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In city centres, land is more expensive than in suburban or rural areas, as land is scarce. Consequentially, housing and parking in cities cost more. However, the same is not true for using the road (such as driving). Indeed, if two people are driving into a city (in one car) to run an errand, it will usually be cheaper for one person to drive around in circles while the other runs the errand, than it is to park the car and run the errand together, even in cities with a congestion charge.

What is the origin of this discrepancy in pricing? Is it merely because we haven't implemented road pricing for technical and political reasons, or are there economic reasons that there is no pricing on roads?

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  • $\begingroup$ I think that you'll find that in areas that have implemented road tolling, the tolls are higher in urban/more dense areas. $\endgroup$ Jan 14, 2016 at 23:55

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Land values tend to increase with population density, because it is typically possible to put the land to more productive use. A store operating in a dense urban core will have more potential customers, more access to public infrastructure (e.g. electricity, communications networks, those roads you mention, public transportation that makes it easier for more customers to visit the store, etc.) and any number of other external factors that contribute to such land being more desirable. Since more high-wage jobs also tend to be available in such places, there is more access to desirable public and private places (e.g. museums, theaters, upscale businesses) people are also generally willing to pay more to live in such places.

Roads, on the other hand, are generally built and paid for by the government. The government almost never collects the full use value for the things they make, and so roads are drastically underpriced, in terms of the charge consumers must pay (if there is any such use fee at all.)

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It is largely a political rather than economic matter.

Like carbon taxes, congestion pricing is supported by most economists, but not by most of the public. To the public, congestion pricing is an explicit, highly visible cost they have to bear, while the corresponding benefits are nebulous.

Where there is sufficient political will, congestion pricing has been introduced. For example, Singapore's technocratic and authoritarian government has successfully run congestion pricing since the 1970s. Some European cities (notably London) have also now run congestion pricing for quite some years.

Even in the US, there is now more traction for the idea. New York City's congestion pricing was just passed (in 2019) and will come into effect in 2021.

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We have politically decided that roads are free, but this is not the ideal economically.

Economically, both parking and road use should be priced and they should in the long run also be changed in supply. So should the height of buildings.

As population increase, land value increase. This means that how we should optimally use this land changes. Buildings have big transaction costs (because they have to be torn down to be replaced with taller buildings that can earn more rent to cover the land rent).

Same goes for roads and parking, but we currently rely on inefficient methods to regulate this.

Parking should be in the short run priced competitively and in the long run, the quantity of parking should be changed to have a revenue of the parking equal to the land rent. Parking spots can be sold to food trucks, cafe seating or public services like a small library, park seating or in the ultra long run, the side walk would be changed and new buildings would take up that space.

The same goes for the roads. We should technically charge for individual road use to cover the cost of the land rent for these roads. In a perfect competition costs would equal the price, so that means the price of using the road should be shared by all road users through kilometer charging - the more use it, the lower the price (this would be counteracted by a congestion charge that would charge to keep congestion down). If the revenue is lower than the land value, some of the road space can be sold for other purposes like more sidewalks, bike lanes, public or private space. Some roads can be closed and built on. Having this combination of road use charge that gets more expensive with less use and congestion charges that want to minimize time waste would create a city that has roads where it needs, in the optimal width, with acceptable congestion and with no underutilisation of roads that would then have been used for better purposes.

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