At the risk of sounding obvious, pricing is fundamental to the functioning of markets. It determines profitability, it allocates resources, and it influences customer behavior, among other things. Take the example of electricity pricing.

In Ontario, we use something called time-of-use (TOU) pricing. What that means is that electricity rates vary according to the time of the day and the time of the year. In the summer, the expensive peak usage period is the afternoon (because of air conditioning) and in the winter it's the morning and early evening (because of heating and lighting when people are generally not at work).

What this pricing strategy does is incentivize customers to change their consumption behaviours. Instead of doing laundry during a peak period, maybe you set a timer and have it run during a low-peak period. In other words, it helps to flatten the demand curve. This is valuable for utility providers because peak periods are more expensive to supply and they also create the risk of brownouts and blackouts. So you worry about peak demand.

With this in mind, let's now switch and talk about highway congestion. The parallels are almost identical, and yet, most highways are free to use, which means we do absolutely nothing to manage peak demand. Instead, we encourage the equivalent of brownouts where demand greatly exceeds supply, traffic crawls, and roads become practically unusable. Why is that? Why should highways be viewed any differently?

In the case of highways, there are even alternatives such as transit (thought not always, of course). But if you need electricity from a monopolistic utility provider, you're paying whatever rates they charge. As you might expect, the answer is not technical or economic. We know with 100% certainty that pricing congestion will reduce it. The reason we don't do it is political. Free roads are preferred to functioning roads.

Cover photo by Hooman R. on Unsplash

At the risk of sounding obvious, pricing is fundamental to the functioning of markets. It determines profitability, it allocates resources, and it influences customer behavior, among other things. Take the example of electricity pricing.

In Ontario, we use something called time-of-use (TOU) pricing. What that means is that electricity rates vary according to the time of the day and the time of the year. In the summer, the expensive peak usage period is the afternoon (because of air conditioning) and in the winter it's the morning and early evening (because of heating and lighting when people are generally not at work).

What this pricing strategy does is incentivize customers to change their consumption behaviours. Instead of doing laundry during a peak period, maybe you set a timer and have it run during a low-peak period. In other words, it helps to flatten the demand curve. This is valuable for utility providers because peak periods are more expensive to supply and they also create the risk of brownouts and blackouts. So you worry about peak demand.

With this in mind, let's now switch and talk about highway congestion. The parallels are almost identical, and yet, most highways are free to use, which means we do absolutely nothing to manage peak demand. Instead, we encourage the equivalent of brownouts where demand greatly exceeds supply, traffic crawls, and roads become practically unusable. Why is that? Why should highways be viewed any differently?

In the case of highways, there are even alternatives such as transit (thought not always, of course). But if you need electricity from a monopolistic utility provider, you're paying whatever rates they charge. As you might expect, the answer is not technical or economic. We know with 100% certainty that pricing congestion will reduce it. The reason we don't do it is political. Free roads are preferred to functioning roads.

Cover photo by Hooman R. on Unsplash