Pareto improvements from Lexus Lanes: The case for value pricing on heavily congested highways

Traffic congestion is a significant and widespread problem. Economists have known how to solve it for more than 90 years; we need to charge tolls that internalize the congestion externality drivers impose on each other. Despite this knowledge, congestion pricing has not been implemented widely. One major barrier is concern among policy makers and the public that congestion pricing makes many, if not most, road users worse off. This concern is supported by the standard economic models of congestion pricing, in which pricing is a Kaldor-Hicks improvement: the winners gain more than the losers lose.;In this paper I show that a judiciously designed toll applied to a portion of the lanes can be a Pareto improvement even before the revenue is spent. Since all road users will be better off this should ease adoption. I achieve this new result by extending the bottleneck model to reflect an important additional traffic externality which transportation engineers have recently identified: additional traffic does not simply increase travel times, but can also introduce additional frictions that reduce throughput.;By using a time varying toll to smooth the rate that people depart for work it is possible to avoid these frictions, increasing speed and throughput. While our ability to obtain a Pareto improvement from pricing the entire road depends on the correlation between agents' value of time and schedule flexibility, pricing a portion of the lanes will always be a Pareto improvement as long as prior to pricing there were always some drivers with a high value of time on the highway.;Using data on California State Route 91 I estimate that pricing the entire road creates welfare gains of over thirteen hundred dollars per road user per year, with a little less than half of those gains accruing directly to the road users. Pricing all of the road leaves less than half a percent of road users worse off. Pricing just a third of the road is a Pareto improvement and creates welfare gains of almost seven hundred dollars per road users each year. In this case, however, less than a third of the benefits accrue directly to road users.