In situations where demand exceeds supply, a good or service can either be rationed by queuing or rationed by price. Economic theory is clear that it is most efficient to ration by price, as the good or service goes to those with the highest willingness to pay, that is those who place the highest value on the good or service. So we rely on the price mechanism to efficiently match supply and demand for large parts of the economy, but not for all. As Productivity Commission Chair Peter Harris noted in a speech yesterday, we largely do not use the price mechanism in relation to Australia’s $280 billion of road assets (see The case for infrastructure pricing reform: what water can teach roads). This means that, during peak hour, the scarce space on our arterial roads is rationed by queuing, that is via traffic jams.

Peter Harris has previously argued the case for a greater use of road pricing on all roads, not just new ones, given that it is technologically feasible to do so and there would be large efficiency gains, as I have also argued in previous posts on congestion charging (e.g. RACQ should push for demand management options such as congestion pricing). Mr Harris noted with respect to our practice of only allowing charges on new toll roads that:

…charging to use the new, more efficient road while leaving the old roads system as an apparently free good is not necessarily supporting efficient resource allocation.

Road pricing reform would lead to better outcomes in the short-term, through reduced congestion in peak hour, and in the long-term through encouraging the right investments to be made in the roads system. At the moment, new toll roads can find it difficult to compete with the free road network. So road pricing reform would be likely to revive interest in road projects by a private sector that is wary given the recent troubled history of toll road projects (e.g. Clem7 and Airport Link).

While the Prime Minister has previously rejected the Productivity Commission’s ideas on road pricing reform (see this ABC News report), I’m very glad Peter Harris has not been deterred and is re-litigating the case.