Highway Charges
Equitable or Efficient?

In 1979 $37.5 billion was allocated for highway purposes in the US, of which about 60 per cent was collected by taxes and charges levied on highway users. Given the sums involved, governments are everywhere concerned with how road user charges should be levied, and in particular, whether they should be equitable or efficient. The US Federal Highway Administration interprets equity to mean that 'users should pay for the highway costs they occasion' where costs are defined as highway agency expenditures. The efficient charge, on the other hand, is equal to the marginal social cost incurred by the vehicle, and includes not only the extra damage done to the highway, which will require maintenance expenditure by the highway agency, but also the increase in operating costs of other road users. On uncongested roads, these extra vehicle operating costs arise from the damage done to the pavement by earlier vehicles. This damage, measured by the increased roughness of the pavement surface, is now known to increase vehicle operating costs appreciably, and is therefore a major component of the social marginal cost of road use. Indeed, these vehicle operating costs typically exceed highway maintenance costs by a factor of ten or more, and so it is of major importance to measure these costs and correctly allocate them.

'Efficient' charges are, however, difficult to calculate, because they require a knowledge of the road deterioration and vehicle costs relationships, both hard to estimate accurately. Governments are therefore tempted to levy 'equitable' charges which cover government costs and appear to be acceptable.

In Discussion Paper No. 59, Research Fellow David Newbery demonstrates that in a variety of circumstances the efficient and the equitable charge are approximately equal. Newbery finds that the two approaches lead to identical charges in the long run, for uncongested roads with no growth in traffic.

Newbery's result greatly simplifies the calculation of road user charges and resolves the potential conflict between the criteria of equity and efficiency. Newbery does not address two other important components of road user charges - the recovery of original capital costs, and congestion costs. His result does nevertheless strengthen the case for allocating maintenance costs in proportion to the damaging power of different vehicles - essentially, all to heavy lorries.


The Fundamental Theorem of Road User Charges
David M Newbery

Discussion Paper No. 59, April 1985 (ATE)