Economics: 

Pricing, Demand, and 

Economic Efficiency

A Primer
Quality Assurance Statement

The Federal Highway Administration (FHWA) provides high quality 

information to serve Government, industry, and the public in a manner 

that promotes public understanding. Standards and policies are used to 

ensure and maximize the quality, objectivity, utility, and integrity of its 

information. FHWA periodically reviews quality issues and adjusts its 

programs and processes to ensure continuous quality improvement.
Contents

The Primer Series and the Purpose of This Volume 2

Introduction 4

Basic Economic Concepts: Highway Supply and Demand 6

The Cost of Travel 6

The Demand for Highway Travel 7

The Supply Side 8

Market Equilibrium 10

Pricing and Economic Efficiency 11

Congestion Externalities and Economic Efficiency 11

Efficient Pricing 11

Variability in Demand and Pricing 12

Congestion Pricing and Other Externalities 13

Toll-Collection Costs and the Role of Technology 14

Forms of Congestion Pricing 15

Priced Lanes: The Economics of Multi-Class Service 16

HOT Lanes 16

Benefits From Product Differentiation 17

Impacts on Capacity and Delay 18

Empirical Estimates of Congestion Tolls 19

Reference Inside back cover
2 | C o n g e s t i o n P r i c i n g

The Primer Series and the Purpose of This Volume

States and local jurisdictions are increasingly 

discussing congestion pricing as a strategy for 

improving transportation system performance. 

In fact, many transportation experts believe that 

congestion pricing offers promising opportunities to 

cost-effectively reduce traffic congestion, improve 

the reliability of highway system performance, 

and improve the quality of life for residents, 

many of whom are experiencing intolerable traffic 

congestion in regions across the country. 

Because congestion pricing is still a relatively 

new concept in the United States, the Federal 

Highway Administration (FHWA) is embarking 

on an outreach effort to introduce the various 

aspects of congestion pricing to decision-makers 

and transportation professionals. One element of 

FHWA’s congestion-pricing outreach program is 

this Congestion Pricing Primer Series. The aim 

of the primer series is not to promote congestion 

pricing or provide an exhaustive discussion of the 

various technical and institutional issues one might 

encounter when implementing a particular project; 

rather, the intent is to provide an overview of the 

key elements of congestion pricing, to illustrate the 

multidisciplinary aspects and skill sets required to 

analyze and implement congestion pricing, and to 

About This Primer Series

The Congestion Pricing Primer Series is part of 

FHWA’s outreach efforts to introduce the various 

aspects of congestion pricing to decision-makers and 

transportation professionals in the United States. The 

primers are intended to lay out the underlying rationale 

for congestion pricing and some of the technical issues 

associated with its implementation in a manner that is 

accessible to non-specialists in the field. Titles in this 

series include:

•	 Congestion Pricing Overview.

•	 Non-Toll Pricing.

•	 Technologies That Enable Congestion Pricing.

•	 Technologies That Complement Congestion Pricing.

•	 Transit and Congestion Pricing.

•	 Economics: Pricing, Demand, and Economic 

Efficiency.

•	 Income-Based Equity Impacts of Congestion 

Pricing.
Ec onomi c s: Pri c ing, Deman d , an d Ec onomi c E ffi c ien c y | 3

provide an entry point for practitioners and others 

interested in engaging in the congestion-pricing 

dialogue. 

The concept of tolling and congestion pricing is 

based on charging for access and use of our roadway 

network. It places responsibility for travel choices 

squarely in the hands of the individual traveler, 

where it can best be decided and managed. The car is 

often the most convenient means of transportation; 

however, with a little encouragement, people may 

find it attractive to change their travel habits, 

whether through the consolidation of trips, carsharing, by using public transportation, or by 

simply traveling at less-congested times. The use of 

proven and practical demand-management pricing 

that we freely use and apply to every other utility 

is needed for transportation. 

The application of tolling and road pricing 

provides the opportunity to solve transportation 

problems without Federal or state funding. It could 

mean that further gas tax, sales tax, or motorvehicle registration fee increases are not necessary 

now or in the future. Congestion pricing is not a 

complete plan of action. It has to be coordinated 

with other policy measures to maximize success. 

This volume describes the underlying economic 

rationale for congestion pricing and how it can be 

used to promote economic efficiency. It lays out 

the basic theory of travel demand and traffic flow 

and shows how inefficient pricing of the road 

network helps create an economic loss to society, 

as well as the means by which this can be alleviated 

through pricing. The impact of congestion pricing 

on highway infrastructure investment and the 

revenue implications of congestion pricing will 

be discussed in a separate volume in this primer 

series.
4 | C o n g e s t i o n P r i c i n g

Introduction

Traffic congestion represents a significant and growing threat to mobility in the United States. According to recent data, the average driver in U.S. urbanized areas traveling in peak periods experienced 38 

hours of total delay in 2005 (up from 14 hours in 

1982), at a total cost of $78 billion in excess travel 

time and wasted fuel consumption.

To some extent, these trends reflect the vibrancy 

of our Nation’s cities, which have seen significant 

economic growth over the past 3 decades. They also 

reflect growing imbalances between travel growth 

and the development of new highway capacity, as 

the former has exceeded the latter for many years. 

However, in an important way, traffic congestion 

also results from the inefficient pricing of highway 

use, leading drivers to travel more than what is economically desirable, particularly during the height 

of morning and evening rush hours. 

The fundamental economic problem in highway 

congestion is that highway users consider the costs 

that they bear themselves (such as fuel costs and 

travel time), but not the additional delay that they 

impose on others when using a congested facility. 

Economists refer to these latter costs as “external 

costs” or “externalities,” because they are not borne 

by the person whose use of the highway creates 

them. The goal of congestion pricing is to make 

drivers “internalize” these costs by directly charging 

them for use of the highway in proportion to the 

external costs that they cause for society. In doing 

so, the economic inefficiencies associated with underpriced and overutilized highways can be significantly reduced.

Congestion pricing is becoming increasingly 

viewed as an important strategy for improving the 

operational performance of the highway system. By 

moving from a system based on fixed or flat charges 

to highway users (e.g., vehicle fees and fuel taxes) to 

a more refined system of charges that can vary by 

the time and location of travel, price signals can be 

used to more efficiently and effectively allocate 

scarce capacity on our Nation’s highways.
Ec onomi c s: Pri c ing, Deman d , an d Ec onomi c E ffi c ien c y | 5
6 | C o n g e s t i o n P r i c i n g

This section introduces some of the basic economic 

principles that provide a foundation for understanding the economic rationale for congestion pricing, 

discussed in the following sections. Key concepts 

include:

•	 The explicit and implicit costs associated with

highway travel; 

•	 The demand for using highway facilities;

•	 Basic relationships of traffic volumes and traffic

flow; and 

•	 The interaction of supply and demand to determine traffic volumes and highway user costs.

The Cost of Travel

We live in a world of scarcity, meaning that resources are not unlimited. As a result, when we consume 

a good or service, we forego the opportunity to consume something else. Economists refer to this as an 

“opportunity cost,” and it is perhaps the most fundamental concept in all of economics. In an important sense, the “price” that people pay for consumption is this opportunity cost. 

For most goods and services, the price that consumers pay is simply the out-of-pocket monetary cost 

to the user; the foregone opportunity would be to 

spend that money on something else. However, economists have also recognized that consumption requires time as well as money, which is itself in limited 

supply. This insight has been useful in analyzing the 

demand for time-saving devices (e.g., microwave ovens) and recreational services, among many others.

For highway travel, the time spent in transit is 

one of the most critical components of the price 

that users face. Time spent in travel is time that 

could be devoted to other pursuits, such as earning 

income or engaging in leisure activities. The value of 

these other pursuits represents the opportunity cost 

of travel time.

Safety is another implicit cost associated with 

highway travel. When people choose to travel, they 

also take on the risk of property damage, injuries, or 

even death due to crashes. These risks can be valued 

based on the willingness of people to pay for reducing the risk of such adverse outcomes. 

Other types of costs borne by highway users do 

represent actual, direct costs. Vehicle operating 

costs include such items as fuel, oil, tires, maintenance, and depreciation. Travel-related taxes and 

tolls represent another direct cost to users. In the 

case of cash or coins paid at toll booths, these can 

literally be “out-of-pocket” costs. 

The preceding discussion of user costs is based 

on the predominant form of highway use, namely 

individuals driving or riding in privately owned passenger vehicles. Similar considerations hold for 

commercial vehicles, with two key exceptions. First, 

the value of time for drivers is a direct cost rather 

than an implicit one, because the drivers are being 

paid for their services. Second, the user cost for 

truck transportation also includes the time value of 

the cargo while in transit.

Basic Economic Concepts: 

Highway Supply and Demand
Ec onomi c s: Pri c ing, Deman d , an d Ec onomi c E ffi c ien c y | 7

The Demand for Highway Travel

 The demand for highway transportation represents 

the value that consumers place on traveling in a 

particular time, manner, and place, as measured by 

their willingness to “pay” for a trip. Some trips will 

be valued very highly, whereas others will be valued 

much less so. This relationship between the cost of 

travel and the level of demand for travel is commonly depicted as the travel demand curve (see 

Exhibit 1).

The travel demand curve slopes downward, reflecting a basic economic truth: As the price of a 

good or service falls, the quantity that will be demanded increases, holding other factors constant. 

The demand for travel is no different: When the 

price of travel is high (in the generalized user-cost 

sense described above), fewer people will be willing 

to make fewer trips; when that price falls, there will 

be more people willing to make more trips. 

The demand curve is characterized by two important qualities: its level and its shape. The level of 

demand (i.e., the position of the demand curve) is 

affected by a number of factors. For example, each 

trip has an origin and a destination. The more people there are at a particular origin and the more 

activities (e.g., shopping or employment) there are 

at a particular destination, the more will routes between the origin and destination be in demand for 

travel. As income levels rise, the willingness to pay 

for travel also increases, shifting the demand curve 

outward. Demand levels can also vary significantly 

(and importantly for the discussion here) by time of 

day, due to the simple fact that people prefer to 

sleep at night and be active during the day, leading 

to higher levels of demand for travel in the morning 

and early evening and lower levels of demand during mid-day and overnight hours. Finally, subjective 

qualities such as comfort and convenience can affect the level of demand.

The responsiveness of the quantity of travel demanded to changes in the price of travel is measured by travel demand elasticity. Mathematically, it 

is simply the percentage change in quantity demanded divided by the percentage change in price. 

Intuitively, elasticity represents the shape of the demand curve. If the quantity demanded changes significantly in response to small changes in price, demand is said to be relatively elastic; thus, the demand 

curve is fairly flat. Conversely, if demand changes 

only slightly in response to large changes in price, 

demand is said to be relatively inelastic; thus, the 

demand curve will be relatively steep. At the extremes, demand can be said to be perfectly elastic 

(i.e., any change in price results in an infinite change 

in quantity demanded) or perfectly inelastic (i.e., 

any change in price results in no change in quantity 

demanded).

The elasticity of demand also depends on a number of factors. Perhaps most important is the timeframe being considered: Demand is typically less 

elastic in the short run than in the long run. When 

the price of travel changes significantly (as it has 

recently with large runups in fuel prices), travelers 

initially have relatively few opportunities for adjusting their behavior. They may decide not to make 

some trips or to change their mode of travel to 

work, but their housing and employment locations, 

key determinants of the level of travel, are likely to 

remain fixed initially. In the long run, however, everything is variable. People may choose to move 

closer to their work or take jobs closer to home. 

Commercial real estate development patterns may 

Traffic Volume

Cost of Highway Travel

Exhibit 1. The travel demand curve.
8 | C o n g e s t i o n P r i c i n g

also respond to reduce the distance between consumers and activity centers. As a result, the longterm impact of an increase in travel costs on the 

volume of highway may be much higher than the 

short-term impact.

The elasticity of demand is also affected by the 

quality and availability of close substitutes. For example, if two companies make very similar products, then consumers are likely to readily switch 

from one product to the other in significant numbers if the price of one of the products changes, 

resulting in high-demand elasticity for each product. Conversely, if there are no good substitutes 

for a good or service, then consumers might simply be faced with a choice between paying a higher price or going without, in which case demand is 

likely to be inelastic. 

For highway travel, public transit use can often 

serve as a reasonable alternative to highway use. In 

general, the higher the quality of that service (such 

as frequency and convenience), the better a substitute it will be to driving and the more elastic highway travel demand will be. Telecommuting can also 

serve as a substitute for highway commuting during 

peak periods; the more readily it is offered by 

employers, and the better it is at substituting for 

time spent in an office (e.g., through high-quality 

telecommunications), the more highway travel 

will respond to changes in the cost of travel. 

The Supply Side

In determining market outcomes, supply is the 

counterpart to demand. For most goods and services, supply is simply related to production: how 

many toys will be fabricated, how many tennis lessons will be taught, etc. For highway travel, however, the relationship is more complicated. The 

highway infrastructure may be built and maintained by a public agency or private entity, but 

consumers supply the vehicles (and their persons) 

to travel on that infrastructure. In order to understand the supply side of highway travel, it is first 

helpful to review some basic principles of traffic 

flow and how highways become congested.

Traffic engineers typically characterize traffic 

flow as a relationship between travel speeds, traffic 

volumes, and traffic density (e.g., number of vehicles occupying a given space on the road). Exhibit 2 

shows the general shape of these relationships. 
Ec onomi c s: Pri c ing, Deman d , an d Ec onomi c E ffi c ien c y | 9

Volume (vehicles/mile)

Speed–Volume 

Speed (miles/hour)

Density (vehicles/mile)

Volume–Density

Volume (vehicles/hour)

Density (vehicles/mile)

Speed–Density

Speed (miles/hour)

Exhibit 2. Fundamental traffic flow relationships. 

When traffic volumes are very low, vehicles 

have minimal impact on one another, and their 

travel speeds are limited only by traffic-control 

devices and the geometry of the road. As traffic 

volumes increase, however, traffic density increases, and the freedom for vehicles to maneuver is more constricted. As a result, travel speeds 

begin to decline, relatively slightly at first, but 

falling significantly as traffic volumes approach 

the maximum capacity (service flow rate) on the 

facility. As traffic density continues to increase 

beyond this saturation point, the speed–volume 

relationship actually bends backward, as traffic 

flow breaks down and fewer vehicles are able to 

get through. 

The decline in travel speeds as traffic volumes 

approach roadway capacity, of course, is what we 

all know as congestion delay. The important implication of this is that there will be a relationship 

between highway-user costs and traffic volumes 

on a particular road. At lower volumes, user costs 

will be relatively constant with respect to volume. 

As traffic volumes increase, however, user costs 

will eventually begin to rise at an increasing rate; 

the point at which this occurs depends on the capacity of the road (see Exhibit 3). This relationship is sometimes referred to as a generalized user 

cost curve.

Volume

Cost of Travel

Exhibit 3. Generalized user costs and traffic volumes.
10 | C o n g e s t i o n P r i c i n g

Demand

Volume

Cost

V0

P0

Exhibit 4. Equilibrium user costs and traffic volumes. 

P = price. V = volume.

Market Equilibrium

When supply and demand are in balance, a market is said to be in equilibrium. This is often represented as the intersection of a supply curve and 

a demand curve, which determines the marketclearing price and quantity (see Exhibit 4). At 

this point, everyone who purchases the good is 

willing to (collectively) buy that amount at that 

price, and producers are willing to supply that 

quantity at that price. If either the supply or demand curves shift, the market price and quantity 

will also change. 

For highway travel, demand is determined as 

described above. The “supply” curve, however, is 

essentially represented by the generalized cost 

curve. The intersection of these two curves determines how high traffic volumes will be and what 

the associated average highway-user costs will be 

at that volume level. When the level of demand is 

low relative to the capacity of the road, it will be 

uncongested, and prices will be relatively constant 

even as volumes increase (the “flat” part of the user 

cost curve in Exhibit 4). However, when demand 

levels are high and the road is congested, both user 

costs and traffic volumes will be higher, potentially 

rising sharply as demand continues to increase. 
Ec onomi c s: Pri c ing, Deman d , an d Ec onomi c E ffi c ien c y | 11

Congestion Externalities

and Economic Efficiency

Economics is focused on the allocation of scarce resources in the economy. When resources are allocated to their highest valued use in the economy, 

the outcome is said to be economically efficient. Under most circumstances, the setting of prices in 

markets through the interaction of consumers and 

producers can help achieve an efficient outcome. In 

many other cases, however, market forces can lead 

to excessive consumption in a particular sector; 

highways are a good example of this.

The key to achieving economic efficiency in a 

market is ensuring that prices reflect the opportunity cost to society of producing and consuming a 

particular good or service. For most goods and services, this opportunity cost will be equivalent to 

the incremental cost of the resources that are required to produce the good. For some goods, however, one person’s consumption can have a negative 

impact on other users (or non-users) of the good, a 

situation that economists refer to as an external cost

or negative externality. If the market price does not 

reflect these external effects, then the opportunity 

cost to society will be greater than the price that 

consumers face, leading to excess consumption 

from the point of view of society and thus creating 

economic inefficiency.

From an economic point of view, externalities 

are a key problem of congested highways. To see 

why, consider the generalized cost curve shown in 

Exhibit 3. This curve is an average cost curve and 

reflects the rise in travel costs that individual users 

face as traffic volumes increase. What it does not 

reflect, however, are the incremental costs that 

each successive vehicle that enters the traffic stream 

imposes on all the others by causing the speed of 

the entire flow of vehicles to decrease as congestion 

builds. The true opportunity cost to society of using highways thus includes both the costs that individual users face and the congestion externality. 

This is sometimes referred to as the marginal social 

cost of congestion (see Exhibit 5). 

 From the point of view of society, the efficient 

traffic level would occur at the point where the 

marginal social cost curve meets the demand curve, 

shown in Exhibit 5 as V*. At this traffic level, all the 

users of the highway value their trips at least as 

much as the incremental cost to society of adding 

more users. The equilibrium traffic level, however, 

is somewhat higher, at V0. At this point, there are a 

large number of drivers who are using the facility, 

because the value they place on travel is greater 

than the cost that they face (the demand curve is 

above the average user-cost curve), but the cost to 

society is greater than the value they receive. Thus, 

there is an economic efficiency loss due to excessive 

traffic volumes.

Efficient Pricing 

Improving economic efficiency under these circumstances requires the elimination of trips that 

are valued less than their social cost. One way to 

do this might be to somehow identify all of the 

lower valued trips and to ensure that they do not 

occur during this demand period on that particular facility, perhaps through prohibition. A much 

simpler means, however, is to adjust the price signals that potential users of the highway facility 

receive. This can be done by imposing a toll on all 

Pricing and Economic Efficiency
12 | C o n g e s t i o n P r i c i n g

users of the facility during congested periods corresponding to the magnitude of the congestion externality; thus, the price that users face is equivalent to the marginal cost to society. At the optimum 

toll level (t* in Exhibit 6), lower valued trips will 

be shifted to other routes or time periods (or not 

made at all), such that the new equilibrium traffic 

volume is also the socially optimum level. This is 

congestion pricing.

 There are several important points to note with 

regard to efficient pricing. The first is to emphasize 

that the optimal congestion toll is intended to reduce congestion on the facility but not eliminate it. 

To see why, consider Exhibit 7. Eliminating congestion in this example would require much more significant reductions in traffic volumes to V1, just 

before congestion begins to build. Doing so with 

pricing would require a toll of t1, much greater than 

the “optimal” toll of t*. This would yield an inefficiently low level of traffic on this facility, because 

many users would be priced based on those who 

value their travel more than it costs society, even 

when accounting for the external costs that they 

impose on others. 

The second point is to note that revenue generation is not the primary purpose of congestion pricing, which is intended to better align supply and 

demand to overcome the economic inefficiencies 

imposed by congestion. In reality, of course, any 

such tolling scheme could potentially generate significant revenues, whose use becomes a significant 

policy and operational issue. The relationship of 

congestion pricing to user revenues and infrastructure investment will be discussed in a separate volume in this primer series.

For a given facility, the level of the optimal congestion toll and the resulting effect on congestion 

levels is largely a function of the elasticity of demand 

for travel. If demand is relatively inelastic, the optimal congestion toll will be high, and the effect on 

reducing congestion will be relatively low. Conversely, if demand is more elastic, then a greater reduction 

in traffic volumes and congestion can be achieved 

with a smaller toll. As was discussed above, a key 

factor in determining the elasticity of demand is the 

quality and availability of alternatives to highway use 

in peak periods, such as transit or teleworking. The 

implication of this is that measures to improve such 

alternatives can greatly improve the effectiveness of 

efficient pricing in reducing congestion.

Variability in Demand

and Pricing 

The level of the congestion toll is also a function of 

the level of demand. Although this is intuitively obvious, it has important implications for the design 

of congestion-pricing schemes and helps demonstrate its superiority to other forms of user charges. 

As was noted above, one of the key features of the 

demand for highways is that it varies significantly 

by time of day as well as by location. This implies 

Cost

V* V0 Volume

P0

P*

User Cost

Marginal Social Cost

Demand

Exhibit 5. Marginal social cost and user cost. 

P = price. V = volume.

V* Volume

t*

User Cost

Marginal Social Cost

Cost

P*

Demand

Exhibit 6. Optimal congestion pricing. 

P = price. V = volume. t = toll.
Economics: Pricing, D e man d , an d Economic Effici e ncy | 13

V* Volume

Cost

P*

V1

P1 User Cost

Marginal Social Cost

Demand

t*

t1

Exhibit 7. Inefficiently high congestion pricing. 

P = price. V = volume. t = toll.

that the optimal congestion tolls will vary over the 

course of the day on the basis of fluctuations in demand. Suppose, however, that a “flat” toll (e.g., 

fixed tolls and fuel taxes that do not discriminate 

based on when travel occurs) must be charged that 

does not vary in this manner. In theory, the flat toll 

could still be set to match the optimal toll during 

congested, high-demand periods. However, if the 

same toll rate applies during uncongested, low-demand times (when there are no congestion externalities and thus no optimal toll), traffic volumes 

will be inefficiently low in those periods. In fact, 

because the tolls are the same throughout the day, 

some of that traffic might even move back into the 

congested period. Because of the potential for this 

to occur, the optimal toll during the peak period 

would be lower (and less effective at reducing congestion) if the tolls cannot vary by time of day.

This example can be extended to multiple demand periods. Suppose the congestion toll is structured to be charged at a fixed rate when it is collected but may be zero (i.e., not collected) during 

off-peak periods. To the extent that demand varies 

during the congestion period (such as between the 

height of rush hour and “shoulder hours” adjacent to 

the peak), the same considerations would apply. 

Congestion tolls for the shoulder period would either be inefficiently high or inefficiently low. The 

result is that the more variability there is in the congestion-pricing scheme, the more effective it can be 

at reducing congestion and the closer it can come to 

achieving an economically efficient outcome.

Similar considerations apply when 

looking at pricing across facilities in different locations. Although traffic congestion can be quite severe in large urban 

areas, there is much less congestion in 

smaller cities or rural areas. As a result, a 

user charge (such as fuel taxes) that is 

applied uniformly to both congested and 

uncongested areas will not be nearly as 

effective as congestion-based pricing in 

efficiently allocating resources within the 

economy. 

Another consideration in limited congestion 

pricing concerns alternate routes. Suppose there are 

two parallel roads between the same origin and destination, both subject to congestion, but only one 

of them can be priced. If congestion tolls are only 

charged on the one facility, some of the trips that 

are priced off that facility will shift to the unpriced 

facility, exacerbating congestion there. Given the 

possibility of this to occur, the optimal toll under 

such a situation will be lower, as will the impact on 

reducing congestion levels. An important implication of this is that congestion pricing will be much 

more effective if it is jointly applied to all major 

highway facilities in a congested corridor, rather 

than to only a subset of the alternative routes.

In reality, of course, highway networks are comprised of a whole series of interconnected segments, 

supporting both alternative and connecting routes, 

as well as access to connections with other modes 

(such as train stations). The Federal Highway 

Administration’s (FHWA’s) Office of Operations 

has been conducting research to examine the potential impact of congestion pricing when applied 

to such real-world transportation networks.

Congestion Pricing and 

Other Externalities

Highway travel creates other external costs for society, in addition to congestion. Perhaps the most 

significant of these other impacts is the damage 
14 | C o n g e s t i o n P r i c i n g

caused to the environment and human health by 

highway vehicle emissions. In a broad sense, the 

marginal social cost of highway use would include 

these costs. Market and regulatory strategies for 

dealing with environmental externalities also exist, 

such as taxes on fuel or regulations on vehicle-emissions control systems and fuel content, and such 

strategies are the most effective way of dealing with 

these particular externalities. However, to the extent that current mechanisms do not fully capture 

these environmental externalties, congestion pricing can help reduce their magnitude by reducing 

excessive highway use (at least during congested 

travel periods).

Toll-Collection Costs and

the Role of Technology

The preceding discussion of the economic principles underlying congestion pricing does not address 

the cost of actually collecting such tolls from users. 

Indeed, although William Vickrey articulated the 

basic theory of congestion pricing in his Nobel 

Prize-winning work in the 1950s, its potential for 

widespread application was limited by the available 

methods of collecting tolls. With manned tollbooths and the traffic-flow restrictions that they 

impose on roadways, it was a case of the “cure being 

worse than the disease.”

Advancements in tolling technology over the 

past two decades, however, have made variable 

tolling in urban cores and on limited-access highways a viable option, and future developments in 

global-positioning satellite (GPS) and dedicated 

short-range communications technologies may 

make it feasible to adopt congestion pricing on an 

even wider basis. Two other volumes in this primer 

series, Technologies That Enable Congestion Pricing 

and Technologies That Complement Congestion Pricing, describe these technologies in greater detail.
Ec onomi c s: Pri c ing, Deman d , an d Ec onomi c E ffi c ien c y | 15

Forms of Congestion Pricing

The discussion above describes the classic economic case for congestion pricing, based on mitigating 

congestion externalities. However, as used today, 

the term congestion pricing has come to be applied 

more broadly, to any projects involving tolls or other charges for road use that vary by the level of demand. The degree of variation in such applications 

can range from simple policies that apply different 

prices in peak and off-peak periods (with no toll at 

all being sometimes applied in the off-peak) to rates 

that change within peak periods, often targeted at 

maintaining a specific level of service. Variable 

charges may be applied on the basis of a pre-set 

schedule (updated periodically) or dynamically 

(changing as often as every 3–6 minutes) in response to real-time changes in demand. 

Congestion-pricing projects that involve tolls 

may be categorized according to their extent of application, as follows:

•	 Priced Lanes: Pricing is applied on a limited number of lanes of a roadway, leaving other travel 

lanes on the facility unpriced. The priced facility 

(commonly referred to as express lanes, managed 

lanes, or high-occupancy toll [HOT] lanes) is 

typically separated from the other lanes, with limited access points. Examples of priced lanes in the 

United States include SR-91 in Orange County, 

CA; I-15 in San Diego; I-394 in Minneapolis; SR167 in Seattle; and I-10 and US-290 in Houston. 

•	 Priced Roadways: Congestion pricing is applied 

on all lanes of a roadway facility. This is frequently done on existing toll facilities that convert their fixed toll regime to a system that varies 

by the time of travel. Examples include bridges 

in Lee County, Florida; the Dulles Greenway in 

Northern Virginia; and freeways in Singapore.

•	 Zone-Based or System-Wide Pricing: Pricing is 

applied on all roadways within a specified zone. 

Pricing can take the form of cordon pricing, in 

which vehicles are charged as they cross a cordon line into the priced zone, or broader based 

tolling that is applied to trips within the zone as 

well. Projects of this type that have been implemented to date have typically focused on congested central business districts, such as those in 

London, Stockholm, and Singapore; however, 

future applications may include larger districts, 

perhaps encompassing entire urban areas.

The Congestion Pricing Overview primer includes 

more information on the practical application of 

these different approaches. 

Variable Pricing in Other Sectors

Although a relatively new concept to highway transportation, charging 

different prices in peak and off-peak demand periods is a well-established 

practice in many other sectors and industries. This is especially common 

in industries in which supply (e.g., the number of available hotel rooms or 

the capacity of the water delivery system) does not vary significantly in 

different demand periods. By charging higher rates during high demand 

periods, proprietors are able to better allocate demand to optimize the 

utilization of the available capacity. 

Examples of such common practices include higher rates for lodging 

and other amenities in tourist areas during the “high season,” discounts 

for afternoon showings at movie theaters, and evening and weekend 

discounts for telephone use. More recently, other industries have moved 

in this direction, including professional sports teams (which have begun 

charging more for tickets to more desirable games, reflecting long-standing practices in the aftermarket for tickets) and electric utilities (in which 

advanced electronic meters now allow usage at different times of day to 

be recorded).
16 | C o n g e s t i o n P r i c i n g

Priced Lanes: 

The Economics of Multi-Class Service

The preceding discussion describes the fundamental 

economic motivation for efficient pricing in its 

“pure” form. However, as noted earlier, the term 

congestion pricing has come to be applied to a variety of different practices of applying tolls or other 

road-user charges that vary based on time and space. 

One such form is tolled express lanes, in which a 

freeway is partitioned into two different classes 

(“priced” and “general purpose”), and tolls are 

charged on the priced lanes to ensure that traffic 

remains free-flowing on them. Although similar in 

some ways to the classical case of congestion pricing, the economic justification for offering multiple 

classes of service is actually quite different.

HOT Lanes

HOT lanes are a special case of tolled express 

lanes, in which high-occupancy vehicles (HOV; 

including carpools, vanpools, and transit vehicles) 

are allowed to use the special lanes for free, whereas low-occupancy vehicles are required to pay a 

toll to use the lanes. To date, most HOT lane projects in the United States have been conversions 

from existing HOV facilities.

The purpose of HOV lanes is to encourage more 

efficient use of highway capacity by increasing average vehicle occupancy, thereby accommodating 

high levels of passenger travel while reducing total 

traffic volumes. The lanes operate by establishing 

minimum occupancy thresholds (typically two or 

three passengers per vehicle) that are set high 

enough to keep traffic at low enough levels to ensure that the lanes remain free-flowing, even during 

peak demand periods. However, because these occupancy minimums must be set at whole numbers, 

the lanes often wind up with significant excess capacity available, even as the general-purpose lanes 

may be severely congested. 

The purpose of converting such facilities to HOT 

lanes is to make use of the excess capacity in the 

HOV lanes, while still preserving the incentives for 

carpool and transit use (no toll and free flow). For 

example, several HOV-3 facilities in the United 

States, such as the reversible express lanes on I-395 

in Northern Virginia, were initially constructed as 

exclusive busways; however, because the buses 

alone did not fully utilize the available capacity, 

carpools and vanpools were soon allowed to share 

those facilities. HOT lanes simply extend this further down the vehicle-occupancy scale, while introducing the element of pricing to manage demand 

more precisely. 

Because most toll-paying users of the HOT lanes 

are likely to shift from the other lanes, congestion 

on these lanes will be reduced and travel times will 

be improved, whereas existing HOV users will see 

no reduction in the quality of the service they receive. The result is a pure gain to highway users.

Although many HOV lanes operate with excess 

capacity during peak hours, this is not always the 

case. In some places, growing traffic volumes have 

resulted in HOV lanes that no longer provide reliable, uncongested travel to HOVs, even if they did 

so when first established. One approach to returning such facilities to free-flow conditions is to increase the minimum vehicle occupancy standard 

for the special lanes, thereby reducing the number 

of vehicles that qualify to use them. The excess capacity that is created through such a move can then 
Ec onomi c s: Pri c ing, Deman d , an d Ec onomi c E ffi c ien c y | 17

make the lanes a candidate for HOT lanes—in some 

cases, additional capacity for HOV lanes (or for 

HOV-to-HOT conversions) can be created through 

restriping or other improvements to roadway geometry and operations. By taking these two actions 

simultaneously (increasing occupancy standards 

and conversion to HOT), a poorly performing 

HOV facility can be transformed into a highly functioning tolled facility, while still allowing users who 

would otherwise be forced off the HOV lanes to 

continue using them by paying a toll.

Benefits From Product

Differentiation

In addition to the capacity utilization benefits afforded by HOV-to-HOT lane conversions, express 

lanes can provide highway users with multiple classes of service quality from which to choose at different prices. This form of “product differentiation,” as 

economists refer to it, can produce significant benefits for consumers. The key is that users of a facility 

may vary significantly in the value that they place on 

travel-time savings. For some users, reducing travel 

times for a particular trip may be quite valuable, 

whereas others may be less sensitive to such reductions.1

 By partitioning the highway into tolled express lanes and free general-purpose lanes, users are 

given the option of selecting the price–quality combination that best suits them, rather than being 

forced into a “one-size-fits-all” solution. 

It is important to note that the value of time 

savings reflects to the total value of all passengers 

in a vehicle, not just the driver. Thus, some of the 

highest value trips are likely to be those in buses 

or other transit vehicles, even if the riders individually have lower values of time than single occupant vehicle drivers. In addition, the value of 

time savings can vary from day to day, even for 

the same user, depending on the time sensitivity 

and value of the activities being pursued at the 

user’s destination (such as attending an important family function). This is reflected in the experiences on express lane projects such as SR-91, 

where a large number of facility users use the express lanes on an occasional basis, when their 

trips are most critical.

An important component of the appeal that 

express lanes can have for highway users is their 

reliability. Variable pricing on express lanes (particularly dynamic pricing based on real-time traffic conditions) can be used to manage demand in 

such a way as to virtually guarantee a free-flowing trip at all times, not just “on average.” Reducing the likelihood and severity of unexpected delays can be very valuable to users and may be an 

important component of their willingness to pay 

for the premium service afforded by express 

lanes. In this way, the introduction of express 

lanes can be viewed as a new product entirely (a 

guaranteed high-speed trip during peak hours), 

previously unavailable at any price (i.e., any price 

below that of private helicopter taxi services), 
18 | C o n g e s t i o n P r i c i n g

that enhances consumer welfare. Such services 

do exist, of course, for the most extremely highvalued trips, such as emergency trips to trauma 

centers or ferrying top business executives around 

major cities.).

Impacts on Capacity and Delay

Although offering multi-class service can be appealing to road users, it may also have some drawbacks. 

When a road is partitioned into two facilities, it limits the ability of drivers to change lanes and fill gaps 

that develop in the traffic stream. Separating the 

roadways may also require barriers or pavement 

markings that take up space that could be otherwise 

used for shoulders or travel lanes. As a result, the 

combined capacity of the two separated facilities 

will be lower than the overall capacity that could be 

realized without the partitioning.

Providing free-flow conditions on the express 

lanes also requires tolls set sufficiently high to limit 

the number of vehicles that might want to switch 

from the free lanes. As a result, traffic and congestion levels may be quite high on the general-purpose lanes. Because delay functions are quite “nonlinear” in the sense that each additional vehicle on 

a congested roadway causes more delay than the 

previous one, adding more vehicles to the generalpurpose lanes causes overall user costs on the combined facility to be higher than they would be if 

traffic were more evenly allocated.

These capacity and delay-related drawbacks to 

providing multiple classes of service on freeways 

make it difficult to make general statements as to 

whether providing express-lane services will enhance or detract from overall economic welfare. 

Under some circumstances (particularly where 

there is significant variation in the value of time for 

different users), the gains from product differentiation may outweigh the increased congestion costs 

on the general-purpose lanes, whereas in other cases the latter effect may dominate.
Ec onomi c s: Pri c ing, Deman d , an d Ec onomi c E ffi c ien c y | 19

Empirical Estimates of Congestion Tolls

Because congestion pricing is still a relatively new 

approach for managing congestion, especially in the 

United States, and has yet to be implemented comprehensively in its “pure” form, empirical estimates 

of the magnitude of optimal congestion tolls are 

limited. However, the results from two separate 

studies of potential congestion-pricing applications 

have yielded interesting insights into the potential 

of congestion pricing.

An analysis of future highway investment and 

performance that used FHWA’s Highway Economic Requirements System (HERS) examined the potential impacts of implementing efficient pricing on 

all congested roads after 2020. The estimated congestion tolls averaged 34 cents per vehicle mile (in 

2006 dollars) on roads where it was “implemented” 

in the analysis, which were predominantly located 

in major urbanized areas. Over 50 percent of the 

vehicle miles subject to congestion pricing in the 

scenario had estimated toll rates below 25 cents per 

mile, whereas approximately 7 percent had toll 

rates over $1.00 per mile (see Exhibit 8).

By using a grant from the Value Pricing Pilot 

Program, the Puget Sound Regional Council in 

Seattle recently completed a study(1) of the impact 

that congestion-based tolling could have on travel 

behavior. The project involved 275 households 

whose vehicles were equipped with GPS-based 

tolling meters. Participants were subjected to a permile toll schedule on major arterials in the region 

that varied significantly based on the time of day 

(with charges up to 50 cents per mile in the weekday afternoon peak) and the location of travel (with 

higher rates applied on freeways). The study found 

that households made several modifications to their 

travel patterns in response to the congestion tolls, 

including reductions in the number and length of 

trips, choosing alternate routes and travel times, 

and switching to transit. On the basis of the results 

of the pilot program, the study estimated that a 

full-scale implementation of congestion pricing on 

the area’s road network could yield over $28 billion 

in net benefits.

35.0%

30.0%

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%

Exhibit 8. Distribution of toll rates per VMT (2020–2025).

VMT = vehicle miles traveled.

$0.00–

$0.10

$0.10–

$0.25

Percent of Tolled VMT

$0.25–

$0.50

$0.50–

$1.00

$1.00– >$2.00

$2.00

Source: Report of the National Surface Transportation Revenue and Policy 

Study Commission, Volume III, Paper 6C-04, January 2008.

Ec ono m i c s: Pri c ing, De ma n d , a n d Ec ono m i c Eff i c ien c y | 21

For more information, contact: 

Darren Timothy

Office of Innovative Program Delivery, HIN

Federal Highway Administration

U.S. Department of Transportation

1200 New Jersey Avenue, S.E.

Washington, DC 20590

Tel: 202-366- 4051

E-mail: darren.timothy@dot.gov

Reference

1. Puget Sound Regional Council. (2008, April). Traffic choices study: 

Summary report. Retrieved on January 1, 2009, from http://psrc.org/

projects/trafficchoices/summaryreport.pdf
ii | C o n g e s t i o n P r i c i n g

Office of Transportation Management

Federal Highway Administration

U.S. Department of Transportation

1200 New Jersey Avenue, S.E.

Washington, DC 20590

Tel: 202-366-6726

www.ops.fhwa.dot.gov/siteindex.htm

November 2008

FHWA-HOP-08-041