What Americans mean by a 'McMansion'. Click for slideshow.

I’m not aware of anyone who disagrees seriously with the contention that car travel is underpriced. The consequence of this inefficiency is we drive more than we otherwise would and more than is socially optimal.

The idea of road pricing is that drivers should pay the real costs they impose on others through traffic congestion, pollution, noise and carbon emissions.

There’s also another force at play here which exacerbates the problem of excessive driving. There are some costs that drivers actually do pay – standing costs like depreciation, insurance and registration – that are “disconnected” from the perceived cost of travel.

A person deciding whether or not to drive somewhere will tend to take account of the cost of their time plus petrol, but they usually don’t perceive the standing costs. This under-estimation promotes more driving.

There have been various experiments with road pricing, such as the well known Singapore and London central city cordons (giving rise to amusing interpretations such as this one by Boris Johnson). However this is a technologically outdated approach – transponders and/or GIS technology mean it is now feasible to charge motorists in relation both to distance and traffic conditions i.e by location and time.

A driver who paid a price for a litre of petrol that included both external and standing costs would have a strong incentive to drive less. A gauge on the dash showing the total cost ticking over with every kilometre would provide an even more powerful nudge to think long and hard about the wisdom of driving.

Road pricing can be thought of in simple terms as a two-part per kilometre tariff that recovers both external costs and those standing costs that can be disaggregated. One part is a charge reflecting the general cost of using the roads. The other is a variable price reflecting specific costs like congestion in peak periods.

There are potentially some important benefits for the wider community from road pricing:

First, by making car travel more expensive, it should reduce the number and length of trips. Drivers will seek efficiencies by chaining trips and cutting down on long journeys. If the price is made a function of the environmental efficiency of the car, it should also encourage drivers to buy greener vehicles.

Second, road pricing increases the value of proximity. It can in theory promote a less sprawled, more compact city form and encourage higher density development around activity centres rather than in dispersed locations.

Indeed, it is doubtful that the objective of a compact city can be fully achieved unless the cost of travel is increased significantly, either by road pricing or by a massive hike in the price of fuel. Since the latter is uncertain, and since drivers have considerable scope to switch to fuel-efficient cars, it seems road pricing will be a more reliable strategy.

Third, road pricing should also make other modes, including public transport, more competitive relative to car travel. In fact, cars are so much more attractive at present than transit for most trips (the CBD is the major exception), it is unlikely public transport will become a major mode unless road pricing is introduced!

Fourth, perhaps the most familiar application of road pricing is the management of traffic congestion in peak periods. It will not increase speeds to the posted limit, but it will keep traffic moving, albeit at a moderate speed. The major benefit is that drivers who are making low value trips will find an alternative, leaving precious peak hour road space for those whose trips are sufficiently important they are prepared to pay a premium.

Most criticism of road pricing focuses on the vertical equity implications. Yet it is little different to the way we charge for public transport, or other services such as water, sewage, electricity and gas.  The more you use, the more you pay. Apart from concessions for those on the lowest incomes, tariffs for water and other ‘essential’ services do not take into account the capacity of the customer to pay.

Further, the affluent do not have a monopoly on “being in a hurry”. Working parents who have to collect an infant from day care by a deadline are likely to appreciate lower traffic congestion. Tradies and delivery drivers might feel they benefit from having a faster peak hour option. A worker whose job range is extended because of faster travel speeds might feel better off if it gives him or her access to a better job.

It is in any event likely that higher income drivers travel longer distances than lower income drivers and hence would pay more.

Travellers will also benefit if the revenue from road pricing is used to fund transport improvements. This is crucial to the political acceptability of road pricing. The size of this funding should not however be over-estimated.

Revenue that was previously collected in standing charges would doubtless be returned to its original purpose, which might be general government income. Further, congestion charging does not necessarily maximise revenue. If it did, the operators of toll roads would have implemented some version of peak period pricing long ago.

It might be argued that a price on carbon would render road pricing unnecessary, however there are two reasons why this seems unlikely. First, a carbon price won’t do much about congestion. Second, even a $40/tonne price on carbon will only increase the price of a litre of petrol by ten cents.

There are still areas of uncertainty related to road pricing. In particular, it is not clear how responsive drivers will be in the long term to rises in the cost of driving.