Road pricing versus tradable entry rights: a transaction cost approach

With respect to market-based transportation policies, it is a widely held view that road pricing entails substantial, though far fewer, transaction costs than tradable transportation permit systems. This conclusion seems to hold only if operational costs are singled out. This paper explores all relevant market, managerial and political transaction costs associated with road pricing and tradable entry rights. The two instruments have the same objective, namely to reduce congestion, and, to a lesser degree, noise, safety and environmental externalities. It is argued that the prevalence of transaction costs is largely dependent on the design of the policy instrument and the technology used. Developments in new technology will ensure that transaction costs associated with implementing a network wide, fleet wide road pricing or tradable entry permit system can remain at a low level. Comparative analysis further shows that a cap-and-trade program of entry permits distributed for free (on a smart card), traded on a brokered market and monitored downstream is not only more effective, but also likely to entail fewer transaction costs than road pricing. Any attempt, in turn, to save the huge information and search costs incurred by road pricing impairs its efficacy by severing the link between the externality and the price paid.