Congestion Pricing and the Appropriateness of Price Rationing

Following up this, consider the following example :

A city has two primary problems, traffic congestion and a drought. How does the possibility of price rationing fit in the two pictures?

In general, higher prices are thought to have the following effects:

1. Reduce demand, especially for more marginally valued uses.
2. Increase supply.
3. Conserve existing supplies.
4. Allocate goods to their highest valued use.

1. For both congested roads and shortages of water, higher prices will reduce demand. This doesn't necesssarily mean that higher prices are preferable to possible alternatives, including direct rationing.

2. For congested roads, increased supply (capacity) is unlikely in at least the short term. For water, while high prices will draw new private supplies, public entities are not generally organized to either buy or sell water. If they were, the question would come up as to why they were in the water business at all.

3. While water not consumed today can be consumed tomorrow, the opposite is true for road capacity. Even the most trivial use of road capacity today doesn't negatively impact tomorrow. In fact, road capacity consumption today may reduce an overhang of consumption demand into tomorrow. Thus conservation of road capacity is not a real motive for price rationing.

4. This is true for individuals in that higher prices are likely to reduce less important consumptions, but it is only true between individuals to the extent that they share a relatively common value of money. A commuter that earns $150k is different from one who earns $15k. It is only the fallacy that values are the result of prices that allows one to imagine that road capacity is being allocated to its highest valued use when the higher paid commuter is allowed to bid it away from the lower paid commuter. In reality, the higher paid commuter is also likely the one with a wider range of plausible alternatives.

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