Developing a market for kilometres

With rapid urban growth over the past decades combined with strong economic growth at a national level, Australians are buying more cars and driving more kilometres.

According to ABS data, between 2001 and 2005, the number of registered motor vehicles grew by 17 per cent in Queensland, 12 per cent in New South Wales and 10 per cent in Victoria. The recently released Melbourne Atlas shows that annual distance travelled by cars in Melbourne has risen by over 50 per cent between 1984-85 and 2001-02.

This increase in cars and the amount of kilometres they drive is a policy challenge for a number of reasons.

First, the congestion this causes in our cities imposes economic costs. Put simply, if we are sitting in traffic, we can’t be sitting at the office or factory and working.

Second, this congestion imposes social costs, because if we are sitting in traffic we have less leisure time and less time with our family and friends.

Third, in this time of increased awareness about the impact humans have on our environment and the consequences this is having on our climate, it is important to note that an increase in the amount of driving imposes an environmental cost.

Motor vehicle emissions make up a significant proportion of air pollution, with estimates indicating that motor vehicles produce 83 per cent of the carbon monoxide in Melbourne, while producing 20 per cent of the carbon dioxide and 13 per cent the nitrogen dioxide in Australia. And the more we drive, the more these emission levels increase. And where there is congestion and our car trips take longer, this only further adds to air pollution.

In response to the problems caused by the increased number of cars and the increased amount of driving, some policy makers have proposed introducing some form of direct pricing for car use. The justification for this is that if a direct price is imposed for the use of cars, then they will be used less and more efficiently.

Such pricing can take two basic forms. One is comprehensive pricing, where a per-kilometre charge is introduced for all driving within a city. Another is cordon pricing, where a charge is introduced for all vehicles entering a specified zone in a city, usually the city centre. Such a charge is currently in place in central London.

There is a general consensus that comprehensive pricing is the most effective system. And technology is rapidly evolving to the point where the introduction of such pricing in cities such as Sydney and Melbourne will be possible.

However, one problem with such pricing is that it would effectively involve the artificial setting of a price for driving. Rather than using market forces to ascertain the price for driving (which is the usual way of determining most prices for most goods in free market economies), a government authority would effectively determine the price.

As has often been the experience in other cases where the government has intervened to set the price of something, this may cause certain problems. A possible consequence of such government intervention is that the price for driving will be set too high, or too low, resulting in an excess supply of road space (empty roads) or an excess demand for road space (continued congestion).