulation Free flow time 39.4 - 108 44.1
Congested time 45.5 - 131 49.6

In SP3, driving costs were presented together with road pricing. This gave a higher
VoT (numerically smaller cost coefficients) than in SP1 and SP2, i.e. the respondents'
willingness to pay for time savings increases. However, road pricing had a higher
coefficient than marginal cost (both coefficients are still more positive than in
experiments without pricing), which indicates that road pricing nonetheless is
considered to be worse than marginal cost.
 Car Users Trade-Off Between Time, Length, Cost and Road Pricing 361

The congested travel time is weighed more negatively than free flow travel time
in all models, as could be expected (which is consistent with earlier Danish studies,
e.g. Nielsen et al., 2002, as well as the references provided in Nielsen, 2004).
The trip length based experiments showed a much higher VoT than the trip cost
experiments. The results are illustrated with the low cost/km (0.55 DKK/km basic-
ally a very economical car) and the value used in the RP (0.7 DKK/km an average
car and fuel price as at the time when the experiment took place). The interpretation
may be that respondents in the cost experiment state their believed willingness to pay,
whilst they in real life primarily want to minimise time and the trip length versus time
experiment describes this trade off better.
The model also contained a number of dummies. The off-peak dummy revealed a
tendency to not change time-of-day travel (inertia). This may explain a relatively
small change in the time-of-day of trips in the main AKTA experiment (Nielsen and
Jovicic, 2003). It is not surprising that peak hour drivers want to stay in the peak; they
have already accepted extra time due to congestion. However, it is surprising that non-
peak drivers want to stay out of the peak, all other things being equal. This indicates
that they have chosen the non-peak as the best time-of-day for their specific trip, rather
than to avoid congestion in the peak.
The Asc51 variable shows inertia to change route compared to the usual route,
which may be logical since this indeed is the preferred choice by the respondent.
T_malep (ToD experiment) shows that males are less willing to change ToD
than females (contrary to the result of Bonsall et al., 1998). This is surprising, since
women could be expected to have a more constrained time schedule than men (as
women more often collect children from kindergartens than men, buy food, etc.).

18.4.2 Income Effect Models

Since willingness to pay may depend on income, different parameterised models

tested this. The more traditional way of modelling income effect is by segmenting the
sample by income classes. Several splits into classes within the answer intervals
between 100, 200, 300, 400, 500, 750 and 1,000 thousand DKK yearly gross house-
hold income for 2001 was tested.
However, data only allowed estimation of two cost coefficients (Table 18.4); for
income groups up to DKK 400,000 and above DKK 400,000. 70% of the sample (195
respondents) belonged to the first income group while the rest (84 respondents)
belonged to the high income group. The income effect could not be estimated
reasonably in the SP1b and SP2b experiments where travel distances were presented
to the respondents, as it appeared that lower income group respondents have a higher
VoT than those with high income which is nonsense.
362 O.A. Nielsen and G. Vuk

Table 18.4. VoT in income dependent EC models (below/over DKK 400,000) calculated as ratio of
coefficients. The values marked in brackets [ ] are the VoT in the similar models without income
dependencies

SP1a and SP2a SP1b and SP2b SP3 (road pricing

(cost/time trade offs) (length/time trade experiment)
offs)
Free flow travel time 18.9/22.8 [20.2] Not significant [54.5] 32.1/44.8 [34.7]
Congested travel time 28.4/34.3 [30.3] Not significant [81.8] 48.2/67.2 [52.1]

The last model types estimated in the study were two models with increasing VoT as a
function of income, either with an additional Ec/I term or Ec/I*c (the latter removing
the choice of unit problem in the coefficient). However, both formulations had low t-
values as well as illogical signs of the coefficients.

18.4.3 Alternative Model Formulations

In addition to the model results presented above, several other models were tested
(Nielsen and Srensen, 2004). The data set is remarkable in the sense that extensive
data is available for each respondent since two pure RP and the combined RP/SP
questionnaires were available and combinable for all respondents (a unique ID
followed all participants through the test). Thus, several segmentation criteria were
possible.
The tested models included adding a dummy for peak travel (fixed and distri-
buted coefficients), combinations of gender and peak (fixed and distributed co-
efficients) and log-normal distributed cost coefficients (either same distribution or
different parameters).
Furthermore, a sequence of models where one or more cost coefficients were
deflated by income was tested. First, linearly increasing coefficients were tested, then
dummies for levels in a search for polynomial relations. At this point, revealed income
relations had coefficients of illogical magnitudes or signs or they were statistically
insignificant; the best model from previous with just two income levels of cost
coefficients prevailed.
Finally, a model combining the search for non-linear relations in combination
with different patterns for different cost components resulted in a model where the
coefficient for road pricing increased with higher income groups. However, the
likelihood value for this model (-1642.65) was only slightly better compared to the
MNL model (-1645.71).

18.5 The RP Route Choice Model

The behaviour of the car drivers in the main AKTA experiment was monitored by a
GPS unit installed in the car. The actual choice of the drivers could hereby indirectly
 Car Users Trade-Off Between Time, Length, Cost and Road Pricing 363

be measured by 1) interpreting the sequence of GPS points (coordinates), 2) matching

these to a digital road map and 3) summarising the variables along the observed route.
However, the alternatives that the car driver may have considered could not be
observed, but had to be generated synthetically before the model estimation (Nielsen
and Jovicic, 2003). The first step in the model estimation based on GPS data was to
estimate a route choice model based on this interpreted dataset. This model is
described in the following.

18.5.1 Utility Function

The route choice model was based on a linear utility function (3), as in the SP model.
However, the error term is the sum of error terms at the arcs a along the specific route
R. Since routes can be correlated (sharing links), H cannot be assumed to be
independently distributed among alternatives as in the multinomial logit model
(Ben-Akiva et al., 1985) and neither can it be assumed identically distributed since
splitting an arc into two in the digital map would imply a twice as high error term.
Gamma distributed error terms overcome this if the variance is set to be proportional
to the mean, since the Gamma distribution is non-negative, additive and overcome the
overlapping route problem (Nielsen et al., 2002). The coefficients E could also follow
distributions (error components as in equation 2). However, no distribution was
assumed a priori (the empirical distributions were revealed). The variables are defined
as in section 18.4.1. The kl is a constant factor for driving cost per kilometre, since no
information on car-specific driving costs was available,

UR VR  H R E c rdprice  E l kl length 
E tff fftime  E tcng cngtime  H
aR
a
(3)

18.5.2 Estimation

The estimation of the route choice model was carried out by running an all-or-nothing
route choice model several times for each trip per person. Each run used different
combinations of the coefficients in the utility function. The sums of the coefficients
were restricted to one, since it is the ratios between the two that determine the choice.
This lowered the possible number of combinations, which were pre-defined in a
factorial design (Nielsen and Jovicic, 2003) to avoid building the calculation graph
dynamically for each run. This speeded up the calculation time in the software
(ArcGIS, see www.esri.com).
In the initial analyses, 48 different combinations of coefficients were run for each
trip (Menegazzo, 2003). This number of combinations was chosen as the best
compromise between accuracy and calculation time. The best fit(s) to the observed
route was recorded in each case. The fit was measured as the ratio of the length of the
trip which had been fitted to the observed route. Since the network contains 350,000
links, this task was quite demanding. In most cases, several combinations gave the
364 O.A. Nielsen and G. Vuk

same fit (in the extreme case where a path is both the shortest and fastest). Each fit
was then weighted proportionally to the number of best fits for the route it tried to
match.
A pilot study examined whether an added error term could improve the results (as
in formula 3). However, this was seldom the case. The analyses were accordingly
conducted using deterministic utility functions for each trip, as this improved calcula-
tion times dramatically. The interpretation must be that most of the heterogeneity can
be explained by differences in the coefficients in the utility function and that the
remaining unexplained variation cannot be explained by a distribution around the
deterministic utility function.
The RP model was based on a marginal cost calculation of fuel (8.5 DKK/l, 12
km/l) which resulted in a cost per kilometre of 0.7 DKK, which was higher than the
SP (which is why the results in Table 18.3 and 18.4 were scaled to the RP values as
well for the purpose of comparison). Using a lower or higher cost per km scales the
VoT linearly which is why the same assumptions must be made to compare the
results.

18.5.3 Within Person Variation

The utility functions for all trips for each car could be compared in the RP experiment.
About 2/3 of the participants had fairly consistent preferences, where the most utility
maximising (rational) participant (car) in the experiment got the best route fit for
exactly the same combination of coefficients (of the 48 different possible) for all trips.
It was in general possible to fit the respondents routes quite well for cars with
consistent preferences (in the 70-100% match interval).
However, some participants had a very wide range of preferences. At the same
time, it was difficult to match the routes (40-60% best match interval). It seems that
these participants did not know the network very well. Manual analyses of samples of
routes showed that they often followed illogical routes (i.e. not explainable after any
reasonable criterion). It appears that more work needs to be done to explain the route
choice of this group if this is at all possible.
The best matches for a random participant in the experiment are shown in Fig.
18.5, where the preferences vary considerably. Using the most likely combination of
coefficients (No. 47) may not be a good idea in this case, since it is the weighting of
time components only (lexicographic behaviour on the edge of the distribution). It is
better to use the mean of the values (used in the following) or the median of the
distribution.
 Car Users Trade-Off Between Time, Length, Cost and Road Pricing 365

1,8
1,6
1,4
1,2
1
0,8
0,6
0,4
0,2
0
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47

Fig. 18.5. Participant with varying preferences. The numbers at the x-axis indicate the combination of
coefficients in the factorial design from 1 which is lexicographic in terms of length to 48 which is
lexicographic in terms of time. The Y-axis is the likelihood of occurrence measured in %

It was examined whether there was any relationship between the best match to
observed routes and socio-economic variables, i.e. if special segments of the popula-
tion act more rationally than others. Such relationships could not be found. There was
a weak relationship between the fit to observed routes and VoT though, but not
significant (t stat in regression -1.16). The higher the value of time the less fit
(decreasing from 70% in average to 60% for those with highest value of time). The
interpretation can be that the persons with lowest VoT are most cost-aware and
thereby examine the options and network more carefully.

18.5.4 Between Person Variation

The distribution of the preferences between persons can be revealed by comparing the
mean of each person's preferences. Fig. 18.6 and 18.7 show the distribution of value of
travel times in the route choice models. The assumption in Multinomial Logit Models
(MNL) that the coefficients are fixed clearly does not hold in this case. This was
confirmed in the SP-based models, where the error component models had much
better log-likelihood values than in MNL. The empirical distributions in the RP based
models are by definition non-negative, as the coefficients have to be positive to make
the route choice model work. The distributions are skewed to the right (the mean is
larger than the median), and they look log-normal although the number of
observations is too small to determine this with certainty. Some of the users have very
high value of time, which is due to lexicographic or near lexicographic behaviour
(time minimisation only). The observations appear bundled at some few levels of
outliers, which is because the factorial design of the search algorithm had fewer grid-
points in this area of the function.
366 O.A. Nielsen and G. Vuk

16 100%
Frequency

14
12 80%
10 60%
8
6 40%
4 20%
2
0 0%
5
20
35
50
65
80
95
110
125
140
155
170
185
200
215
230
245
VoT

Fig. 18.6. Frequency and cumulative distribution of free flow value of time in DKK (7.3 DKK
equals approximately 1 EUR). Mean VoT = 73 DKK median = 58 DKK

16 100%
Frequency

14
80%
12
10 60%
8
6 40%
4
20%
2
0 0%
125
155
185
215
245
275
305
335
365
35
65
95
5

VoT

Fig. 18.7. Frequency and cumulative distributions of value of congested time. Mean VOT = 119
DKK median = 92. Note the different scale on the x-axis

The VoT from the RP based model is about one-third lower than the SP trip length
experiment based on the same cost per kilometre. On the other hand, the RP VoT is
about twice as high as the SP cost experiment. If the empirical distribution is fitted
with a normal distribution, the best fit will most likely be around the mass of the
distribution and with a right tail fitted to the high values. This again will imply a
tail on the left side as well, since the normal distribution is symmetrical. The VoT
calculation by simulation in Table 18.3 truncates the denominator, which to some
extent takes care of this and should make the VoT estimates comparable, i.e. the
last two rows in Table 18.3 should be compared with the mean VoT in Fig. 18.6
and 18.7.
 Car Users Trade-Off Between Time, Length, Cost and Road Pricing 367

Another issue is whether the two distributions are independent. The ratio between
the two would then contain values below one. As can be seen from Fig. 18.8, this is
clearly not the case. The smallest ratio is 1.2, i.e. the VoT for congestion time is
always higher than for free flow time. The mean and median ratios are 1.6, which
indicates a nearly symmetrical relationship between the two time components which
was confirmed in a scatter diagram, not shown in this chapter. Basically, this illus-
trates that if a person has a high free flow value of time, then the value of congestion
time is even higher. If a person has a small free flow value of time, then the conges-
tion value of time is bigger than this. The ratio is in both cases symmetrically distri-
buted around 1.6.

18 120%
Frequency

16
100%
14
12 80%
10
60%
8
6 40%
4
20%
2
0 0%
1,00

1,20

1,40

1,60

1,80

2,00

2,20

2,40

R a tio

Fig. 18.8. Frequency and cumulative distribution of the ratio between free flow value of time and
congested value of time (shown in the X-axis where , should be understood as .). Mean = 1.6
median = 1.6

A regression between the two time-components gave 43.9 in t statistics for the
gradient of the line (see Fig. 18.9). Hence, it can be seen that the assumption used in
many ML models that the error components are uncorrelated with each other is clearly
not valid in this case since there indeed is a clear relationship as shown in the figure.

18.5.5 Estimation of the Impact of Road Pricing on Traffic

The estimation of route choice under the influence of road pricing was done in the
same way as the model estimation in the control period. Only the high kilometre-
based scheme has been analysed. It turned out to be difficult to estimate a utility
function with one further variable than time due to current software limitations.
368 O.A. Nielsen and G. Vuk

Another approach was applied instead, where the model was re-estimated assuming
the same coefficient for road pricing as the marginal cost (length multiplied by 0.7
DKK per km). This resulted in a slightly lower VoT than in the control period, i.e. a
higher response on road pricing than if it was assumed equal to marginal cost. This is
different from the SP, where the respondents tend to state less change in behaviour
than if cost was equal (both the rdprice and costSP3 coefficients in the SP were lower,
which equals a higher VoT than from the coefficient without road pricing, drvcost). In
addition, the SP model contained a number of dummies for inertia, which would
suppress changes further, while this in the RP is built into the coefficients. It should be
noted though that the SP road pricing experiment was based on time-of-day decisions
(but in a joint model estimation over all 3 experiments), whilst the RP data analysed
all time periods. However, it is surprising that the road pricing in fact leads to such big
changes in behaviour in the main RP experiment.

600
VoT Congestion (DKK

Observations
500 Predicted Y

400

300

200

100

0
0 50 100 150 200 250 300
VoT Free Flow (DKK/h)

Fig. 18.9. Correlation between free flow VoT and congestion VoT (DKK per hour). The slope
was tested with a t-stat of 43.9

The opposite was the case in a comparable experiment (Bonsall et al., 1998). How-
ever, the pricing schemes were defined differently, the urban settings were different
and the pricing level lower.
The high kilometre-based scheme in AKTA varied from 1 DKK per kilometre to
5 DKK per kilometre in the peak hours. The marginal driving cost was assumed to be
0.7 DKK (0.55 DKK in the SP). The increase in cost is accordingly quite large. The
 Car Users Trade-Off Between Time, Length, Cost and Road Pricing 369

cost level for public transport was about 1 DRK per kilometre at the time of the
experiment (the average of the zonal-based price system).

18.5.6 Income Effect

Fig. 18.10 illustrates the VoT as function of household income, where the values
for each income group have been averaged. The figure shows an increasing
relationship. However, somewhat surprisingly with the highest VoT level at the
third highest income level. This can be due to other socio economic attributes (e.g.
higher time budget constraints in families with children, while the average age of
the highest income categories must be assumed higher), or higher fixed budget
constraints (e.g. housing); or the explanation may simply be the small sample size.

90
VoT (DKK / hour)

80

70
VoT
60

50

40

30

20

10

0
0 200 400 600 800 1000
Income (1,000 DKK)

Fig. 18.10. Values of travel time as a function of yearly cross-household income (1,000 DKK)

The figure explains the problems with the SP model estimation in section 18.4.2., i.e.
where the only possible model had one VoT level under 400,000 DKK and another
over, which seems to be the best specification. However, it does not explain why an
SP-based model with a linear increasing VoT could not be estimated, except that the
SP data may not include enough observations to estimate this interrelationship. This is
similar to the SP estimation where the alternative specific constant is somewhat
similar to the intercept.
The relationship between income and VoT has substantial variation within each
income category (Fig. 18.11). The regression is significant when the line is forced
370 O.A. Nielsen and G. Vuk

through the origin, but not otherwise. The slope had here a t stat of 12.8. However, if
an intercept is introduced the slope is no longer significant. It is reasonable to assume
that zero income implies zero VoT, i.e. no ability to pay.

300
Value of free flow time (DKK/h) )

250

200

150

100

50

0
0 100000 200000 300000 400000 500000 600000 700000 800000
House hold income (gross, DKK)

Fig. 18.11. Regression between Value of Time and income

18.5.7 Other Explanatory Variables

In contrast to the SP experiment, it was possible to estimate some weak relation-

ships between the value of time and other socio-economic variables based on the
RP data.
There was an increasing VoT for respondents who had fewer restrictions on
time of the trip, i.e. from 60 DKK with 1) strong restrictions to 80 DKK with 4) no
restrictions, over 2) to some extent and 3) to limited extent. The t-stat for the slope
of this relationship was 1.74. The relationship is perhaps surprising as one could
expect higher VoT with more time restrictions. An explanation can be that low
income groups may have more time restrictions (e.g. fixed hours of work) or
families with small children a tighter budget. The same tendency was the case for
both free flow time and congestion time.
Another finding was that when household size increased, VoT decreased (from
100 DKK with one person to 50 DKK with six persons, t stat of the slope -2.09).
The reason here must be tighter budgets for children families and maybe also less
income, since income increases with age.
The value of travel time increased with age from 50 DKK for the 20-30-year-
old group to 95 DKK for the 60-70-year-old group (t stat of the slope 1.96).
 Car Users Trade-Off Between Time, Length, Cost and Road Pricing 371

18.6 Comparison Between SP and RP Models

It was obvious, that the participants had little idea of the real marginal or average costs
of driving. Depending on the formulation of the question, different answers were
given which were inconsistent with each other. The value of travel time from the SP
experiments that traded off cost with time differed by a factor of 2-3 from the RP data.
The SP experiment which traded off trip length and times was in the same magnitude
as RP, although not equal.
Using error components improved the SP based models significantly. A
substantial heterogeneity of the coefficients was found (high variance compared to the
mean). Similar large heterogeneities were found in the RP data. The RP data indicates
that the VoT follows log-normal distributions and that the VoT of different time-
components are highly correlated.
About one-third of the participants in the RP experiment had non-explainable
behaviour, whilst the others clearly were utility maximisers. The SP-based logit
models assume utility maximisation with an error term. Since the choices here are
binary, the unexplained variation will be taken care of by the alternative specific
constants and the error term.
The RP data showed an increasing VoT with income. This could be assumed to
be linearly increasing or clustered around one level below 400,000 DKK in household
yearly cross income and another level over. The SP model could only be estimated as
a two-level VoT segmentation as there were fewer observations than in the RP data
set. A split at 400,000 DKK gave the best fit, which was confirmed by the RP-based
model. It can therefore be concluded that both methods led to the same main causal
relationship, but that the RP model could refine the functional form of the utility
function compared to the model based on the SP experiment.
It is not easy to compare absolute numbers of VoT from the RP and SP models
due to different assumptions of costs per kilometre as well as problems with
calculation of VoT from the model with normally distributed coefficients in the utility
function. However, it appears that the SP in the same formulation as the RP (trip
length-time trade offs) overestimates VoT slightly. The ratio between different time-
components (free flow time and congestion) remains fairly equal and the magnitude of
heterogeneity is similar as well.
The SP indicates that the value of road pricing is higher than the value of
marginal driving cost (fuel mainly). However, both cost coefficients became less
negative compared to the situation without road pricing (VoT increased). The RP on
the other hand showed that the participants changed behaviour slightly more (i.e. a
lower VoT) than expected, assuming that the value of money was equal. It must be
concluded that respondents tend to underestimate their behavioural changes due to
road pricing in the SP experiment compared to the field experiment, where the money
is real. Alternatively, they may answer strategically in the SP. This is surprising since
they could be expected to change their behaviour less in real life due to time-
constraints (constraints in their time-budget), habit or lack of reasonable alternatives
(Bonsall et al., 1998).
372 O.A. Nielsen and G. Vuk

It was possible to investigate the issues of heterogeneity, income-dependent VoTs

and other socio-economic variables in more depth using the RP data instead of the SP
data. Although RP data is more difficult for model estimations due to a correlation
between variables that cannot be controlled as in the SP, the RP data contained far
more observations per participant. The SP consists of 3 sub-experiments with 6 trade-
offs per participant. Whilst the RP contained between 200 and 1,000 trips per car, each
trip with an individually estimated utility function, which resulted in about 100,000
observations in the present model.
It should be noted that the budget for the full RP AKTA experiment was over 10
million DKK, whilst the AKTA SP budget was only about 0.5 million DKK. The RP
contains much more information, but the SP provides if formulated as length versus
time experiments and EC models good indicators of the behavioural responses.

18.7 Summary and Conclusions

The chapter has presented some results and analyses concerning inconsistencies in
respondents' answers depending on how questions are formulated, variables defined
and whether it is a Revealed or Stated Preference experiment (RP or SP). All
questions were asked to the same group of participants, i.e. the same person faced
different questions within the same SP, followed by the RP over a minimum of a 16-
week period (two experiments of 8 weeks each). As the RP data was collected by the
GPS technology, the behaviour could be measured very accurately.
The respondents evaluations of driving cost were obtained by various
approaches. They were asked to confirm or modify cost and trip length estimates.
Although costs a priori were calculated as a function of the trip length, only 18% of
the participants modified this whilst 43% modified the length. They were then asked
about their average driving cost per kilometre. This turned out to be highly in-
consistent with the cost per length they had accepted before during the same
interview/experiment (often by more than a factor 2). Finally, they were asked which
elements they had included in the calculation of cost per kilometre. This again was for
many respondents highly inconsistent with their prior answers. It appears that car
users have very vague and erroneous knowledge of the cost of driving, whilst they
have a fairly good knowledge of the travel length and time. This is critical when car
users responses to road pricing are estimated and modelled, i.e. the predicted impact
of a pricing scheme may depend on the way the questions are formulated.
The SP experiment then focused on Value of travel Times (VoT), where half of
the respondents chose between time and length and the others between times and cost.
Cost was defined proportionally to the trip length and estimated based on the
respondents usual trip. The resulting VoTs differed considerably by the two methods
with up to a factor 3. However, the ratio between free flow VoT and congestion VoT
was comparable. The SP model based on length versus time trade-off and cost-esti-
mate based on true marginal driving costs gave almost identical VoTs as the AKTA
RP data. If both costs and travel times are changing, this ratio is especially critical. A
simultaneous change of both variables is likely to be the consequence of a road pricing
 Car Users Trade-Off Between Time, Length, Cost and Road Pricing 373

scheme, where cost increases whilst traffic and hereby congestion and travel times
decreases.
The SP also investigated road pricing for existing trips, which was then charged.
This led to a higher VoT than the RP route choice experiment (about 50% higher),
whilst the coefficient of road pricing was about 20% higher than the pure cost
coefficient. The interpretation must be that car users dislike road pricing more than
other out-of-pocket costs but that their behaviour nonetheless changed to a less degree
than expected. This must be interpreted as some inertia for changing behaviour (which
was also described by a dummy coefficient in the SP model), this, however, is
somewhat counterintuitive compared to the higher value of money (coefficient) for
road pricing.
The AKTA RP provides a clearer conclusion; the participants changed their
behaviour to a lesser degree (about 20%) than expected if the value (coefficient) on
road pricing where the same as marginal driving cost. The estimated utility functions
confirmed this both in their coefficients and value of time. The interpretation must be
that respondents in SP may overestimate their changes in behaviour or answer
strategically but when faced with real life restrictions in time and space they retain
their existing pattern (perhaps due to habit, convenience or lack of knowledge of
alternative options).
All models were initially estimated as traditional logit models, followed by a re-
estimation in a Mixed Logit framework (ML). The ML models based on SP were
estimated by maximum simulated likelihood. Different distributions were applied
first normally in different combinations on the coefficients, then log-normal and
finally simultaneous distributions (to allow for correlation between the distributions of
the coefficients). The different assumptions did alter the results, but not to a large
extent. Models with random coefficients (ML) improved the models significantly and
there are therefore no reasons to assume that a model with fixed coefficients (MNL) is
valid.
The RP data contained enough information to estimate a model per participant.
The empirical distributions of the coefficients within and between respondents could
accordingly be derived. Statistical distributions were fitted to this, where the log-
normal gave the best result. In this context, it is interesting to note that some of the car
users had lexicographic behaviour i.e. that the cost coefficients were zero within
their available choice set and the VoT was therefore in principle infinite. The
distribution was accordingly skewed more to the right than the log-normal.
Another conclusion from the RP data was that about 2/3 of the car users had a
clearly utility maximising behaviour, i.e. that their choices could be explained with a
good fit by a utility function where the coefficients between trips had a reasonably
small variance. However, the remaining 1/3 of the cars had a very high variance of the
coefficients they sometimes minimised costs and at other times time at the same
time as a less good fit was obtained in relation to the observed routes. One explanation
may here be that each car could be used by different members of a given household.
Both the RP and SP models were tested for income effect. Both as dummies,
piecewise coefficients and a full specification of income effect in the indirect utility
function following a micro economic framework (cost-dependent cost-coefficients).
By experimenting with the interval, the SP model could be estimated with VoT in two
374 O.A. Nielsen and G. Vuk

intervals (all other models gave illogical signs and small t-values). The RP data could
reveal VoTs for each of the 9 income intervals for which people have provided
information. The most reasonable functional form to explain this reproduced the
findings from the SP.
The overall conclusion is that car users are much better at estimating trip length
than cost. There are many heterogeneities in behaviour and preferences, which can be
fitted better by log-normal distributed coefficients than by normally distributed ones.
The distributions of different time components are most likely very correlated. SP can
lead to results of the same magnitude as RP if it is designed the right way. However,
in the worst cases there could be a substantial difference between the results and even
the signs of the impacts could differ.

References
Ben-Akiva, M., Lerman, S.R. (1985). Discrete Choice Analysis; Theory and Application to travel
Demand. MIT Press, Cambridge, MA, USA.

Ben-Akiva, M., Bolduc, D., Bradley, M. (1993). Estimation of Travel Choice Models with
Randomly Distributed Values of Time. Transportation Research Record, 1413: 88-97.

Bonsall, P., Cho, H-J., Palmer, I., Thorpe, N. (1998). Experiments to determine differences in
drivers' response to a variety of road user charging regimes. The PTRC conference. Cambridge
UK, September.

Menegazzo, P. (2003). Estimation of route choice models on GPS data. Joint master thesis
between the University of Padova, Italy and the Technical University of Denmark.

Nielsen, O.A. (2004). Behavioural responses to pricing schemes: Description of the Danish
AKTA experiment. Journal of Intelligent Transportation Systems, 8(4): 233-251. Taylor &
Francis Ltd.

Nielsen, O.A., Jovicic, G. (2003). The AKTA road pricing experiment in Copenhagen. 10th Interna-
tional Conference on Travel Behaviour Research. Proceedings, session 3.2 Valuation/Pricing.
Lucerne, Switzerland, August. 2003.

Nielsen, O.A., Srensen, M.V. (2004). Sensitivity of variable definitions in SP analyses An

empirical study of car users evaluation of length, cost and time. World Conference on Transport
Research Society (WCTRS) Proceedings, D01 Paper 1407, July 7th, Istanbul, July 4-8.

Nielsen, O.A., Frederiksen, R.D., Daly, A. (2002). A stochastic multi-class road assignment
model with distributed time and cost coefficients. Networks and spatial economics, 2: 327-346.
Kluwer.
19 The Impacts of e-Work and e-Commerce on
Transport, the Environment and the Economy

Andy Lake

HOP Associates, Cambridge, England

Abstract
This chapter provides an overview of recent research into Virtual Mobility, set
against the context of European policy development. Based on current work with
the UK Department for Transport, it explores the various impacts of e-work
(telework) and e-commerce on transport, the environment and land use. In an area
where there is much speculation, the approach taken is to distinguish between
empirical data and conjecture, showing where significant evidence-based results
have been obtained and where conclusions can be drawn to influence transport
policy and analysis. This chapter also highlights where further research needs to be
undertaken, and suggests an alternative approach to the substitution versus
generation debate.

19.1 Being Active Without Moving

Historically, we have needed transport for carrying out many of the key activities
in life working, shopping, learning, having fun and undertaking many kinds of
social interaction. Either we need to travel to do them, or we have needed to have
physical objects sent and received. The new information and communications
technologies (ICT) allow us to change the way we undertake these activities.
Telework or e-work allows us to work from anywhere the commute trip to
the office is not a necessity. E-commerce allows us to buy and sell online, without
necessarily having to undertake a physical journey.
It is important for transport analysts, planners and policy-makers to understand
the transport effects of these new technologies.
The key questions for the transport analyst are:
x How is travel replaced, generated or modified by applications such as e-work,
e-commerce and other electronically mediated activities?
x How is the movement of goods replaced, generated or modified by applica-
tions such as e-commerce and electronic service delivery?

Over the past decade or so, a kind of sceptical orthodoxy has arisen in these
matters, dismissing telework as the future that never arrives or proclaiming that
ICT applications generate as much or more travel than they eliminate (Black,
2001) which, amongst other targets, debunks claims for ICT-based transport
376 Andy Lake

substitution. Less provocatively, influential US pioneers of research into telework

such as Salomon and Mokhtarian have modified some of their more upbeat early
findings to conclude in favour of complementarity between online applications and
physical travel.
This view has arisen in reaction to earlier over-excitable claims from futurists
and business interests in the 1970s and 1980s. There is, then, a key research task:
to steer a neutral course and establish whether online applications in the current
jargon e-work, e-commerce and e-services can or cannot be shown to have
a quantifiable traffic reduction effect.
Quantifying the transport impacts also relates directly to the issue of whether
these e-applications contribute to environmental sustainability. There is increasing
emphasis in European and national policies on the contribution that ICT can make
to reducing the need to travel and cleaning up economic growth. The goal is a
sustainable information society, where economic growth is decoupled from
transport growth (e.g. European Commission, 2000a; European Foresight for
Transport, 2002).

19.2 The UK Study

In order to begin to find a way through the claims and counter-claims, the UK
Department for Transport (DfT) has undertaken a project (Lake and Charrett, 2002,
and Lake, 2003) to build a knowledge base of research literature examining the
effects. The work has been carried out by HOP Associates and the Transportation
Research Group at the University of Southampton. Results can be found online at
www.virtual-mobility.com.
The project tackled these questions through a critical review of existing
studies, focusing on the evidence for transport impacts. While the value of more
speculative studies is accepted, the focus of the research was to determine what is
actually known, and what remains conjectural. So for the purposes of this study, a
premium has been put on studies that include robust empirical data. As far as
possible, data sources and consistency of methodology were evaluated, and an
assessment made of the accuracy of the results and the transferability of the
research into the UK situation.
It was important at the outset to distinguish the scope of the field. For the
majority of transport engineers and researchers, ICT is about managing transport
through technology, rather than replacing it. This study focused on virtual
mobility, which overlaps into a number of other existing fields of study. The
figure below sketches out the field of the study.
 The Impact of e-Work and e-Commerce on Transport 377

Fig. 19.1. The field of study

As this is an interdisciplinary field, criteria were developed to assess strengths and

weaknesses of the factors considered understanding of transport, of technology,
and of wider socioeconomic factors.
The primary focus of the study was on e-work and e-commerce, with reference
also to the potentially important area of e-services, although in this latter area there
is an absence of empirical studies related to transport effects.

19.3 E-Work

E-work encompasses a number of different fields, which may be summarised as:

x Telework
o home office/home as base
o telecentre-based
o satellite office/local office/facilities exchange
o mobile teleworking
o working form client sites
x Online collaboration (replacing meetings)
x Videoconferencing
x Remote diagnostics and monitoring
x Electronic service delivery/customer service (i.e. changes in location for
workers when e-services and e-commerce are introduced)
378 Andy Lake

Changing working practices and business processes to introduce any of the above
necessarily has an impact on travel behaviour. However, it is studies of home-
based and telecentre-based telework that provide by far the largest amount of
empirical data about the relationship between ICT-based activity and travel
behaviour.
Probably one reason for the concentration on these forms of e-work is that
journeys are relatively easy to count - at least in terms of commute trips replaced
and can very easily be incorporated into surveys and travel diaries. The very
concept of telecommuting the more common term in the US emphasizes an
impact on the home-to-work commute trip. The other forms of e-work listed above
have received little research coverage so far.
The evidence from implemented schemes is overwhelmingly of significant
travel reductions per teleworking occasion (which to some extent is self-evident),
and per teleworker. The following table gives examples of the travel reduction
found in studies using travel diaries:

Table 19.1. Examples of travel reductions reported

Study Travel reduction per teleworker
Hamer et al. (1991) 17% total trip reduction
26% reduction in peak-hour car travel

Koenig et al. (1996) 27% total trip reduction

Non-commute trips increase by 0.5 trips per person per day

Surrey County Council (1999) Average19% reduction in trip length to work for staff using
telecentre

Glogger et al. (2003) 19% total trip reduction

43% reduction of commute trips

Strict comparison is difficult, as studies tend to take different approaches to recording

and interpreting data, and in particular in factoring in non-work trips and travel by
other household members. But there is now a healthy number of robust studies that
provide clear evidence of an immediate transport reduction effect. This effect
endures when direct rebound effects are taken into account (which we discuss below
in the rebounds section).
In the studies as a whole, it is possible to identify a typical range of 20-50 miles
saved (PMT) per teleworking occasion, and a typical range of 1300-3500 miles saved
per teleworker per year (with calculations in studies usually based on teleworking for
between 1 and 2.5 days per week according to the particular implementation).
There are a number of studies that have shown higher than average reductions:
 The Impact of e-Work and e-Commerce on Transport 379

Table 19.2. Travel reductions per teleworker

Study Commute travel reduction per teleworker

Mitchell and Trodd (1994) 42 miles per teleworking occasion
113 miles per week

Lyons et al. (1998) 58 miles per teleworking day

Mokhtarian et al. (1997) 51 miles per teleworking occasion (centre-based)

34 miles per teleworking occasion (home-based)

Hills et al. (2003) 90 miles per week for car users

124 miles per week for rail users

Hopkinson et al. (2001) 90 miles per week (full-time home-based) (= 18 miles per day)

Mileage reductions are found whether teleworkers are home-based or centre-based.

The unexpectedly high mileage saving from the centre-based survey is attributed to
the teleworkers who used the centre having even longer commute trips than their
home-based colleagues.
Table 19.2 includes two teleworking case studies where higher mileage
savings are achieved at the telecoms giant BT (Hills et al., 2003) and for call
centre agents at the AA, providing a roadside assistance service (Hopkinson et al.,
2001). In both cases, the teleworkers work from home for more days per week. At
BT, extensive provision of remote working technology and a culture that
encourages remote work help to achieve these higher levels of commute reduction.
The AA case is of their "virtual call centre" where staff work entirely from home
a comparatively rare practice as yet. It is also worth noting that the AA call centre
workers are non-typical as teleworkers in other ways, being female, on lower
income and with previous average commute journeys pretty much at the national
average. This is a reminder that the majority of studies reflects patterns of early
adoption, and that future patterns may well be different.
An assumption found more in the transport literature than in the technological
or business literature is in the tendency to treat telework as a single phenomenon
regardless of the technologies and business processes involved. The quality of the
telework experience would appear to have an impact on the frequency of tele-
working. For example, the AA virtual call centres are set up with seamless access
to all the office systems, to allow 100% home-based teleworking. At the European
Commission (European Commission, 2000b, three categories of telework (hard,
medium and soft) were introduced on the basis of selected staffs need to tele-
work. Different levels of technology and access to office systems were provided
accordingly. In each case, frequency of telework occasion is directly linked to
technology provision. In turn, this impacts on the travel substitution potential. This
is an area that needs to be studied more closely.
Various attempts have been made to aggregate potential travel reductions
through telework to the city, state or national level. While they often raise interest-
ing conceptual issues, they are almost entirely unconvincing due to data problems
and methodological weaknesses.
380 Andy Lake

A kind of methodological orthodoxy has emerged for speculative studies,

based on estimating telework penetration in the workforce and levels of
teleworking (the numbers who would be teleworking at any particular time). As
large-scale studies of teleworkers and their travel behaviour have not been
undertaken, a variety of proxy indicators have been used numbers of white-collar
workers in census data (e.g. Gillespie et al, 1995), home PC ownership, Internet
connections, numbers of self-employed, growth of services sector, and so forth. At
some point in the mid-1990s, influential US researchers proposed a notional ceiling
of 40% of the workforce as the upper limit for teleworkers. This is frequently cited,
but it is a far from robust figure. The figure of 1.5 days per week as an average for
the number of teleworking occasions is somewhat more robust, based on measured
studies of implementations. But studies also show that it is difficult to generalise
about how that will translate into substituted trips.
Similarly, calculations about new trips generated that should be deducted from
the savings are far from convincing at this aggregate level, and back of the
envelope calculations are frequently cited as gospel. A good example concerns the
extra trips generated due to urban sprawl, caused by teleworkers moving further
from their workplace (US Department of Energy, 1994). Though the authors of this
notional clawback make it clear this is guesswork, it reappears as authoritative in
many other studies.
In terms of total reduction potential, conservative commentators put estimates
in the region of 1-2% (e.g. Mokhtarian, 1998; Dublin Transportation Office, 1998),
while the most upbeat of the recent studies forecasts that in 2010 homeworking and
telecentre working will reduce car commuting by 15% from its forecast level,
business travel by 5%, and car shopping trips by 10% (Dodgson et al., 2000). This
range of forecasts highlights the need for further research, new forms of data
collection and new approaches to modelling.
Probably one of the greatest weaknesses in our understanding of the impact of
telework on transport so far has been an almost exclusive focus on the commute
trip. A few studies have looked at the impacts on business travel. Some measure-
ment has been done of the transport effects of introducing teleworking for field
staff (e.g. Jupp, 1998; Hills et al., 2003). This is an area urgently in need of further
research.

19.4 E-Business and e-Commerce

The study evaluated literature examining e-business impacts on transport, but here
we will comment primarily on findings relating to e-commerce. E-business
describes the range of online business processes within companies or encom-
passing their external relationships with partners, customers and suppliers. In one
sense, e-commerce is a particular subset of e-business activities focusing on
marketing, sales, purchasing and order fulfilment.
 The Impact of e-Work and e-Commerce on Transport 381

E-business processes may have a transport effect, primarily by improving

efficiency in inventory management and logistics, and by moving the paper trail of
business organisation online.
In our field of study, business-to-consumer (B2C) e-commerce has the added
interest of impacting on both passenger travel and freight movements. B2C
operations will in most cases be supported by business-to-business (B2B) e-
commerce operations as well. There are, however, very few studies of e-commerce
impacts that include robust empirical data. In the absence of numbers, there is a
growing literature focusing on the principles underlying the interaction between e-
commerce and transport, and making projections based on various scenarios.
Millard-Bell, in an article in Local Transport Today, cites studies suggesting
increases in the number of light van movements of up to 17% (Millard-Bell, 2000).
But the article concluded that it was difficult to quantify the exact impact of e-
commerce on freight movements as it was still in its infancy. In some ways, this
sums up the current state-of-the-art. The following paragraphs summarise some of
the speculative and semi-speculative findings that illustrate the wide variance of
opinion.
Cairns et al. (2004) report that replacement of the private car by delivery
vehicles for food shopping could reduce food shopping travel by 70%. For non-
food shopping, 64% of online shoppers report that it had saved them a trip. Other
work (e.g. Easley and Easley, 2000) suggests that there could be substantial
increases in delivery vehicle movements as a result of increased e-activity.
Travel survey data from both Sydney and South-East Queensland in Australia,
however, show that the majority of shopping trips are short trips. According to
Nariida Smith, It is less likely that 5-minute dashes for a loaf of bread or carton of
milk will be replaced by online orders, except to customers willing to pay a
premium (Smith et al., 2001). Intuitively, this sounds correct. However, this
remains conjecture, and in a fast changing world it can be dangerous to base
predictions on current practices and expectations. Who 30 years ago would have
predicted that millions of people would order home deliveries of products like
pizzas? Round-the-clock convenience does appear to be something people are
willing to pay for.
Some literature discusses the ways in which companies that are starting to
develop B2C e-commerce might develop in the future (e.g. Marker and Goulias,
2000; Browne, 2001; Hultkranz and Lumsden, 2001). There is a general
assumption that growth in ICT will continue to open up new markets and increase
revenues.
Browne predicts that B2B e-commerce will lead to new group distribution
strategies, becoming more demand responsive with shared information leading to a
reduction in overall aggregate inventories. The potential impact of ICT on
warehousing has been raised, with a reduction predicted as companies ship directly
to customers. In Finland, an early Internet adopter, demand for warehousing space
is declining, with a concomitant rise in the mean distance travelled by vehicles
between warehouses and retailer (Kilpala et al, 2000). The number of retail stores
is also diminishing as planners opt for over-sized trade centres. This decreases the
distribution of freight by trucks, but increases the mileage of private cars.
382 Andy Lake

Furthermore, it has been suggested that an increase in Internet shopping may

render conventional supermarkets unprofitable leading to three possible outcomes:
x Abandoning retail stores and delivering from warehouses.
x Abandoning large retail stores and adopting a boutique strategy.
x Maintaining large retail stores and competing on price.
The first two options in particular have significant land use implications (Marker
and Goulias, 2000).
Several commentators also suggest that the impacts of e-shopping may not be
as great as suggested. Shopping is a social and recreational experience that cannot
be replaced by e-shopping, although some kinds of shopping are more attractive
than others (Gould and Golob, 1997). Shopping involves information gathering as
well as the actual purchase and e-shopping may not be able to supplant other
means of information gathering, although information requirements for grocery
shopping may be limited.
Salomon was one of the first of many to express the view in this context that
humans need to travel out of boredom or a sense of exploration (Salomon, 1986).
Any reduction in travel through technology may be offset by increased latent travel
demand. Telecommunications may generate trips that would not have occurred
without them. But, as with telework, even 18 years after Salomons observation,
there is little beyond speculation about trip generation effects. The conjecture may
be plausible, but it remains conjecture.
One study that does attempt to provide comprehensive insights into the traffic
effects of e-commerce (as part of a comprehensive approach to the effects of all
ICT applications) is the Motors and Modems Revisited study (Dodgson et al.,
2000). Reduction (from predicted levels) of car travel for shopping is forecast to be
5% by 2005 and 10% by 2010. Delivery trips, primarily by light goods van, are
predicted to increase by 0.25% and 0.5%, and freight movements by HGV are
expected to decline by 17% and 18.5% by these dates.
How these figures are reached is not entirely clear. In the case of the decline in
shopping trips, an extra weighting appears to be given to the rise and potential of
new technologies. In this respect, most other commentators are more cautious,
foreseeing other obstacles to their use as well as greater trip-generation potential.
The HGV figures are based on a comparatively greater emphasis on the de-
materialisation of products, ICT-based efficiencies in the supply chain and
logistics, and displacement of some road freight to rail and water-based transport
as ICT helps these alternative modes to become more competitive again usually
in the form of combined transport options with ICT smoothing out the cross-mode
logistical difficulties. The comparatively few extra trips for light goods vehicles
seems to hinge on the principle that most extra goods ordered online will be carried
by existing services, adding relatively few trips and implying greater efficiency.
Many commentators predict that not all businesses using e-commerce will
wish to develop their own logistics capabilities, leading to a growth in 3PL (third
party logistic) providers. Marker and Goulias (2000) have stated that 3PL
companies could consolidate deliveries for B2C transactions, although the number
of customers who shop from multiple stores, or the number of customers each store
has, is unknown. Hopkinson and James (2000) suggest a quantitative threshold for
 The Impact of e-Work and e-Commerce on Transport 383

the take-off of B2C e-commerce, which will trigger major changes in distribution
patterns. It may also be the case that there is a qualitative threshold, where online
activities become a more natural thing to do. A weakness of many studies seems to
be an assumption that if you have a computer and telecommunications all the
options are open. This is clearly not the case: issues such as pricing plus level,
quality and reliability of service, etc. are very important. Studies need also to
analyse patterns of market penetration something which so many of the early e-
commerce entrepreneurs and investors failed to do successfully.
In some ways, in the heady pioneering days of e-commerce, it may be rash to
build scenarios around first wave practice. For example, the WebVan experience
is cited by some commentators as one possible model for future practice. WebVan
was a third party provider, and unfortunately one of the more spectacular victims
of the bursting of the dotcom bubble. The downturn in its fortunes undermines
the credibility of the business model and the projected transport effects built on it.
However, a similar implementation by other entrepreneurs in more propitious
times may prove to be more successful.
The lack of sophistication mentioned above in studying telework is generally
evident in the study of e-commerce. While some studies have noted the different
models of distribution, few have noted the variety of different business implement-
ations of e-commerce, e.g.:
x Amazon completely online sales operation, sourcing products from other
producers for repackaging and distribution
x Dell online sales operation, producing own product to order
x Tesco existing retailer supplementing bricks and mortar operation, fulfilling
online orders from designated local stores and warehouses
x Next/Debenhams existing retailers supplementing bricks and mortar
operation, fulfilling online orders from centralised warehouse also used for
mail order operations
x Dematerialised product providers buying of music, e-books, software, etc.
online with fulfilment and delivery also online

So there is no simple model for determining transport impacts transport from

manufacturer to wholesaler, to retailer to customer all of which will vary
according to both the kind of product and the business model. What is required is a
period of monitoring, clearly differentiating between the different models and their
diverse effects, so that analysis and policy-making have robust foundations.

19.5 Rebounds

Crucial to understanding the overall impact of ICT on transport is the need to

understand the nature and extent of any rebound effects. Two factors have hindered
this so far:
x A tendency to prefer plausible speculation to measurement
384 Andy Lake

x A lack of clarity about how far to cast the net when fishing for rebound effects

In study after study that we reviewed, measured implementations of telework

contained a cautionary but conjectural epilogue. This normally says something to
the effect that while certain travel savings had been recorded, factors x, y and z
could lead to a reduction of these benefits. These rebound issues can be
summarised as:
x To what extent will new trips be made by the home/telecentre worker during
the course of the day that would otherwise not have been, or by other family
members using the car?
x How proportionately will transport substitution affect different traffic modes
(e.g. will regular public transport users become occasional car users)?
x To what extent will latent demand be realised by other road users taking
advantage of "liberated" road space?
x Will ICT in due course affect location decisions so that people will tend to live
further from their places of work, and therefore make fewer, but longer trips,
and contribute to urban sprawl?

It is important to note that in most studies these are posed as questions, and the
effects are almost never measured. The minority of telework studies that attempt to
tackle these questions by counting alternative trips for the teleworker and their
households nevertheless still show a net reduction of trips even allowing for
compensatory trips. For example, a study of US telecentres showed that on average
teleworkers increased their number of home-to-work trips because they were more
likely to go home for lunch. Nonetheless, their total mileage was substantially
reduced, as the telecentre was much nearer home than the normal workplace.
More interesting than the simple plus-and-minus substitution versus genera-
tion game is analysis of the redistributive effect on household activities and
associated travel. A spatial analysis of the activity space of telecommuters and
their household members by Saxena and Mokhtarian (1997) found that on
telecommute days around 30% of activities (including shopping and leisure) are
performed closer to home than on non-telework days, and that destinations on
telecommuting days are more evenly distributed in all directions around the home,
whereas a majority of destinations on commuting days are oriented toward the
work location.
Other studies have found similar, and sometimes counter-intuitive results, with
trips for the whole household reducing after teleworking begins (e.g. Hamer et al.,
1991). A recent study in the Munich area by Glogger et al., see chapter 21, found
significant redistribution effects in household activities redistribution of tasks by
household members, redistribution of timing of some activities, and some changes
of mode for some trips. Similar phenomena are found in the BT case study (Hills et
al., 2003).
It is also sometimes forgotten in studies into ICT/transport impacts that all
demand management measures have rebound effects, but these are generally not
the subject of close scrutiny. Questions are being asked of the impacts of e-work
and e-commerce that are not being asked of other mode-shift measures.
 The Impact of e-Work and e-Commerce on Transport 385

Someone who cycles or catches a bus to work will need replacement trips for
shopping, as much as an e-worker. Each alternative mode involves leaving a car at
home, potentially for use by other household members. Amongst these options,
public transport is unique in that it requires by its nature additional trips by another
mode to be generated in order to use it (unless the worker lives and/or works at a
public transport depot!). We could define public transport as modes of travel that
take you from where you are not, and deliver you to where you dont exactly want
to be and so is likely to generate complementary car travel on many occasions.
There is substantive evidence that the promotion of park-and-ride facilities
generates additional car travel (e.g. Parkhurst, 2000): nonetheless it is considered
beneficial to reduce car trips from congested urban areas even if it risks increasing
them in less congested rural areas. Marshall and Banisters (2000) comparative
study of travel reduction strategies is instructive in this regard. This examines
teleworking alongside other intended travel reduction measures such as cycling
measures, park and ride, improved parking information, city centre restrictions and
changes in urban form all of which have both benefits and negative rebound
effects
When considering rebound effects, the wrong approach is to tally the positive
impacts and the negative rebounds and simply put them in the balance to see
whether it all adds up to the initial e-activity being worthwhile. The point of policy
is to identify and maximise the positive impacts, while identifying and combating
any negative impacts.

19.6 Environment

Many studies indicate a reduction in energy consumption as a result of telework.

Usually this is a direct extrapolation from reduced car use, calculated either from
directly observed monitoring in case studies or from application of hypothetical
reduction in car use applied at a local, regional or national level using transport
statistics and/or models. Many individual studies combine an element of the latter
approach on the basis of if this pattern were followed at a national level
In Japan, teleworking has been incorporated as a measure to be promoted in
order to help the country meet its emissions reductions targets under the Kyoto
protocols.
In the US, studies by the US Department of Transportation (1993) and the US
Department of Energy (1994) both attempted to quantify the total amounts of
pollutant emissions that might be avoided by the US as a whole given predicted
levels of telecommuting uptake. The latter study also attempts to factor in
allowances for urban sprawl, though it is not clear what this calculation is based
on.
It is interesting that some studies working on this basis attempt quite detailed
calculations. For example, the Department of Energy study attempts to factor the
impacts of more cold starts and shorter journeys in reducing the assumed beneficial
effects of teleworking in reducing pollutant emissions. While the principle may be
386 Andy Lake

important, the margin of error in the base figures is so wide that such tinkering at
the statistical edges is far from convincing.
A study at the Department of Employment in Sheffield (Wright, 1997)
adopted a distinct approach, measuring total energy consumption in the office, in
teleworkers homes and in their vehicle use. This found that home working
produces around 80% reductions in energy use in an ideal scenario one where
not only the commute trip is eliminated but where the office space is also
decommissioned. The study is useful in three respects. First, it measures every
aspect of energy consumption at home, on the road and in the office. Secondly, it
serves as a reminder that the assumed economies of scale that offices theoretically
achieve tend not to occur. This is mainly due to systems and equipment being
always on lighting, heating, ventilation, IT, photocopiers, drinks machines, etc.
whereas in the home these are only on when needed. The extra lighting and heating
etc. often mentioned for home-based teleworking was found to be less than
expected. Thirdly, around two-thirds of an office workers energy consumption is
attributable to travel.
The Sheffield study appears to be one of a kind. Though the 80% reduction
figure may raise some eyebrows, and would require extensive demolition of offices
under some kind of teleworking command economy to achieve, the study has
clearly taken a rigorous and all-inclusive approach to the measurement of energy
consumption. Further studies of this nature, in a range of contexts, would be
welcome.
A field of study very much in its infancy is illustrated in the works of
Forseback (2000, 2001) for the European Commission. These look at the wider
environmental impacts of the Information Society as a whole. The studies
include numerous case studies of ICT-based processes, products and services
reducing resource and energy consumption, and various approaches to measuring
the impacts. The resource use, energy consumption and pollutant by-products of
transport are one element of the wider picture. The case study approach makes for
interesting reading, though it raises questions about the underlying methodologies
of the case studies cited.
These works also explore and attempt to quantify aspects of ICT use not
covered in the other literature on e-commerce and ICT. In particular, the
dematerialisation of products and services raises important issues that require
further study. That is, products or services that previously were of a physical nature
requiring physical movement to access or distribute are being converted to or
supplanted by new ICT-based alternatives. Examples such as the replacement of
answering machines by voicemail are given. Here, a physical product brought into
the home is replaced by an electronic service located at the exchange, and requiring
no transport to implement it.
One can think of other examples that are in principle measurable in terms of
transport effects: the closure of branch offices and demise of travelling representa-
tives in the financial services sector, being replaced with call centre based services.
Just beginning are major developments in the music industry that most commenta-
tors think will lead to major changes in the distribution of musical products for
sale. The bulk production of CDs and distribution from factory to retail outlet is
 The Impact of e-Work and e-Commerce on Transport 387

expected to be largely replaced by online products and electronic distribution over

the next few years. It would be advantageous to undertake research into such
phenomena to monitor their effects as they evolve.
Some recent comparative case studies of actual and hypothetical e-commerce
implementations have adopted a life-cycle analysis approach (e.g. Williams, 2002;
Reijnders and Hoogeveen, 2001). In these, transport is one component in total
energy usage. Studies so far tend to indicate that online retail operations as a whole
use as much energy as traditional operations. They indicate that customer travel
does decrease but additional freight movements plus other items such as
additional packaging mean that there is no overall reduction. However, while this
approach has considerable benefits, the increased freight and reduced customer
travel seem as much to stem from assumptions as from observation.
In general, commentators conclude that transport substitution through e-work
and other aspects of ICT use will have only a very limited effect in reducing
energy use and pollutant emissions. Better home insulation and more fuel-efficient
vehicles are amongst the comparisons made as better options for improving
environmental performance. And, of course, a key issue is that these ICT innova-
tions also take place in the context of the pursuit of economic growth.

19.7 Economic Growth, Transport Growth and European Policy

Promoting ICT has become a key plank in European policy and in the policies of
most national states. This is partly in terms of its expected benefits for job creation,
learning, creating more efficient administrations, etc. Information Society policy is
now enshrined in an Action Plan, eEurope 2005: An Information Society for All
(European Commission, 2002). In addition to these benefits, ICT has now become
the glue that holds together arguably incompatible policies and aspirations.
European economic policy is committed to continuing prosperity and
economic growth. Transport policy is committed to increased mobility, not least
with regard to European enlargement and the expectations of the accession states
for increases in trade with other member states. The links between increased
mobility and economic growth have long been recognised, and key instruments of
economic development have been (and still are) the building of new infrastructure
for transport.
At the same time, European policy, not least in the transport arena, is
committed to sustainability, and aspires to decoupling economic growth and
transport growth. In this respect, ICT is coming to be invoked almost as a magic
wand that has the potential to reconcile these policies. Virtual mobility at a
conceptual level continues the linkage between increased mobility (access to more
places, and increased speed of access, almost to the point of instantaneity) and
increased prosperity. Similarly in the UK, the DfT and a large number of local
authorities are promoting telework as a component of company Travel Plans.
It is probably fair to say that the policies are running ahead of the evidence.
Although the benefits from increases in e-work may be comparable to potential
388 Andy Lake

benefits from mode-shift transport measures, increases in physical transport arising

from increased prosperity are set to continue for the foreseeable future.
However, some commentators note a correlation between increased ICT-based
economic growth and a relative slowdown in energy consumption (ABARE, 2001;
Romm et al., 1999). The Internet economy does, it is claimed, deliver increases in
GDP at lower rates of increase in energy consumption. Economic analysts
ABARE, on the basis of current data, have modelled a scenario where an increase
in the uptake of e-commerce of 50% above a projected reference case results in an
increase in world GDP of 3.9%, but an increase of energy consumption of only
1.5%. This is an area where one needs to proceed with caution, as the evidence is
at best circumstantial. Other commentators have attempted to show a correlation
between increased telecommunications use and increased use of physical transport
(Plaut, 1999). Both kinds of approach are full of assumptions, and causality is
inappropriately inferred from contemporaneous trends, with insufficient
demonstration of necessary connection.
The measured studies of e-working would, however, lend some support to the
view that similar or higher levels of productivity can be achieved with lower levels
of transport energy. The appropriate conclusion from this, however, is not that
decoupling is being achieved, but that there are new dimensions to the relationship
between mobility and economic growth.

19.8 Future Research Directions

One of the reasons why policy tends to revolve around hopeful generalisations, and
forecasters are often at sea in predicting trends and impacts of e-applications is that
there has been no systematic approach to building up, piece by piece, our under-
standing of the impacts of ICT on transport. Big-brush terms like ICT have a
certain convenience, but are often unwieldy in terms of analysis. Research into e-
work is a little more mature than research into e-commerce, reflecting its longer
history as a practical proposition. But research into the transport effects of other e-
applications, such as e-learning, telemedicine and online administrations, is pretty
much non-existent.
ICT encompasses a wide range of applications, and researchers need to
unbundle the concept in order to research the wider picture. What is needed is an
identification of discrete areas where empirical data can be gathered areas such
as home-based e-work, mobile e-work, e-shopping, telemedicine, etc.
In each of these areas where in turn there will be numerous different models
of implementation evidence needs to be gathered to answer the questions about
the extent of the phenomenon, trends in uptake, limits to growth, characteristics of
user profile, technology variations, direct transport impacts and rebounds in terms
of new trips and activity redistribution.
The importance of this is that while gaining a big picture view of the
relationship between telecommunications and travel may be academically interest-
ing, at a policy level it is no help at all. For example, if it can be shown that home-
 The Impact of e-Work and e-Commerce on Transport 389

based e-work has a net impact of reducing travel, appropriate policies need to be
developed to encourage it. It would be a missed opportunity if it were to be
neglected or even constrained, on the grounds that other ICT applications are
believed to have a different effect. Appropriate policies need to be developed for
each application.
This unbundling approach is also important when analysing practices within a
particular field of ICT application. For example, most of the studies we have
reviewed on the transport effects of e-commerce have to some extent hedged their
bets, saying, if e-commerce is organised like this, it will have these effects, but if
it is organised like that, it will have those effects. At present, these kinds of
statement are not very helpful. But after research has established what these and
those effects are, the different models of practice become very significant for
developing targeted policies. Research, for example, may identify the value or
otherwise of having community distribution points to enable B2C e-commerce
(Hopkinson et al., 2000).
There are also particular implications for Information Age transport
modelling. Work is being done to build up a picture of the types of factors that
need to be measured in order to model the effects of ICT (e-work, e-services, e-
commerce) on residential and business location. Particularly noteworthy are the
studies by Golob (2000), Ben-Akiva et al. (1996), Handy and Mokhtarian (1995)
and Mokhtarian (1998). The principles and issues outlined in these studies provide
helpful guidance for developing new modelling processes.
Existing models are based on historic data typically fairly old data and
none of it relating to how ICT use replaces, generates or redistributes travel. Golob
and Regan (2001) have suggested that in-home travel will be so important that:
practitioners will come to realise that most household travel survey data collected
to date will be of little use in forecasting impacts of telecommunications on travel.

19.9 Conclusion

Our conclusions from the project can be briefly summarised as follows:

x There is a growing body of empirically robust studies that demonstrate a travel
reduction effect from certain forms of e-work: home-based and centre-based
telework (other forms being almost completely unresearched).
x Where rebound effects have been measured concerning new trips by
teleworkers and their households, the effects are complex, but do not
eliminate, and sometimes add to, the travel savings.
x Research into e-commerce is in its infancy. The common sense consensus that
LGV movements will increase, and passenger shopping trips decrease, needs
to be supported with observed data.
x The views expressed by some commentators that wider rebound effects will
compromise the benefits, or that e-applications generate significant amounts of
travel, are almost entirely based on plausible conjecture. The empirical work
to demonstrate these effects has yet to be done.
390 Andy Lake

x All transport impacts, whether reduction, generation or redistribution are

important for transport analysts and policy-makers.
x There is insufficient evidence as yet to show that ICT can lead to a decoupling
of economic growth and transport growth. But there are indications that
economic growth can be achieved at lower levels of associated transport
growth.
x The way forward for research is to focus on gathering new data, and projects
should focus on discrete applications such as mobile telework, particular
forms of e-commerce, etc. rather than on broad-brush speculation, of which
there is already more than enough.

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20 A Web-Based Study of the Propensity to
Telework Based on Socio-Economic,
Work Organisation and Spatial Factors

Lasse Mller-Jensen1, Chris Jensen-Butler2r, Bjarne Madsen3, Jeremy Millard4 and

Lars Schmidt4
1
Department of Geography and Geology, University of Copenhagen, Denmark
2
Department of Economics, University of St. Andrews, Scotland
3
Centre for Regional and Tourism Research, CRT, Bornholm, Denmark
4
Danish Technological Institute, rhus, Denmark

Abstract
This paper discusses estimates of the extent of teleworking in Denmark and reports
on a study aimed at identifying the determinants of the decision to practice
teleworking. The study is based on a panel dataset obtained through a major
commercial opinion poll and market research agency using a web-based survey.
There are 2,680 respondents from the panel. The data set is used i) to identify the
probable determinants of the choice to become a teleworker and the determinants
of intensity of teleworking, ii) to make a first estimate of the consequences of
teleworking for travel activity and iii) to make a first estimate of the long-term
effects of teleworking on choice of place and type of residence and place of work.
It appears that factors related to the place and organisation of work are the most
important in explaining both propensity to telework and its intensity.

20.1 Introduction

The results presented in this paper are part of a major research effort aimed at
identifying the potential contribution of teleworking to the reduction of emissions
to the environment in the transport sector. This research project has a number of
specific aims.
1. Estimates will be made of the extent of teleworking in Denmark
2. Estimates will be made of the effects of teleworking on the demand for
transport, in particular, use of the private car.
3. Changes in transport activity will be related to changes in emissions to the
environment.

r
After this chapter was written Chris Jensen-Butler has died.
396 Lasse Mller-Jensen et al.

4. Estimates will be made of the determinants of the decision to practice

teleworking and the determinants of the intensity of teleworking activity
amongst potential teleworkers.
5. This will lead to forecasts of future levels of teleworking activity.
6. The effects of teleworking on local, regional and national economies, through
reduction of commuting costs, congestion and emissions will be estimated
using and local economic model.

The present paper deals primarily with question 4 and, to a lesser extent, with
question 1.

20.2 Teleworking: Theoretical and Methodological Issues

The principal methodological issues relate to the definition of teleworking,

identification of the extent of teleworking, identifying substitution and comple-
mentary effects with respect to transport, modelling telework take-up, the treatment
of technology and modelling the local and regional economic effects of telework.

20.2.1 Defining Teleworking

There is no easy operational definition of teleworking, which can include a range

of work-related activities, such as home-based work using ICT (information and
communications technology), work at home using ICT, with a permanent place of
work elsewhere, work in telecentres and work using mobile telephony and Internet
access. Not all work at home is telework. Furthermore, some people no longer have
a fixed workplace outside the home which is their own. Vilhelmson & Thulin
(2001) provide data from the Swedish national ICT survey estimating the follow-
ing:

Home-based work 4.0%

Commuting-based work 86.3%
Mobile work 6.9%
Other 2.8%

They estimate that 4.8% of all employed persons are teleworkers (at some un-
specified interval), mainly in the group Commuting-based work. They define
telework as regular work done at a location other than the ordinary fixed place of
work. A similar definition is adopted here, where the prime interest is the commut-
ing-based workers, who sometimes work at home using ICT. This definition
excludes mobile teleworking and work in telecentres. This more restrictive
definition is necessary for operational reasons, as problems of definition and data
collection otherwise would get severely out of hand. However, there still remains
 Web-based Study of Propensity to Telework 397

the problem of measuring the frequency of teleworking and the relationship of this
frequency to the definition of telework.

20.2.2 The Extent of Teleworking

Estimates of the extent of teleworking vary considerably as a few examples show.

NERA (2000) provides an estimate that 1998 levels of telecommuting are between
0.5 and 5.0% of the UK working population and that on any one weekday 0.1 to
1.0% of the UK working population actually is engaged in teleworking.
Vilhelmson and Thulin (2001) estimate that about 5% of all gainfully employed
persons were in 1999 regularly engaged in telework and about 2% were actually
engaged in this activity on any weekday. The Danish Ministry of Science and
Technology (Ministeriet for Videnskab, Teknologi og Udvikling, 2002) estimates
that in 2001 28% of Danes with access to the Internet use ICT to work at home.
59% of all Danish families are estimated to have Internet access. This implies that
17% of all families telework at some point in time. Whilst this figure is in accord
with other estimates (European Directory of Teleworking 2000 for example), it
does seem to be a very optimistic estimate.
Where small numbers in a large population are involved and where there is no
obvious stratification criterion, the problems of collecting data on teleworking are
substantial, which, together with problems of definition, is a fundamental reason
why substantially different results are obtained in different studies.

20.2.3 Teleworking and Savings in Transport Effort

A number of studies have estimated savings in transport through teleworking.

Balepur et al. (1998) suggest that a telecentre project in California reduced total
weekly car travel by the order of 18%, whilst another study (Varma and Mokhta-
rian, 1998) found a reduction in car travel of the order of 11-12% in another study
of Californian telecentres. The interest in telecentres reflects the serious problems
of obtaining data for teleworking at home, where there is no obvious method to
identify teleworkers. NERA (2000) have provided estimates of reductions in car
commuting of 11% by 2007 and 22% in 2017. Car business travel was estimated to
be reduced by 6.5% in 2010. These estimates include allowances for secular
growth in traffic.
The key issue is to what extent teleworking is a substitute and to what extent it
is a complementary activity in relation to transport. There is considerable literature
on this subject (Batten 1989, Salomon 1996, 1998, 2000, Mokhtarian and Salomon
1997). A key problem in investigating the extent to which substitution occurs is the
conceptual question of complementary effects. Teleworking can have several
effects:

1. Reduction in use of private and public transport by the teleworker.

2. Reduction in use of private and public transport by other household members.
398 Lasse Mller-Jensen et al.

3. Increase in use of private and public transport because of work requirements

when partly undertaking work at home using ICT (for example, greater
flexibility at work which generates more trips).
4. Increases in numbers of non-work related trips by the teleworker because of
greater flexibility of working patterns.
5. Increases in numbers of trips by other household members, either because of
greater flexibility or because of availability of a vehicle.

These questions can only be answered satisfactorily by difficult and costly travel
diary studies.
On balance, it seems that the literature indicates that there is some evidence
for a limited substitution effect from teleworking, but that the substitution effect
has not been so powerful that it has given rise to substantial numbers of and growth
in teleworkers. Vilhelmson and Thulin (2001) suggest that this failure to live up to
expectations has been because researchers have tended to view teleworking in
isolation. If, instead, research took as its point of departure what motivates travel
and communication using ICT, in an activity-based perspective, where activities
are viewed in time and space, better understanding of the nature and growth poten-
tial of teleworking could be gained. This suggestion is reinforced by a small
number of studies suggesting that the importance of the substitution and com-
plementary effects is related to type of region and geographical context. In more
peripheral, less densely populated and rural areas, complementary effects are more
important, whilst substitution effects are stronger in urban areas.

20.2.4 Modelling the Take-Up of Teleworking

There are a few proposals in the literature for methods to model the take-up of
teleworking. Mokhtarian and Salomon (1994) have set out the basic theoretical
issues in a constrained utility maximisation framework. Mokhtarian (1998) pro-
poses a simple multiplicative probability model identifying key factors at each
stage of the take-up model. The expected number of people who telecommute at
any given time (T) can be estimated by:

T=ExAxWxC

Where E is the average number of people employed in a given time period, A is the
number of workers who are able to telecommute, W is the proportion of those who
can telecommute, who want to telecommute, C is the proportion of those who
choose to.
It follows from this that the average number of people teleworking on any
given day is:
O=TxF

where F is the frequency of teleworking (fraction of a five-day working week).

This simple multiplicative model is then translated into reductions in transport
 Web-based Study of Propensity to Telework 399

effort by a multiplicative extension of the model relating teleworking to transport

effort. However, the model depends entirely upon the definition of probabilities,
and some investigation of the role of exogenous variables in determining these
probabilities is necessary. This is an issue addressed by the present paper, using the
multivariate logit model. The interpretation of the coefficients of the logit model is
difficult, as the dependent variable is the logarithm of the odds of the occurrence of
an event (teleworking).

20.2.5 Technology Issues

A variety of technological issues affect the take up and growth of teleworking.

These can be grouped under three main headings.

Access technologies
The literature considers at some length the role of access technologies in driving
the growth of teleworking. Many models assume that Internet access is a
precondition for teleworking. However, this may not be the case, as the decision to
obtain Internet access may be closely related to telework. In particular, the
transition from ISDN to Broadband (ADSL) technology is regarded as being a key
driver (NERA, 2000). This view is highly technology-determined.

Organisation of work
Changes in the organisation of work, including degree of work flexibility,
participation in strategic decision-making and leadership models are also forms of
technology, often ignored by more hardware-driven views (Vejrup-Hansen, 2000).

Activity Patterns
In a broader sense, treating activity patterns as technology places teleworking
inside a broader theoretical framework, as argued by Vilhelmson and Thulin
(2001). In this approach, the impact of a wide variety of changes in activity
patterns can be related to teleworking take-up and intensity.

20.2.6 Long-Term Effects

A series of important issues arises when considering the long-term effects of

teleworking. Changes in commuting costs, including congestion costs will, in the
long run, affect behaviour with respect to choice of place of residence and place of
work. However, this is only one factor affecting these future choices. The nature of
the pattern of settlement and urban development which will emerge from the
Information Society is one of considerable importance, both for the future pattern
of economic development and not the least future energy consumption and
emissions to the environment (Graham and Marvin, 1996).
400 Lasse Mller-Jensen et al.

20.3 The Determinants of Teleworking and Transport Substitu-

tion Effects

The study presented below addresses these issues. A set of background variables is
examined in relation to whether or not teleworking is practiced and these variables
are related to the intensity of teleworking, amongst teleworkers identified.
The data are a panel data set obtained through a major commercial opinion
poll and market research agency. All members of the panel are Danish users of the
Internet. There are 2,680 respondents from the panel, whilst the response rate is
unknown. This number is reduced to 2,210 when respondents who are not working
at present are removed. Responses from the panel are obtained via the Internet.
Amongst these Internet users, a subset undertakes telework. Caution must be
exercised with respect to estimating absolute figures in the Danish population, as
there are grounds for believing that the selection of the panel involves bias, as
more motivated Internet users will tend to be panel members. However, compari-
sons within the panel would seem to be more defensible. The questionnaire permits
identification of the 1,009 members who state that they telework. Comparisons can
be made with those who do not. This questionnaire does not permit identification
of travel patterns of other household members and differences in these when
teleworking occurs, compared with travel patterns when there is no teleworking.
Thus, the main use of the data set is i) to identify the probable determinants of the
choice to become a teleworker, the determinants of intensity of teleworking, ii) to
make a first estimate of the consequences of teleworking for travel activity and iii)
to make a first estimate of the long-term effects of teleworking on choice of place
and type of residence and place of work.
The next stage of the study will involve a much larger data set on travel
behaviour for a representative sample of the population, collected by Statistics
Denmark. This data set involves travel diary type of information for all household
members.

2.4 The Consequences for Travel of Working at Home

There are 1,009 persons who state that they sometimes telework. This number is
reduced to 946 when those who only work at home are removed.
Table 20.1 shows, for all teleworkers, their personal use of different means of
transport, measured as an average number of minutes for a) the last working day
when the respondents worked at home and b) the last working day when they did
not work at home.
 Web-based Study of Propensity to Telework 401

Table 20.1. Average times spent on different types of transport by teleworkers on days when they
do and do not telework
Non-teleworking day Teleworking day
N Mean minutes N Mean minutes
Walking 221 20 209 21
Bicycle 179 33 166 28
Own car 468 68 370 45
Other car 121 62 76 59
Bus 59 49 32 34
Train 72 63 18 64

Table 20.2. Total number of minutes spent by all teleworkers in the sample on different days
Non-teleworking day Teleworking day
Total Minutes Total Minutes % change
Walking 4372 4475 2.4
Bicycle 5956 4705 -21.0
Own car 32030 16466 -48.6
Other car 7480 4467 -40.3
Bus 2919 1087 -62.8
Train 4571 1151 -74.8

There are clear differences between travel activity measured in minutes, particular-
ly with respect to use of own car and use of bus and to a lesser extent use of
another persons car. This suggests a certain potential for reduction of travel to the
extent that teleworking encourages work at home. Table 20.2 shows for the entire
panel the total number of minutes used, by means of travel, on days when
respondents worked at home and when they did not. This table shows that
substantial reductions in travel time by car, bus and train (of the magnitude of
50%) occurred when working at home. The biggest absolute reductions were for
the car. It should be stressed that changes in use of means of transport relate only
to the respondent and not to his or her household, thus complementary effects of
teleworking are not properly considered. Furthermore, these savings only apply on
days when teleworking occurs, thus their absolute effect is substantially reduced
when weighting for frequency of teleworking is applied. However, there does seem
to be a substitution effect between telework and transport effort, for the respond-
ents at least, though this may be modified when household travel patterns are taken
into account.

20.5 Determinants of Teleworking

Respondents were asked whether or not they teleworked at all. Teleworking was
defined in a limited manner, as work undertaken at home with partial or continuous
use of a computer with Internet links. This excludes other sorts of telework,
including work undertaken in telecentres and mobile teleworking. A range of
explanatory variables can be related to this yes/no question.
402 Lasse Mller-Jensen et al.

A number of bivariate relationships were examined. Concerning teleworking

by sex the results show that while 45.7% of all respondents have undertaken some
form of telework, men are more likely to be teleworkers than women as 50.4% of
men are teleworkers whilst 39.6% of women telework. This difference is real as 2
is significant at the 1% level. Concerning teleworking by age the results show that
the probability of teleworking increases with age up to 50 years. 25.8% of the 16-
30 year old respondents telework, whilst 45.5% of the 31-40 year olds and 54.6%
of the 41-50 year olds telework. This falls to 49.4% of those over 50 years of age.
Again, these differences are statistically significant. When looking at teleworking
by family type the results show that teleworking occurs with the highest frequency
(49.1%) amongst families with children at home, where there are two adults.
Families with only one adult and no children at home have the lowest teleworking
frequency (38.4%). Perhaps most surprising, is the relatively low frequency
(41.9%) of single parents who telework and the relatively high frequency of
couples without children who telework (45.3%). Overall, differences are not
substantial, but they are statistically significant.
Looking at teleworking by type of employment the results show that self-
employed persons have a greater propensity to telework (66.5% of the self-
employed) compared with employees (44%). As will be seen later, this is almost
certainly associated with the organisation of work and related flexibility issues.
Again, this difference is significant at the 1% level. The frequency of teleworking
varies markedly by sector. Financial and business services are clearly over-
represented (50.3%), followed by public and private service (46.5%). Other sectors
are under-represented, the lowest being industry (34.5%), construction (38.6%),
energy and utilities (40%), transport, post and telecommunication (40.9%)
commerce, hotel and restaurants (41.8%), the primary sector, including agriculture,
(44.2%). However, it is perhaps surprising how relatively important teleworking is
in traditional sectors. Concerning teleworking by education, the results show that
there is a clear relationship between educational level and frequency of telework-
ing. 65.4% of respondents with university degrees telework, whilst only 30-32% of
respondents with a basic school education or a trade qualification telework. In
general, the propensity to telework increases with level of education. This is
perhaps a surprising result, given the assumption that routine office tasks are usual-
ly considered to be suitable candidates for work at home.
Concerning teleworking and organisation of work, the results show that the
degree of influence on the way in which the respondent can plan his or her own
work is an important determinant of the propensity to telework. 54.1% of those
who reply that they have considerable influence on planning of their own work
also telework, whilst only 5.3% of those who reply that they have almost no
influence undertake teleworking. When looking at teleworking and planning and
organisation of others work, the results show that 61.8% of respondents who plan
and organise work tasks for others also telework, whilst 31.1% of those who have
no leadership responsibility telework. Concerning teleworking and strategic
decision-making roles, the results show that 67% of the respondents who
participate in strategic decision-making in their own organisation telework, whilst
only 31% of those who do not participate undertake teleworking.
 Web-based Study of Propensity to Telework 403

The results of the bivariate analysis report also on the relationship between
size of firm (numbers working at the same place of work) and propensity to
telework. In general, it can be seen that there is little variation in propensity to
telework by size of firm, when the smallest firms (0-1 employees) are removed.
The relationship between the length of the respondents working week in hours and
propensity to telework is such that 27.9% of those who work less than 37 hours a
week telework, whilst 59.2% of those who work between 38 and 50 hours telework
and 77.8% of those who work over 50 hours a week, telework. Clearly,
teleworking seems to extend the number of working hours.

100

90

80

70
% teleworking

60

50

40

30

20

10

0
10-20 20-25 25-30 30-35 35-40 40-45 45-50 50-55 55-60 60-65 65-70 70-75 >75

monthly income (1000)

Fig. 20.1. Teleworking by gross personal monthly income

Fig. 20.1 shows the relationship between respondents gross personal income and
propensity to telework. There is a clear and positive relationship between income
and telework, except in the highest income groups, where teleworking becomes
less important. Concerning car ownership, the results show that whilst only 32.2%
of respondents who live in a household without a car telework, this increases to
53.8% for respondents living in households with at least two cars. Single car
households occupy an intermediate position. Teleworking appears, therefore, to
have a certain potential to change travel patterns where the car would be otherwise
used.
The bivariate analysis also included issues related to the residence of the
respondent: Concerning size of residence (in square metres), the results show that
33.3% of respondents living in the smallest residences (under 80 m2 ) telework,
whilst 62.4% of respondents living in the largest residences (over 200m2) telework.
As the size of residence increases, so does the propensity to telework. Concerning
existence of a dedicated room for telework, the results show that 52.7% of
respondents who have a dedicated room at home telework, whilst 41.8% of those
404 Lasse Mller-Jensen et al.

who do not have a dedicated room telework. Concerning type of residential area,
the propensity to telework by degree of rurality has been analysed. The probability
of teleworking is similar in rural and non-rural municipalities. Likewise, there
seems to be little difference between propensities to telework in municipalities of
different sizes. The observable differences for these two variables are not statistic-
ally significant.

20.5.1 Multivariate Relations

As a number of the relationships identified above are almost certainly spurious, a

multivariate logit model was used to identify causal relationships in relation to
adoption of teleworking. The qualitative dependent variable is dichotomous, being
the answer to the question whether or not the respondent sometimes is involved in
teleworking.

Table 20.3. A multivariate logit model with teleworking as the dependent variable
Variablesa B S.E. Wald Df Sig. Exp(B)
SEX -0.122 .104 1.369 1 .242 .885
AGE .008 .005 2.391 1 .122 1.008
EMP .157 .218 .521 1 .471 1.170
FAMP -.020 .134 .022 1 .883 .980
FAMK .178 .111 2.568 1 .109 1.195
IND -.047 .103 .205 1 .651 .954
EDU .316 .047 45.968 1 .000 1.371
PLAN .790 .114 48.391 1 .000 2.203
LEAD .068 .073 .860 1 .354 1.070
ORG .345 .078 19.709 1 .000 1.412
INC .021 .005 18.033 1 .000 1.021
CAR .055 .086 .418 1 .518 1.057
ROOM .283 .106 7.110 1 .008 1.327
SIZE .003 .001 5.980 1 .014 1.003
WEEK .037 .007 27.634 1 .000 1.038
FIRM .000 .000 .093 1 .761 1.000
RURAL -.283 .155 3.344 1 .067 .754
Constant -6.892 .551 156.473 1 .000 .001

a) Variables: Sex (binary), Age (interval), Employment (binary: employee=1, self-employed = 0),
Family type P (binary:1=single, 0=couple), Family type B (binary:1=children at home, 0=no
children at home), Ind (sector, binary: 1=financial and business service, private and public service
0=all others), Edu (interval: length of education, 1-4), Plan (interval: degree of influence on
planning of work 1-3), Lead (interval: degree of influence on planning of others work 1-3), Org
(interval: degree of involvement in strategic, decision-making 1-3), Inc (interval: gross personal
income), Car (interval: car ownership 0-3), Room (binary: dedicated room for teleworking:
1=yes, 2= no), Size (interval: of residence, m2), Week (interval: average weekly work time), Firm
(interval: number of employees at place of work), Rural (binary: 1= rural municipality, 2=urban
municipality).
 Web-based Study of Propensity to Telework 405

The result is shown in Table 20.3. R2 is low at 0.274, which is not uncommon in
models based upon individual-level data and the variables which are significant,
using the Wald test, at the 5% level are EDU (educational level, + sign), PLAN
(degree of influence on planning of one own work, + sign) ORG (degree of
involvement in strategic decision-making, + sign) INC (income, + sign) ROOM
(existence of a dedicated room, + sign) SIZE (size of residence, + sign), WEEK
(number of working hours in a the week, with a positive sign).
The model has been rerun with these variables alone, with the same pattern of
significance levels and no change in R2.
It seems that the most important variables related to the probability of being a
teleworker are those related to the way in which work is organised and the
associated industry technology. Independence in planning ones own work and
involvement in strategic decision-making in the firm, together with a longer
working week are highly significant. Planning and organising the work of others is
not significant, suggesting that teleworking is not directly associated with leader-
ship functions. Educational level, a closely related variable, is also significant, as is
income. Finally, two variables related to place of residence appear significant, size
of residence (m2) and presence of a dedicated room.
In order to validate these results, an OLS regression model using intensity of
teleworking (measured by average hours per week working at home on line) as the
(interval-level) dependent variable was tested. The same variables as used in the
logit model were chosen as independent variables, with the addition of estimated
distance to work (DIST: interval). Table 20.4 shows the results of this analysis. R2
is 0.167 and the significant variables at the 5% level are AGE (+ sign) EMP (+
sign, indicating that self-employed are more likely to telework) EDU (educational
level, + sign), PLAN (influence on planning of ones own work, + sign), WEEK
(weekly hours of work, + sign) and DIST (distance to work, + sign).
In relation to intensity of teleworking, the variables PLAN and WEEK,
relating to the nature and technology of work reappear, as does EDUC, Educational
level. What is perhaps interesting is the positive relationship between intensity of
teleworking and distance to place of work. On the other hand, the coefficient of the
variable DIST suggests that an increase of one kilometres commuting distance
increases the average amount of teleworking by only 1/50 of an hour. Age has now
entered as a significant variable. These results seem to provide some validation of
the logit model, though they do imply that the set of variables which determine the
probability of becoming a teleworker are fewer and more strongly related to the
nature and organisation of work and the technology involved than the variables
which determine intensity of teleworking.
The implication of these findings is that forecasting of future telework
frequencies should involve consideration of changes in the nature of organisation
of work and related industrial technology, rather than variables related to the
individual characteristics of teleworkers and the localities in which they live.
406 Lasse Mller-Jensen et al.

Table 20.4. An OLS regression model with intensity of teleworking as the dependent variable
Non-standardised Standardised
Model coefficients coefficients
B Std. error Beta t Sig.
(Constant) -10.444 3.369 -3.100 .002
SEX .360 .607 .019 .592 .554
AGE .006 .033 .069 2.100 .036
EMP -5.900 1.139 -.170 -5.179 .000
FAMP .944 .776 .043 1.218 .224
FAMK 1.224 .634 .066 1.930 .054
IND -.529 .592 -.029 -.894 .372
EDU .587 .266 .071 2.206 .028
PLAN 1.680 .800 .065 2.100 .036
LEAD -.588 .420 -.048 -1.402 .161
ORG .522 .429 .044 1.216 .224
INC .004 .027 -.050 -1.357 .175
CAR -.396 .497 -.029 -.798 .425
ROOM -.275 .591 -.015 -.466 .641
SIZE .001 .005 .051 1.377 .169
WEEK -.318 .037 .296 8.657 .000
FIRM .000 .001 -.018 -.602 .547
RURAL -.121 .894 -.004 -.136 .892
DIST .002 .006 .126 4.098 .000

20.6 Long-Term Effects of Teleworking

The opportunity to take up teleworking may potentially influence future decisions

concerning choice of workplace as well as residence location and possibly
residence size. This has been examined using a separate set of questions within the
questionnaire.

Table 20.5. Teleworking and choice of future location of residence

Intensity of teleworking
(hours last 5 work days)
<= 4 >4 Total
Will influence Yes very Count 19 47 66
choice of important Row% 28.8% 71.2% 100.0%
location of Col% 4.2% 9.6% 7.0%
residence Yes, but less Count 79 119 198
important Row% 39.9% 60.1% 100.0%
Col% 17.3% 24.3% 20.9%
No Count 359 323 682
Row% 52.6% 47.4% 100.0%
Col% 78.6% 66.1% 20.9%
Count 457 489 946
Total Row% 48.3% 51.7% 100.0%
Col% 100.0% 100.0% 100.0%
 Web-based Study of Propensity to Telework 407

Table 20.5 shows the respondent teleworkers view of to what extent the
opportunity to work at home has affected their choice of location of their
residence. 4% of respondents state that there has been an effect on their choice. It
can also be seen that of those who responded positively to this question of
locational choice tend to be those who work more intensively with teleworking.
These 4% divide equally into two groups where one group states that they have
moved closer to place of work, whilst the other group states that they have moved
further away. Concerning choice of size of residence, 3.4% answer positively that
the opportunity to telework has affected choice of size of residence, again mainly
those who work more intensively with teleworking. Concerning future choice of
location of residence, given the opportunity of teleworking, the results show that
7% answer that it will have considerable influence and 21% answer that it will
have some influence. Again, those who work most intensively with teleworking
tend to state that it will have the greatest effects and again, the number stating that
they will move further away is approximately the same as those who state that they
will move closer. However, the average stated distance for those who will move
closer is 18 km and for those who will move further away it is 39 km.

Table 20.6. Teleworking and choice of place of work

Intensity of teleworking
(hours last 5 work days)
<= 4 >4 Total
Changed Yes Count 5 24 29
workplace to Row% 17.2% 82.8% 100.0%
increase Col% 1.1% 4.9% 3.1%
teleworking No Count 452 465 917
Row% 49.3% 50.7% 100.0%
Col% 98.9% 95.1% 96.9%
Count 457 489 946
Total Row% 48.3% 51.7% 100.0%
Col% 100.0% 100.0% 100.0%

Concerning choice of place of work, Table 20.6 shows the respondents answer to
the question of whether they have changed their place of work because of the
opportunity to telework. 3.1% reply positively, again predominantly those who
work more intensively with teleworking. The numbers who have moved closer is
approximately equal to those who have moved further away.
Table 20.7 shows the percentage of respondent teleworkers who are
considering changing their place of work in the future in order to have a greater
possibility of working at home. 6% answer positively to this question, again
distributing themselves evenly between those who say that the distance between
home and work will increase and those who say it will decrease.
In conclusion, it seems that the opportunity to telework will potentially affect
long-term decisions concerning place of residence and place of work, but that it is
impossible to say whether the result will be a spatially more or less dispersed
pattern, as these sorts of decisions are complex.
408 Lasse Mller-Jensen et al.

Table 20.7. Teleworking and choice of future place of work

Intensity of teleworking
(hours last 5 work days)
<= 4 >4 Total
Will change Yes Count 23 34 57
workplace to Row% 40.4% 59.6% 100.0%
increase Col% 5.0% 7.0% 6.0%
teleworking No Count 434 455 889
Row% 48.8% 51.2% 100.0%
Col% 95.0% 93.0% 94.0%
Count 457 489 946
Total Row% 48.3% 51.7% 100.0%
Col% 100.0% 100.0% 100.0%

20.7 Conclusion

This empirical study presents results obtained from data derived from a web-based
questionnaire sent out to a panel of Internet users in Denmark. The results indicate
that there seems to be considerable potential for reduction of the use of the private
car, looking alone at the behaviour of the teleworker. Variables which influence the
decision to telework at all have been identified and a multivariate analysis indicates
that those variables related to the organisation and flexibility of work and its inte-
gration with Information and Communication technology are the important deter-
minants. This has substantial implications for the design of forecasting of telework-
ing frequencies. Finally, the long term effects of teleworking on location of place
of residence and place of work are difficult to identify. The general finding is that
at present it seems that teleworking will have limited effects on these choices.

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21 The Impact of Telecommuting on Households
Travel Behaviour, Expenditures and
Emissions

Andrea F. Glogger, Thomas W. Zngler and Georg Karg

Technische Universitt Mnchen, TUM Business School, Germany

Abstract
The demand of individuals for travel increases steadily. As a consequence, traffic
increases as well, especially by car. Due to the negative side-effects of traffic on
the environment, e.g. air quality, a change in travel behaviour is required. Innova-
tive concepts are called for. Recently emerging information technologies offer
chances to replace to a certain extent physical by virtual travel and therefore reduce
traffic induced emissions.
The research project presented here examines an option that was developed for
work-related travel: telecommuting. The objective of this project is to analyse the
effect telecommuting has on travel behaviour of telecommuters and their
household members, the households expenditures in money and time and traffic-
induced emissions.
To determine the effects of telecommuting, a pre- and post-treatment survey
was carried out using detailed travel diaries and questionnaires. Analysis of the
survey leads to the following results: telecommuting changes the distribution of
trips over the day. Peak hour traffic is avoided, and the total number of trips and
distance travelled decrease. Expenditures in time and money change accordingly.
The amount of traffic-induced emissions of greenhouse gases and air pollutants
decreases.

21.1 Introduction

In a market economy, households have various options to earn income and

purchase goods. The activities to generate and spend income can in general not be
undertaken at households places of residence. Usually the household members
have to travel from their home to their employers locations or the locations of

This study was made possible by the support of the German Federal Ministry of Education and
Research and the City of Munich.
The bpu Unternehmensberatung consultancy introduced telecommuting into the surveyed
enterprises and was involved in the development of the questionnaires. bpu and NFO infratest
carried out the fieldwork.
412 A.F. Glogger, T.W. Zngler and G. Karg

purchase. Even leisure activities like meeting friends or relatives, or visiting

natural and cultural sites require travel.
In Western societies, the mobility of people arising from earning and spending
income is a main driver for the standard of living of private households. At the
same time, this mobility is also responsible for problems like overcrowded
commuter trains, congested streets and polluted air resulting from travel. Except
for CO2, these negative impacts of traffic manifest themselves, especially in con-
urbations (MOBINET, 2002). To date, it is generally accepted that this develop-
ment is not sustainable. Therefore, a change in travel behaviour is required.
To change travel behaviour, one has to take into account that frequent travel
on regular trips (for example, travelling to and from work every day) becomes
script-based or habitual (Grling et al., 2001). Thus, the performance is carried out
without much deliberation (Lotan, 1997; Ouellette & Wood, 1998; Grling &
Golledge, 2000; Grling et al., 2001; Grling et al., 2002; Grling & Axhausen,
2003).
For this reason, traditional instruments of traffic management have not been
able to change travel behaviour in such a way that its negative effects on the
environment can be reduced. Innovative concepts of mobility management are
therefore required. This is all the more important because the demand of individu-
als for travel is increasing steadily. In this context, the emerging information
technologies offer opportunities to reduce traffic while maintaining mobility.
Information technologies have this potential as they enable people to substitute
some physical travel and therefore reduce traffic and its associated negative effects
(Glogger, 2002).
Work-related travel is a major source of traffic. With information technology,
travel-related work can be reduced by telework. Various kinds of telework have to
be distinguished. In this study, we consider part-time (alternating) telework
(Empirica, 2000), referred to as telecommuting. The employee works part of the
week in his or her office at the employers location and part of the week at his or
her home.
Since telecommuting is a promising concept for mobility management (Rye,
2001), its introduction gave rise to numerous travel studies with the objective of
evaluating the impacts of telecommuting on travel behaviour (Wermuth et al.,
1984; Quaid & Lagerberg, 1992; Kitamura et al., 1991; Axhausen, 1995; Axhausen
et al., 2002).
One of the first studies (Nilles et al., 1976) analysed a project on tele-
commuting in a remote work centre in Los Angeles in 1973. Their study states
that telecommuting in a tele-centre saves petrol by reducing commuting distances.
The State of California Telecommuting Pilot Project resulted in various
publications on the interdependence of telecommuting and travel (e.g. Kitamura et
al., 1991; Pendyala et al., 1991). Their main findings were the reduction of peak-
period trips, a significant decrease in the total amount of trips and distance
travelled, and reduced action spaces for telecommuters. Additionally, a reschedul-
ing and reallocation of activities was noted. According to this project, household
members do not increase their car use if additional family cars become available.
In 1991/92, the Puget Sound Telecommuting Demonstration took place (Quaid
 The Impact of Telecommuting on Households Travel Behaviour 413

& Lagerberg, 1992). The effects of the tele-centre implemented in this project were
analysed by Henderson & Mokhtarian (1996). Travelled distances were
significantly reduced. Furthermore, Mokhtarian (1997) used two telecommuting
programmes in San Diego, California, to document and illustrate a variety of
transportation-related impacts of telecommuting. She also reported a reduction in
the aggregated distance travelled without generation of any new trips. Yet she also
argued that telecommuting did not motivate individuals to give up a car, and it
might also support long-distance residential relocation.
Europe can benefit from the detailed telecommuting research undertaken in
the USA. However, local and contextual factors, like differences between countries
with respect to infrastructure and general travel culture, have to be taken into
account (NERA, 2000).
Hamer et al. (1991, 1992) focused on the Netherlands and measured direct and
indirect effects of telecommuting on telecommuters and their household members.
Their findings confirm the already reported significant reduction of travel
distances. However, Hamer et al. stress that especially trips using public transport
are eliminated. After the telecommuters started telework, the mobility of other
household members was reduced as well. In Germany, Vogt et al. (2001) analysed
the travel behaviour of telecommuters in urban and rural areas. According to their
study, travel distances were reduced due to telecommuting and peak-period trips
were increasingly avoided.
Summing up the findings of these studies, there is evidence for some
substitution of physical by virtual travel. However, the socially desired effect of
substitution is not the only possible interdependence between physical and virtual
travel (Mokhtarian, 2000; Salomon, 2000). Different studies have given varied
results and there has been much debate on the interrelations between physical and
virtual traffic, as well as on the trade-offs within households (Hamer et al., 1991
and 1992; Niles, 1994; Nilles, 2000; Empirica, 2000; Mokhtarian, 2000).
The research programme, MOBINET (1998-2003), sponsored by the German
Federal Ministry of Education and Research, contains a project which examines
among other things the effect of telecommuting on travel in the Greater Munich
Area (City of Munich and eight neighbouring districts). The City of Munich itself
is with 310 square kilometres and 1.3 million inhabitants the most densely
populated town in Germany. The Greater Munich Area has a population of 2.4
million people with 1.3 million employees in 2000.
In recent years, there have been two developments in the Greater Munich Area
which are favourable for the introduction of telecommuting. On the one hand, the
service sector has expanded and now dominates the economy. In this sector, work
progress can often be transported via information and communication networks.
On the other hand, the average home to work distance increased in recent years due
to continuing suburbanisation. Thus, people become more open to suggestions for
reducing the strain of commuting every day.
The objective of the project is to analyse in the monocentric conurbation of
Munich the effects which telecommuting has on:
Travel behaviour of telecommuters and their households,
Households expenditures in money and time and
414 A.F. Glogger, T.W. Zngler and G. Karg

Traffic-induced emissions of greenhouse gases and air pollutants.

This chapter is structured as follows. First the models and the method used in the
empirical analysis are described, then the results are presented and discussed, and
finally conclusions are drawn.

21.2 Model

Two models were used to describe and analyse travel behaviour of telecommuters
and their household members. The first model (Fig. 21.1) is the adapted Socio-
economic Model of Travel Behaviour (Zngler, 2000). It describes the travel
behaviour of individuals:
At the micro level with respect to the mode choice, extent, activity and the
socio-economic characteristics of the telecommuter, his or her household
members and their household,
At the meso level with respect to accessibility to shopping facilities, social,
cultural, economic institutions and businesses,
At the macroscopic level with respect to macro-economic and institutional
characteristics.

Household

Household member m

Household member 2

Household member 1 (Telecommuter)

TRIP
Activity
Mode of
Transport
Type
Time &
Distance
Mode of
Communication Location
micro level

accessibility to shopping facilities, social, meso level

cultural, economic institutions and businesses

macro level
socio-demographics, state, law and norms,
society, culture

Fig. 21.1. Socio-economic Model of Travel Behaviour (adapted from Zngler, 2000)
 The Impact of Telecommuting on Households Travel Behaviour 415

The second model (Fig. 21.2) focuses on the interrelations between physical and virtual
mobility.
In a free society, households have access to physical and virtual mobility. To
become physically mobile, they use the available network of transport (Salomon,
2000). To become virtually mobile, household members use the available commu-
nication network, e.g. telephones, Internet or faxes. In the context of telecom-
muting, the relation between physical and virtual mobility can be described as
follows. Without telecommuting, employees travel to work every day and use the
available network of transportation to reach their office. When telecommuting,
they commute less frequently between home and office via the network of trans-
portation; instead they become virtually mobile and travel via the network of
communication.
Both networks are also used by the household and employer to carry out other
activities to reach other locations.

other activities/locations

NC

Virtual Mobility Virtual Mobility

Household h t1 Employer

Physical t0 Physical
Mobility Mobility

NT

other activities/locations
NT network of transportation t 1 with telecommuting
NC network of communication t 0 without telecommuting

Fig. 21.2. Interdependence between Physical and Virtual Mobility

Theoretically, the interrelationships between physical and virtual mobility can be

modifying or neutral. In the case where they are neutral, no effect can be measured.
In the case where physical and virtual mobility modify one another, there are in
general three different effects to be considered (Moktharian, 2000; Salomon,
2000):

1. Substituting/replacing physical by virtual mobility or vice versa

416 A.F. Glogger, T.W. Zngler and G. Karg

2. Generating virtual or physical mobility or both

3. Changing responsibilities in household duties and/or shifting mode or time of
transport.

Usually, combinations of all three effects are likely (Moktharian, 2000). These
effects can express themselves qualitatively (e.g. modal shifts or modified travel
patterns) or quantitatively (e.g. a change in the total distance travelled), or both.

21.3 Method

In the years 2000 (t0) and 2001 (t1), a survey of the travel behaviour of tele-
commuters and their household members was carried out in eight big enterprises in
the Greater Munich area. All employees who were to start telework were asked to
take part in the study. It was set up as a pre- and post-treatment survey (before and
after the introduction of telecommuting).
The telecommuters and their household members of driving age were asked to
fill out a detailed 2-day travel diary, a personal and a household questionnaire
(adapted from Zngler, 2000; Axhausen, 1995 and 2002; Jones et al., 1985).
Each person had to report his or her travel in the travel diary. The reported
mobility day started at 4 a.m. and ended at 4 a.m. the next day. Trips were
recorded by the day of the week, the starting and finish time of the trip, the
distance covered and the means of transportation used. Questions were asked about
accompanying persons, subjective reasons for the choice of the mode of transport
and subjective impressions of the trip. Activities were recorded in detail with
respect to purposes, destinations, importance, time limits, and stops (intermediate
or final).
The personal questionnaires consisted of detailed questions on the expected
influence of telecommuting on use of time, distances and the household budget, the
telecommuters professional as well as private life, questions on the preferred
mode of transport and the persons driving licence, access to private means of
transportation, and habitual travel behaviour.
The household questionnaire was completed by the person familiar with the
general characteristics of the household. These general characteristics are location
and type of the place of residence, access to different social, cultural and economic
institutions of daily life, the organisation of household duties (e.g. shopping, child
care), availability of electronic equipment, car ownership, access to public trans-
port, and the total income of the household. Household size and socio-demographic
variables describing household members are also included.
 The Impact of Telecommuting on Households Travel Behaviour 417

21.4 Results

In the following, the characteristics of the sample are described, followed by

resulting changes in travel behaviour, expenditures measured in both money and
time as well as emissions.

21.4.1 Sample Characteristics

In the first round, the main unit of the survey at t0 consisted of 227 future
telecommuters and the members of their household with a total response rate of
46%, in the second round 51% of these respondents took part. In both rounds, 16%
(36 telecommuters and 29 household members) participated.
Gender was almost equally distributed over the sample with 54% female and
46% male telecommuters, 52% female and 48% male adult household members.
The average age of t1 was 39 years for telecommuters and 40 years for household
members. The average household size was three persons per household, which is
above the average in Munich. Children lived in 69% of the households.

21.4.2 Travel Behaviour

In the following, the impact of telecommuting on the temporal distribution of

physical mobility and on cumulated distances is described for telecommuters and
household members alike. The significance tests used were the McNemar test for
the temporal distribution of physical mobility and the Wilcoxon test for trip
distances. The non-parametric test was used due to the fact that the data are not
normally distributed1.
The most likely indicator to change after the introduction of telecommuting is
the temporal distribution of trips over the day (Pendyala et al., 1991). Fig. 21.3
describes the temporal distribution of trips for telecommuters respectively their
household members before and after the introduction of telecommuting. The x-axis
represents 24 hours and is subdivided into 96 time intervals of 15 minutes. The y-
axis shows the relative frequency (in per cent) of physically mobile persons (tele-
commuters or household members) of the corresponding target group.
Fig. 21.3 a respectively b refer to telecommuters respectively household
members and show the temporal distribution of physical mobility over the day
before (t0) and after (t1) the introduction of telecommuting.
Fig. 21.3 c respectively d refer to telecommuters respectively household
members in t1 and show their temporal distribution of physical mobility on a
telecommuting day versus an ordinary commuting day.

1
The McNemar test is a sign test used when binomial variables are analysed in a dependent
sample. It relies on the change of the proportion of frequencies between the first and the second
phase (Sachs, 1992).
418 A.F. Glogger, T.W. Zngler and G. Karg

The introduction of telecommuting leads to the following effects. Among

telecommuters (cf. Fig. 21.3 a), the share of mobile persons decreased in the
morning and evening rush hours in t1. This observed change on the temporal
distribution of physical mobility of telecommuters is significant2.
Among household members (cf. Fig. 21.3 b), the share of physically mobile
persons is less in t1 than in t0. However, the observed change is not significant and
the curve progression of their temporal distribution in the course of the day does
not change (qualitatively). A large part of the decrease in physical travel is due to
the telecommuters change in travel participation. However, household members
cut their travel time and travelled distance by one-third as well. When interpreting
these findings, underreporting as observed in the State of California telecommut-
ing pilot project (Kitamura et al., 1991) has to be considered. However, Hamer et
al. (1992) also reported that household members of telecommuters are more at
home after the introduction of telecommuting.
After the introduction of telecommuting (t1) a comparison of telecommuting
and commuting days demonstrates the following effects. Among telecommuters
(cf. Fig. 21.3 c)3,the share of mobile persons during a telecommuting day is con-
siderably less than during a commuting day. Moreover, there is a clear difference
between the temporal distribution of physical mobility on a telecommuting and
commuting day resulting in a smaller share of mobile persons during the morning
and evening rush hours.
Among household members (cf. Fig. 21.3 d), the share of mobile persons and
their temporal distribution on a telecommuting and commuting day is practically
equal.
For telecommuters, there is a decrease in total number of trips by 21% and in
work trips by 46%. Households cut their number of all purpose trips by 18% and
work trips by 33%.
The telecommuters share of commuting distance by car increases from 38%
to 45%. In addition, the number of car trips for leisure purposes and the total
distance travelled for leisure purposes increase. At the same time, the household
members share of car trips for leisure purposes decreases from 64% to 51% (see
Table A21.1 and Table A21.2).

2
The differences between the shares of physically mobile tc in t0 and t1 are highly significant
from 06:15h to 07:30h, from 16:00h to 16:45h, from 17:00h to 18:00h (McNemar, p<0.001), and
significant from 08:00h to 08:30h, from 16:45h to 17:00h, from 18:15h to 18:30h (McNemar,
p<0.05).
3
The differences between the shares of physically mobile tc t1 on telecommuting days and
commuting days are highly significant from 06:15h to 07:30h, (McNemar p<0.001) and
significant from 05:45h to 06:15h, from 09:45h to 10:00h, from 15:30h to 16:30h, 17:45h to
18:00h, from 18:30h to 19:00h, from 22:00h to 22:15h (McNemar p<0.05).
 The Impact of Telecommuting on Households Travel Behaviour 419

(3a) telecommuters t0,t1 (3b) household members t0, t1

100
100 90
90
80 80

household members [%]

70 70
60
telecommuters [%]

60
50 50
40 40
30 30
20 20
10 10
0 0
14:00
15:00
04:00
05:00
06:00
07:00
08:00
09:00
10:00
11:00
12:00
13:00

16:00
17:00
18:00
19:00
20:00
21:00
22:00
23:00
00:00
01:00
02:00
03:00

04:00
05:00
06:00
07:00
08:00
09:00
10:00
11:00
12:00
13:00
14:00
15:00
16:00
17:00
18:00
19:00
20:00
21:00
22:00
23:00
00:00
01:00
02:00
03:00
time of day [h:min] time of day [h:min]

trendline telecommuter, t1 trendline telecommuter t0

trendline household members, t1
trendline household members, t0
n=72 Persondays n=58 Persondays

(3c) telecommuters t1 (3d) household members t1

telecommuting - commuting telecommuting - commuting
50 50

household memebers [%]

40 40
telecommuters [%]

30 30

20 20

10 10

0 0
04:00
05:00

07:00

09:00
10:00
11:00

13:00
14:00
15:00

17:00

19:00
20:00
21:00

23:00
00:00
01:00
02:00
03:00
06:00

08:00

12:00

16:00

18:00

22:00

04:00
05:00
06:00
07:00
08:00
09:00
10:00
11:00
12:00
13:00
14:00
15:00
16:00
17:00
18:00
19:00
20:00
21:00
22:00
23:00
00:00
01:00
02:00
03:00
time of day [h:min] time of day [h:min]
trendline telecommuter, telecommuting t1 trendline household members, telecommuting day t1
trendline telecommuter, commutung t1 trendline household memebers, commuting day t1
n=36 Persondays n=29 Persondays

Fig. 21.3. Temporal Distribution of Physical Mobility

21.4.3 Expenditures

Before starting to telecommute, the individuals were asked to give an estimate of

their expected monetary and temporal savings due to telecommuting. The
estimations regarding monetary savings varied from 1 to 178.95 EUR/week, with
an average of 29.55 EUR/week, temporal savings were estimated at between 2 to
14 hours/week, with an average of 5:41 hours/week.
Comparing expected and actual effects, the monetary and temporary savings
were considerably overestimated (Table 21.1.). The greatest part of the monetary
and temporal savings was due to a reduction in car use followed by the reduction
of used public transport (cf. Table A21.3. and A21.4.).

Table 21.1. Expected and actual changes in expenditures of money and time of telecommuters
Expected t0 Actual t1
Expenditures Difference t1-t0
(mean) (mean)
Money [EUR/week] 29.55 23.67 -5.88
Time [h/week] 5:41 4:00 -1:46
n = 36 telecommuters.
420 A.F. Glogger, T.W. Zngler and G. Karg

21.4.4 Emissions

For the evaluation of the change in emissions, estimates provided by the German
Federal Environmental Agency were used (UBA, 1999; see Tables A21.3 and
A21.4). As expected, the emissions diminished after the introduction of telecom-
muting. There is a decrease per telecommuter of about 22 kgCO2/week and
60 gNOX/week, and a decrease per household of about 33 kgCO2/week and
82 gNOX/week (see Tables A21.3. and A21.4.)

21.5 Discussion and Conclusion

The model is a compromise between the need for information and the ability and
readiness of individuals and households to provide it (Axhausen, 1998). In this
context, the model reflects the relevant parts of reality for this studys purpose.
The method applied was useful but it can still be improved. The travel diaries
are very detailed, thus the response rate might be improved by eliminating some
less important information. Better results regarding both the response rate and
accuracy can probably be achieved with a 24-hour recall telephone interview
(Atteslander, 2000).
Telecommuting has a substantial influence on the travel behaviour of tele-
commuters and their household members depending on the activity considered. In
particular, the reduction of compulsory work travel leads to a different temporal
distribution of trips. A different distribution of trips over the day and a reduction in
numbers of trips by telecommuters were also reported by Vogt et al. (2001) in
Germany, Hamer et al. (1992) in the Netherlands, by Pendyala et al. (1991) and
Kitamura et al. (1991) in the USA. Their results are supported by the findings in
this study. Still, the possibility of underreporting has also to be considered (see also
Pendyala et al., 1991).
The results of this study show that telecommuting does reduce the total
number of car trips. Likewise, the distances travelled by car decrease. Similar find-
ings were obtained in the Californian Telecommuting Pilot Project (Pendyala et al.,
1991; Kitamura et al., 1991) and by Vogt et al. (2001). In addition, a contraction of
the action radius of telecommuters was observed which was also shown in the
Californian Project (Pendyala et al., 1991).
Expenditures measured in both money and time changed. A comparison
between expected and actual effects of telecommuting leads to the assumption that
the actual monetary trade-off from telecommuting is lower than expected by
telecommuters as is the temporal trade-off.
Due to the reduction in distances travelled by car and public transport, a
reduction in the emissions of CO2 and NOX was found. The influence of the use of
flat-rate values instead of motor-related characteristics has to be kept in mind.
Thus, a positive impact of telecommuting on travel behaviour was found in
this study. There was a decrease in peak-hour traffic, in total trip numbers,
travelled distances, expenditures and emissions.
 The Impact of Telecommuting on Households Travel Behaviour 421

Further studies should focus on the interrelation between household members

and long-term effects such as residential relocation decisions.

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424 A.F. Glogger, T.W. Zngler and G. Karg

Appendix
Table A21.1. Trip distances t0 and t1 per telecommuter per day and week by mode of transport

Distances
t0 t1 Difference t1-t0
Tele-
Commuting
Av. day Av. week 1) commuting Av. week 4) Av. week
Telecommuter (tc) day3)
day2)
(a-b) (e-b)/b
a) mean b) mean c) mean d) mean e) mean
abs. rel.
[km/ [km/ [km/ [km/ [km/ [km/
[%]
tcday] tcweek] tcday] tcday] tcweek] tcweek]
Walk 0.9 4.5 0.7 0.2 2.3 -2.2 -48.2
Bicycle 0.1 0.6 0.2 0.0 0.5 -0.1 -22.2
Public transport 25.0 124.8 0.0 20.8 52.0 -72.8 -58.3
Park & ride 21.5 107.4 0.0 27.6 69.1 -38.3 -35.6
Car 43.9 219.6 5.1 61.8 167.4 -52.2 -23.8
Others 0.8 4.2 0.0 0.0 0.0 -4.2 -100.0
n.a. 4.5 22.6 0.0 0.0 0.0 -22.6 -100.0
All 96.7 483.7 6.1 110.5 291.4 -192.4 -39.8
1)
mean: 5 working days/week; 2)mean: 2.5 days/week; 3)mean: 2.5 days/week;
4)
=(2.5* distance telecommuting day) + (2.5* distance commuting day)
n = 36 households.

Table A21.2. Trip distances t0 and t1 per household per day and week by mode of transport

Distances
t0 t1 Difference t1-t0
Tele-
Commuting
Av. day Av. week1) commuting Av. week4) Av. Week
Household (hh) 2) day3)
day
(a-b) (e-b)/b
a) mean b) mean c) mean d) mean e) mean
abs. rel.
[km/ [km/ [km/ [km/ [km/ [km/
[%]
hhday] hhweek] hhday] hhday] hhweek] hhweek]
Walk 1.3 6.3 1.2 0.6 4.6 -1.8 -27.8
Bicycle 0.1 0.7 0.4 0.2 1.4 0.7 94.1
Public transport 29.3 146.3 3.3 24.8 70.2 -76.0 -52.0
Park & ride 28.1 140.5 8.3 36.0 110.8 -29.7 -21.2
Car 84.8 424.2 32.2 92.5 311.8 -112.4 -26.5
Others 12.9 64.4 0.0 0.0 0.0 -64.4 -100.0
n.a. 4.6 23.2 1.9 0.0 4.9 -18.3 -79.0
All 161.1 805.5 47.3 154.1 503.6 -301.9 -37.5
1)
mean: 5 working days/week; 2)mean: 2.5 days/week; 3)mean: 2.5 days/week;
4)
=(2.5* distance telecommuting day) + (2.5* distance commuting day)
n = 36 households.
 The Impact of Telecommuting on Households Travel Behaviour 425

Table A21.3. Effect on expenditures in money and time and emissions per telecommuter by mode
of transport

Difference t1-t0
Distance Expenditures Emissions
Telecommuter (tc)
abs. monetary1) total time CO22) CO2 NOx3) NOx
[km/ [EUR/ [EUR/ [h/ [g/ [kg/ [g/ [g/
tcweek] pkm] tcweek] tcweek] pkm] tcweek] pkm] tcweek]
Walk -2.2 0 0 0.1 0 0 0 0
Bicycle -0.1 0.08 -0.01 0 0 0 0 0
Public transport -72.8 0.08 -5.68 -2.1 86.8 -6.3 0.33 -24.0
Park & Ride -38.3 0.16 -5.93 -0.8 142.4 -5.4 0.37 -14.2
Car -52.2 0.23 -12.06 -1.2 198.0 -10.3 0.41 -21.4
Others -4.2 - - - - - - -
n.a. -22.6 - - - - - - -
All -192.4 - -23.67 -4.0 - -22.1 - -59.6
1)
StBA, 2000; 2)UBA, 1999; 3)UBA, 1999
n = 36 households.

Table A21.4. Effect on expenditures in money and time and emissions per household by mode of
transport

Difference t1-t0
Distance Expenditures Emissions
Household (hh)
abs. monetary1) total time CO22) CO2 NOx3) NOx
[km/ [EUR/ [EUR/ [h/ [g/ [kg/ [g/ [g/
hhweek] pkm] hhweek] hhweek] pkm] hhweek] pkm] hhweek]
Walk -1.8 0.00 0 0 0 0 0 0
Bicycle 0.7 0.08 0.05 0.1 0 0 0 0
Public transport -76.0 0.08 -5.93 -1.6 86.8 -6.6 0.33 -25.1
Park & ride -29.7 0.16 -4.61 -0.7 142.4 -4.2 0.37 -11.0
Car -112.4 0.23 -25.96 -2.3 198.0 -22.2 0.41 -46.1
Others -64.4 - - - - - - -
n.a. -18.3 - - - - - - -
All -301.9 - -36.44 -4.6 - -33.1 - -82.2
1)
StBA, 2000; 2)UBA, 1999; 3)UBA, 1999
n = 36 households.