Would a Congestion Charge Be a Market Price?

by: Ryan Avent

Let’s address this comment:

It’s disingenuous to keep referring to government pricing with reference to the market such as “the government wasn’t using market prices.”

Requiring people to pay for road space might be a good idea but it has little or nothing to do with markets or creating a market. It’s pricing by government decision — not pricing by individual consumers bidding on their perception of value in real time.

The institutional structures will (my surmise) never allow or be able to do dynamic pricing. How would the bid process work? Park by the side of a road until the flow of cars was low enough so that the agency would lower the rate to encourage more capacity? In real time? Every 30 seconds?

Making people pay to drive cars may be necessary but let’s not play with words and call it “market pricing.”

So, a congestion charge would obviously be set by a government, and if your definition of “market price” excludes any price set by the government, then you’ll obviously conclude that a congestion charge is not a market price. But I’ll disagree with you.

First, it’s clear that dynamic pricing would be difficult to impossible to achieve, nor would drivers be able to bid in any sense on what a trip is worth to them. But when I walk into my local grocery store, I don’t announce bids or hang around waiting for a food item to drop to a level I’m willing to accept. I pay the same thing every morning for a cup of coffee. But I don’t think anyone would argue that the six-pack of beer I get at the grocery or the morning coffee aren’t sold at market prices.

Or we can look at this another way. I think most people would agree that the price of carbon in a cap and trade system is a market price. A congestion charge isn’t that different. The government is basically adjusting the cost of a negative externality until it finds the point at which congestion is “capped” at zero. And basically we’re talking about matching consumer demand with a fixed supply of road space.

Are prices charged by monopolists market prices? Price may not equal marginal cost, but really, how often does it?