Vehicle Charges
Roads Scholarship

The basis on which road taxes are levied in the United Kingdom is theoretically flawed and underestimates the true cost of road use by all classes of vehicles except Heavy Goods Vehicles, argued Programme Director David Newbery at a June 11 lunchtime meeting. Instead of charging road users for the costs they impose, the system allocates the total current expenditure on roads according to 'fair attribution'. Newbery found it ironical that the actual level and pattern of UK road taxes appeared to have more logic than the system of cost allocation upon which they are defended. The present system did, however, have perverse effects on road usage and on highway investment: if the correct basis for charging were accepted, then it might lead to a substantial increase in the level of highway investment.

David Newbery is Reader in Economics at the University of Cambridge and Co-Director of the Centre's programme in Applied Economic Theory and Econometrics. His analysis was based on research presented in CEPR Discussion Paper No. 174.

The present system of road cost allocation in Britain has at first sight very little justification in economic theory, as it does not seek to charge road users for the costs they cause but instead allocates total current road expenditure according to principles of fair attribution. Road user charges for commercial vehicles are intended to cover these costs, though taxes on cars include an additional 'sumptuary' element.

Efficient road user charges should reflect the marginal social cost of road use. Vehicles impose four main costs on society - road damage costs, congestion costs, accident externalities, and environmental pollution costs. Pollution costs could not be measured but are known to be a small proportion of total costs in the United States. Road damage costs are those costs which arise because vehicle passage damages the road surface. They include the increased cost of repairing the road, borne by the highway authority and the damage and increased operating cost incurred by subsequent vehicles driving on the damaged or rougher road. Research in the past five years has thrown new light on the nature and measurement of road damage costs. It suggests that the system of cost allocation may seriously overestimate the road damage costs of heavy vehicles, since a large fraction of road deterioration is caused by weathering rather than by vehicles. If all damage were caused by vehicles, then Newbery's earlier theoretical research (described in Discussion Paper No. 59) suggests that under plausible assumptions the road damage cost would be equal to the average maintenance cost. Since only about 40% of road deterioration in the United Kingdom can be attributed to traffic damage, however, it is efficient to charge only this fraction to heavy vehicles.

The present charging system ignores congestion costs, which arise because extra vehicles on the roads impose delays on other vehicles. These costs are difficult to calculate, but the theoretical literature suggests that given a variety of simplifying assumptions, the optimal road congestion charge will exactly cover the annual costs of highway construction and maintenance. Newbery presented estimates of congestion costs for each type of vehicle, arguing that the apparently high level of congestion costs provides strong evidence that the road system should be expanded to reduce congestion. Apparently the Department of Transport currently has to turn down many profitable highway improvements because of shortage of funds, despite the fact that road user charges generate substantial surpluses for the Treasury.

The present system also ignores 'accident externalities', which arise because extra vehicles on the road increase the probability that some other road user will be involved in an accident. The Department of Transport estimates the cost of a fatal accident largely in terms of the forgone output which might have been produced by the victim. Newbery argued that it was more appropriate to measure this cost by individuals' willingness to pay for a reduced risk of accidents. This could increase the estimated costs of fatal accidents by a factor of ten. A major uncertainty remains, however, in estimating the increase in accidents attributable to an increased traffic flow. Newbery therefore presented a range of estimates of the costs arising from accident externalities.

These figures suggested that motorcycles and buses cause high costs to pedestrians. Heavy Goods Vehicles do not appear especially costly while buses and coaches are, contrary to popular impressions. Newbery stressed that the figures rest on a number of contentious assumptions, but that further research on the costs of accidents and on ways to reduce them would seem to merit high priority. If accidents are anything like as costly as his estimates suggest this would justify a considerable investment in road improvements, possibly associated with rises in road user charges.

Newbery then calculated the efficient road user charges, based on these three categories of costs, and compared them with the present system of cost allocation in the United Kingdom. Because congestion costs appear to be so high, Newbery's efficient charge for cars is considerably larger than the present allocation. Although heavy vehicles would be charged a smaller portion of maintenance costs under the efficient system, the increase in congestion costs offsets this and the total charge for these vehicles is hardly changed, at least if accident costs are ignored (as they are at present). The present state of knowledge concerning accident externalities is very unsatisfactory, but Newbery's calculations suggest that these costs are so large that all classes of road user are being undercharged by the present system of road taxes.

The correct approach to determining road investment must take into account all the costs and benefits of the road transport system, Newbery concluded. Under the present charging system low levels of expenditure on roads reduce the costs to be allocated and charged. If the true costs of road use were calculated, taking into account congestion and accident costs, higher road user charges would be called for. These increased charges would in turn help finance higher levels of investment in the road system.