Socially Optimal Solutions

Congestion is a problem of bad economics, not bad engineering.

I’ve heard this said a few times and I think it’s worth repeating. Another way of putting this is that our current economic framework does not result in a “socially optimal solution”.

Economists define a “socially optimal solution” as “the optimal distribution of resources in society, taking into account all external costs and benefits as well as internal costs and benefits.”

It’s what we should be trying to get as close as possible to when setting up the economic framework in which our transport systems exists. Our current framework was introduced in the 70s and is largely unchanged since then. At the time it was seen as a massive step closer to a “socially optimal solution” than what we had previously, mainly because it introduced an element of user-pays. Previously transport infrastructure had been funded from general taxation. Now a reasonable chunk of it would come from users in the form of fuel excise and vehicle registrations.

But it’s definitely sub-optimal. It still sucks out massive subsidies from rates and general taxation, as well as imposing big externalities on society. I remember in 2017 when the Auckland regional fuel excise was being debated, someone asked Bill English why his nominally “centre-right” party didn’t support this small step closer to a user-pays system, and he said “we already have a user-pays system”. I wasn’t sure if it betrayed a dishonesty from Bill, or was just a reflection of how poorly New Zealanders understand how transport funding works here, even the politicians supposedly running it.

Despite being a step forward from what we had, our current system is a very long way away from being truly user-pays, and a very long way from being a socially optimal solution.

I’ve pondered a lot about what a socially optimal solution system might look like.

A socially optimal solution should be as close as possible to user-pays, accounting for both internal and external costs.

If we had a pure user-pays system, then:

1. Costs of driving on rural local roads would roughly double (capital and maintenance costs of rural local roads are subsidised roughly 50% by rates).
2. Costs of driving on rural state highways would stay roughly the same (capital and maintenance costs of state highways are not subsidised).
3. Costs of driving on urban state highways would increase subtantially, probably several-fold at peak times. Although capital and maintenance costs are not subsidised, land costs are (which are much more significant in urban areas). Also the external costs of each car are far greater – the negative impacts of delays to everyone else trying to use road space, noise, vibration, pollution, safety, amenity, land values, public health etc.
4. The costs of driving on urban local roads would increase the most, again probably by several times over at peak times. For the same reasons as point 3 above, plus having to double to cover the full cost of maintenance and capital.
5. On average public transport costs would roughly double (services are generally subsidised around 50%). But this would vary wildly between routes. High-patronage routes would increase by only a small amount, or could even reduce in price. In contrast, low-patronage routes would increase by more than double. Also off-peak prices would likely plummet to almost nothing, while peak prices would spike.
6. Costs of parking would generally increase, particularly in cities.
7. All petrol/diesel vehicles (private and public) would cost significantly more to account for their carbon emissions and pollution.
8. Costs of cycling would increase (from nothing at the moment). But it would be an extremely small increase given their negligible maintenance costs, tiny footprint and almost non-existent externalities (delays, noise, vibration, pollution etc).
9. Similarly the costs of walking would increase (from nothing at the moment), but it would also be an extremely small increase.

It’s notable that every single type of travel would increase in cost. Or to put it another way, all travel is subsidised under our current framework.

To me this is a huge problem. It’s no wonder we are constantly battling congestion, over-crowding, lack of infrastructure, and lack of funding, when we as a society are subsidising everyone to travel lots more than they otherwise would.

I’d like to see the prices of travel increase to reflect their true costs. Obviously this means we could have corresponding decreases in rates and general taxation. But more importantly it means we wouldn’t need to spend nearly so much on over-the-top transport infrastructure that doesn’t actually make economic sense, meaning even further decreases in rates and taxes. It would also completely change the shape of our cities – there would be higher demand for walkable neighbourhoods and central city living, and lower demand for stand-alone houses in far-flung auto-dependent suburbia.

The mechanisms for this pricing will soon be with us. The people I’m talking to are saying that within 10 years the whole vehicle fleet in NZ will have GPS units that will charge for driving based on distance, time and location. This will make it easy (from a technological point of view anyway) to price driving at its true cost. We already charge fares for public transport, so doubling these is extremely easy. Walking and cycling are trickier to charge for as there is currently no mechanism to do so. Also, the charges would be so miniscule that any system we were to implement would probably cost more than the tiny amount of revenue you’d collect. So in reality we’ll probably always have to keep walking and cycling free of charge.

The only real problem I can see with moving to a socially optimal solution is the equity impacts. Although as a society we’ll be far better off overall, there will be a small number of people within society who end up worse off. I think this could be quite easily dealt with though, by providing discounts or free travel for certain groups (e.g. people on benefits, people with community services cards, mobility cards, the elderly, children, students etc.). Alternatively we could use some of the revenue collected to help these people through higher welfare payments, or lower income taxes for low earners. It’s far better to have sensible pricing combined with targetted benefits for those who need it, than to wontonly subsidise everything for everyone, as we do now.

Would you like our transport systems to move towards a socially optimal solution, or are you happy with our socially sub-optimal state of affairs?