The Bay Bridge Blunder

The Bay Bridge Blunder

Stephen Shmanske

Stephen Shmanske is professor of economics at California State University, Hayward.

Pricing goods and services offered by the public sector is problematic at best. A case in point is congestion pricing of tolls charged to commuters for the use of bridges, tunnels, turnpikes, and other travel routes that become bottlenecks during rush hours.

The subject of this article is the San Francisco/Oakland Bay Bridge on which 30,000 to 35,000 westbound vehicles travel each weekday from 6:00 am to 10:00 am. Traffic merges from several freeways and surface streets through a toll plaza and metering lights into five lanes. The toll for automobiles is $1 in the westbound direction; high occupancy vehicles with three or more occupants are not charged a toll and are allowed to bypass the metering lights. Congestion at the toll plaza occurs nearly every morning, causing peak delays averaging twenty minutes. When these delays and the delays caused by the return commute in the evening are evaluated at prevailing wages, the congestion cost amounts to over $20 million per year. Air pollution caused by idling engines adds even more to the cost of the congested facility.

For decades economists have analyzed the problems of traffic congestion and the economics of rationing travel routes by making commuters wait to use them. And economists have offered a simple alternative to waiting: raise the price for using the routes.

Indeed, the lines that develop at the metering lights are manifestations of excess demand at the current price. The optimal market response to excess demand is to raise prices. If the excess demand exists for only part of the day, then the price should be raised for only that part. The private sector naturally implements such pricing as evidenced by the differential, time-of-day pricing schemes that have evolved in markets for diverse products including movies, telephones, restaurants, and air travel. The public-sector agencies operating the Bay Bridge, however, have only recently caught on to the efficacy of time-of-day pricing and have been unable to implement it.

This article is based on agenda items, meeting memoranda, and the personal experiences of the author who attended several of the open meetings on congestion pricing that were held approximately monthly from March 1994 through February 1995 at the Metropolitan Transportation Commission (MTC) headquarters in Oakland. The article examines the process that the public sector went through during its ultimately unsuccessful attempt to implement congestion-relieving pricing on the Bay Bridge. The story recounted here does not show the political process in a favorable light. The political process took congestion pricing—an idea favored by groups across the political spectrum from the Reason Foundation on the right to the Environmental Defense Fund on the left—and turned it into a proposal that could not even find a sponsor in the state legislature.

Moreover, this analysis highlights policymakers’ lack of understanding of market solutions to transportation issues. The only true market solution, of course, is privatization. The "market-based" solutions of planners invariably attempt to reverse the causality of the market process. The true market process starts with human behavior and results in coordinating prices; "market-based" solutions, imposed by planners, set prices in order to influence the underlying behavior of individuals.

Congestion Pricing

Pricing for a facility like the Bay Bridge affects two kinds of resource allocation: the allocation of resources to bridges; and the allocation of the bridge capacity to commuters. If a bridge is not crowded, the only economically relevant pricing question is how to pay for the bridge itself—this is the issue of allocating resources to the bridge If this were the only issue, then once the construction bonds were retired and an endowment established for ongoing maintenance, there would be no reason to charge a toll. Occasionally some still invoke this as an argument for the complete elimination of tolls. Indeed, judging from letters to the editor in various local publications, many people believe access to the bridge should be free—one should not have to pay for something for which one has already paid.

It is not a stretch to say this is a "Soviet-style" transportation system in which the scarce economic good is underproduced and rationed by inefficient queuing

Once a bridge becomes crowded, however, pricing is used to efficiently meter access to it—this is the issue of allocating the scarce capacity of the bridge to users. This scarcity cannot be ignored simply by not charging a fee. If space on the bridge is limited, it will simply be rationed in another, less-efficient manner like long queues. If population and demand continue to grow, the metering price would increase and any accompanying profits would accrue to the owners. The high price and profits are the market’s signals that it is time to expand capacity. In this way, the price that allocates the scarce capacity is the same price that attracts resources to bridge construction in the first place.

This is only true, however, if the prices are set in free and open markets. If the prices are set administratively, they do not necessarily bear any resemblance to cost or value. No information about the desirability of another bridge or even of the current bridge can be ascertained from such pricing.

The beauty of the free-market price system is that it simultaneously (1) allocates scarce space on the bridge; (2) makes commuters internalize the costs they impose on others; (3) makes commuters economize their use of scarce transportation infrastructure; (4) makes travelers choose between competing modes and times of travel; (5) signals the desirability of increases in capacity; (6) creates revenue to pay for resources used in the bridge’s construction, maintenance, and expansion; and (7) gives entrepreneurs incentive to discover new ways to increase quality and reduce costs.

It would be nice if an administratively set pricing scheme could achieve these results, but there is no mechanism to guide administrators. At best, planners focus on one or two of the above issues in an attempt to modify behavior. At worst, as public choice theory has pointed out, an administration’s incentives are perverse in nature.

The Bay Bridge case provides a textbook example of misguided incentives. The status-quo price on the Bay Bridge was set primarily to recoup construction and maintenance costs and secondarily to cross-subsidize other loss-making transit modes. Planners considered neither the allocation of scarce space nor the market’s negative assessment of mass transit projects. This type of pricing has (1) understated the value of the bridge; (2) preempted private market expansion of commuter alternatives; (3) led to increased congestion and air pollution; (4) distorted the travel-mode choices of commuters; and (5) wasted resources in rent seeking through cross-subsidization.

Rent seeking occurs because the bridge earns revenues in excess of the costs, or "rents," that can be spent in other areas. Lobbyists representing a variety of interests will compete for the privilege of spending the rents, using resources in the process. It is not a stretch to say this is a "Soviet-style" transportation system in which the scarce economic good is underproduced and rationed by inefficient queuing; insider bureaucrats vie politically to protect and expand their fiefdoms; and citizens are supposed to be mollified by the subsidized provision of government-run mass transit for which riders are unwilling to pay even operating costs.

Congestion pricing is potentially a step in the right direction. Toll-plaza queues offer clear evidence that the current price is too low. Efficiency should improve, therefore, with an increase in price. This certainly is part of the conventional wisdom. Conventional wisdom also holds that if raising the price to eliminate a queue is good, then the fact that extra revenue will be earned by the bridge is a bonus.

Recent public choice analysis by Dwight R. Lee of the University of Georgia at Athens and Paul W. Wilson of the University of Texas, Austin, however, challenges this assumption. Lee and Wilson point out that there is a fundamental difference between revenue earned by a private owner and revenue earned by a public agency. Privately earned revenue definitely makes the owner better-off. Indeed congestion pricing by a private bridge owner would turn "waiting-in-line costs" into revenue with a pure gain to the owner. Publicly earned revenue, however, suffers from the "tragedy of the commons." Clear title to the surplus public revenue does not exist a priori, so rent seekers, using scarce resources, will compete to obtain power to use the extra revenue. In the end the extra revenue will be completely frittered away in rent-seeking attempts to capture them.

Efforts to Initiate a Toll Hike

The process of changing the toll structure on the Bay Bridge is very different from what would be required of a private owner, even a regulated one. By law the California Department of Transportation (Caltrans) operates the bridge and with the MTC controls expenditure of the toll revenues. Also by law the state legislature must pass a statute that must be signed into law by the governor to approve any price changes. This is a cumbersome process, but one can see how it is wholly necessary in light of the taxpayers’ reluctance to give both taxing and spending authority to Caltrans, the MTC, or any other administrative agency not directly accountable to the voters.

In the fall of 1990, Bay Area legislators were approached with a proposal for higher peak-period tolls of $5, but they could not find a sponsor. The extra revenue would have subsidized transit, paratransit, and ride sharing improvements. Several legislators stated that they would not sponsor the proposal because of the hardship it would supposedly create for lower-income commuters. This is a disingenuous reason given that congestion pricing is clearly a more progressive tax than either the regressive sales or gasoline taxes to which the legislature acquiesced. Congestion pricing would mainly fall on those with above average incomes. Census figures for 1990 indicate that the average income of the relevant commuters, about $68,000, is more than 50 percent higher than the average household income in the areas from which the commuters come.

One is left with the suspicion that the lack of sponsorship was due to the wasteful proposals for spending the money, or to the fact that the legislators themselves would be out of the loop in controlling the expenditures.

A separate effort to raise tolls to $2 across the board was seen as the tax-and-spend scheme that it was. An across-the-board increase of a modest nature would minimize the "hardship" on commuters but do little to combat congestion. Instead, it would simply raise revenue for the MTC or Caltrans.

Senate bill 210, another effort to increase the toll on the Bay Bridge by 100 percent (as well as the San Mateo-Hayward and Dumbarton Bridges), passed the assembly and senate in 1992 but died in conference committee because of conflicts over the distribution of revenue.

Politicized Pricing

The MTC and Caltrans needed a politically acceptable way to raise tolls. To this end they jointly petitioned for, and received, a grant of more than $1 million from the Federal Highway Administration (FHWA) to study congestion pricing by putting together a "congestion pricing demonstration project." By funding such projects, the FHWA hoped to show how congestion pricing could be a win-win policy that would ease congestion and decrease pollution. Further, the federal government offered a one-time grant of $23.5 million to entice the development of a congestion pricing program. The MTC and Caltrans formed the Bay Area Congestion Pricing Task Force to pursue and administer the original grant.

The task force included members from the MTC, Caltrans, Bay Area Air Quality Management District (BAAQMD), Bay Area Council (BAC), Bay Area Economic Forum formed by the Association of Bay Area Governments (ABAG), Environmental Defense Fund (EDF), Santa Clara County Manufacturing Group, Sierra Club, and Union of Concerned Scientists. With the possible exception of the Santa Clara County Manufacturing Group, which seems out of place in this listing both philosophically and geographically, there were no defenders of free markets. Notable omissions from the task force included academics, automobile associations, taxpayer advocates, and labor unions.

The job of the task force was not primarily the study of the technical aspects of congestion pricing in the Bay Bridge setting. In fact there was very little to study in this regard since models and estimates of the possible effects of congestion pricing already existed. Estimates based on research by Greig Harvey of the MTC already indicated that a $4 toll would eliminate congestion during the morning commute, and a $3 toll would decrease quantity demanded by about 7 percent and cut waiting times nearly 50 percent. There was little more that could be done to improve the precision of these point estimates or to provide assurance that all the underlying assumptions were correct. Moreover, there was already a consensus on the ballpark figure of $3 to $4 for the peak-period toll. There was no way to prove that congestion pricing would work short of trying it—a point conceded by Steve Heminger of the MTC. Furthermore, if Harvey’s predictions turned out to be wildly inaccurate, the toll could be changed to rectify the situation. In any case no one in government, on the task force, or at the MTC could be held accountable for costs incurred based on incorrect predictions. It simply was not necessary to spend $1 million studying congestion pricing.

Instead, the task force attempted to find out how citizens felt about congestion pricing and how they wanted to spend the roughly $22 million from surplus toll revenues and the $23.5 million from federal grants. Armed with such input, the MTC and Caltrans would have a better chance of getting a proposal through the legislature. To this end the task force held meetings, interviewed people in focus groups, and requested proposals for expenditures on new transit alternatives from transit agencies.

Equity, Profit, Power

Two issues sidetracked the task force. The first concern was the effect of congestion pricing on the poor, which became known as the equity issue. The equity issue dominated discussions at several meetings, notwithstanding the facts that only a small percentage of the Bay Bridge drivers

could be classified as poor; that the poor have no greater moral right to pollute or congest than middle- and upper-income groups; and, that the MTC is supposed to be involved with transportation issues, not income redistribution plans. Instead of responding to the facts—that prices should reflect costs, and that poor people have problems not because prices are high but rather because their incomes are low—the task force attempted to accommodate the desire for price breaks for the poor. This was a mistake. Lower-income individuals have problems affording not only transportation, but also housing, food, health care, entertainment, and other goods. The solution is not to artificially lower the prices of these goods, but rather to undertake policies to raise income. Doing away with artificial price intervention; removing workplace regulations that impede employment; and lowering social security taxes, income taxes, and sales taxes would be good places to start. The task force placed itself in the untenable position of attempting to change travel behavior by making commuters bear the full expense of their actions without actually raising prices.

The result of the equity debate was the inclusion of an income-based rebate or reduced toll fashioned along the lines of the "lifeline rates" used in pricing some public utilities. The rebate would cost approximately $1 million. To some, it seemed the task force was engaging in social engineering, and this was a major obstacle when it came to garnering support from Republicans in the state legislature. To others, the nebulous promise to provide relief left nagging questions over whether groups such as single mothers with children should qualify for the lower toll. Indeed, the editorial page of the December 13, 1994 Oakland Tribune highlighted in large print, "You’ll get across the bridge eight minutes sooner but pay $500 a year for the privilege. Is it worth it?" For all the attention paid to "equity," editorial writers still thought the price was too high.

While the equity issue placed the proposal on shaky ground, the second issue—how to spend the $23.5 million one-time grant and the $22 million in recurring revenues—doomed it. Although the task force went through the motions of asking for public input in open meetings and focus groups, decisions were made before the process had begun. Indeed the original proposal to the FHWA specified that any additional toll revenues would subsidize other competing transit modes; it simply was a matter of which ones. A revenue neutral proposal was never even on the table.

The "Draft Summary of the March Focus Group Wave" prepared by J. D. Franz Research describes the focus group charade. The focus groups were asked to allocate a fixed budget among a list of spending alternatives that included more Bay Area Rapid Transit (Bart) trains; more Alameda County Transit (AC) express buses; more San Francisco Muni service; more ferries; more carpool assistance; decreased fares; more bicycle racks; and even, more child-care centers. Rebating the money to the bridge owners or the taxpayers was not an option, nor was lowering or eliminating the tolls at nonpeak periods in an attempt to forge a revenue neutral proposal. The participants could allocate a maximum of 12.5 percent of the budget to an open "other" category, and it appears that at least one participant broke both the rules of the exercise and the spirit of cross-subsidization by allocating the whole budget to an extra freeway lane. Meanwhile, an earlier focus group had made it clear that they "did not come to believe that the funds would be properly administered under any management system." The task force pushed ahead with its agenda anyway.

The open meetings held by the task force and its management board were similarly biased. This author’s suggestions for a revenue neutral plan that would separate the congestion pricing issue from the cross-subsidization and equity issues fell on deaf ears. Mine was a vox clamantis in deserto. Meeting attendees included representatives of the Sierra Club, Bart, the MTC, Rides, BAAQMD, Caltrans, FHWA, Muni, EDF, BAC, San Francisco County Transportation Authority, Urban Habitat Program, Earth Island Institute, Federal Transit Administration, SamTrans, San Mateo Labor Council, Amalgamated Transit Union, Regional Alliance for Transit, East Bay Bicycle Coalition, Port of Oakland, AC Transit, ABAG, Alameda/Oakland Ferry, Contra Costa County Transit Authority, Air Transit Union, and the cities of Alameda, Berkeley, and Vallejo. All these groups had in common an a priori hostility toward automobile commuting and a desire to see more subsidization of mass transit and other alternatives to the automobile. They were the rentseekers who stood to gain from the MTC’s dispersion of toll revenues and, in that sense, they were the direct clientele of the MTC. It was no surprise that these groups went along with the MTC’s cross-subsidization plans. In fact, they bombarded the task force with support for congestion pricing and competed with each other to obtain their share of the subsidy pie.

The task force took all the requests for funding and prioritized them based on ad hoc and incompletely specified parameters. The management board employed five criteria, but there was no objective way of ranking or scoring them. For example, one criterion was: "Is the new service user-friendly and does it improve service quality?" How this criterion (which is actually two criteria) was measured, or how it fit together with the other criteria could not be explained. The final list of proposed projects to fund, however, looks suspiciously like the money was spread around to each of the cities, transit districts, and transit programs to gain their support for the proposal. Additionally, almost $1 million per year was slated for sharing between Caltrans, the MTC, and BAAQMD, and for administration, monitoring, and public information. The task force even proposed a line item for Caltrans to add two tow trucks for the bridge even though fewer would be needed since congestion pricing would lower total bridge volume.

The Final Proposal

The task force’s final proposal, which was accepted by the MTC and Caltrans, was to raise the westbound toll to $3 during the morning and afternoon commutes. The task force estimated that this would shave about eight minutes off the twenty-minute delay and raise about $22 million extra per year. The funds were to be divided among various public agencies overseeing alternative transit modes including Bart, AC Transit, the cities of Alameda and Berkeley, the Contra Costa County Transit Authority, Muni, SamTrans, Vallejo Transit, Regional Transit Coordination Council, Caltrans, the MTC, and BAAQMD. Some of the funds were to go toward a discount for eligible lower-income commuters. The toll increase was scheduled for 1996.

In addition, the MTC was to maintain a hold on the purse strings. The agency would be authorized to cutoff funding for projects that it deemed unworthy or ineffective. On the one hand, such oversight would have been necessary to prevent the extra toll revenues from becoming "free money" for the various transit providers. On the other hand, it simply solidified the MTC’s power base and made local transit authorities kowtow to their commands. Ultimately, it is not surprising that the MTC authored a bill that created a source of revenue that it would be empowered to spend.

The MTC proposal was rejected flatly by every senate and assembly member approached to sponsor the bill. Given the reinvigorated antitax climate in Sacramento and the Republican majority in the legislature, the proposal—with its spending links to bureaucratically controlled, loss-making mass transit systems—was no longer supportable. When this idea was touted as congestion pricing, it had supporters; but, when it became a cross-subsidization and redistribution issue, it lost the support of free-market proponents. The early praise of congestion pricing by those who favored its market-based aspects turned to opposition when it became clear that there was more extra-market intervention and subsidizing than adherence to market principles.

The state senate transportation committee chair Quentin Kopp recognized the fiscally profligate underpinnings of the proposed bill. "It’s nothing but a tax increase," he said. "It will never pass the senate. It will never pass the assembly, and even if it did, [Governor] Wilson would never sign it. I don’t know why they keep flagellating themselves." Presumably "they" refers to the MTC, which has a history of proposing toll increases in such a way as to administer the money itself. Perhaps the MTC would do better if it handed the money over to the legislature to spend. Public choice theory indicates that they could get a sponsor for such a bill. Whether such a bill would help the citizens, taxpayers, or commuters is doubtful.

All for Naught

The MTC and Caltrans took an economically viable idea and spent over $1 million gathering information and informing the public. They loaded down the idea with cross-subsidization and income-redistribution schemes. They put forth a tax-and-spend proposal that only cut congestion 40 percent, but created $22 million per year in discretionary funds for themselves. During the process, they lost the support of those who were originally attracted to the idea’s market-based aspects. Finally, they were rejected flatly in Sacramento. This political, public choice process was time-consuming, expensive, and wasteful. Most important, it did not work—congestion pricing will not be tried.

Judging from the experience of the congestion pricing failure, it will be a long time before Bay Area residents have an economically rational transportation system. Reformers are faced with a basic public choice problem and an underlying problem with the transportation planner’s mindset. The basic public choice problem is that those who benefit from having an economically rational transportation system are the taxpayers and commuters who are left out of transportation policy planning. Simply put—no one in the state legislature, Caltrans, or the MTC would gain from revenue neutral congestion pricing or from other pricing innovations, like price-discriminating tolls, even if such policies would benefit the public. The MTC seems only to back proposals that increase its budget, its power, or its ability to intervene in subsidizing mass transit.

The underlying problem with the mindset of the planners is underscored in the following example. While the MTC has placed congestion pricing on the back burner, it is now considering a tax-and-spend, cross-subsidization scheme based on a regional fuel tax. According to a January 12, 1995 memorandum by Robert McCleary of the Contra Costa Transit Authority, such a "revenue source should be dedicated to a regional trust fund administered by MTC." Among other things, the money could be spent to "meet transit capital and operating shortfalls" and "to improve the operational efficiency of the existing roadway system without a physical expansion of capacity." In other words, the MTC plans to tax motorists and subsidize mass transit.

The transportation planning bureaucracy considers any program that uses a price to be a "market-based" program. But the congestion pricing and regional fuel tax ideas are "market-based" only when compared to more onerous command-and-control policies that might be used instead, such as outlawing single occupancy vehicles, enforcing odd-even rationing similar to that used during water and gasoline shortages, or other restrictions on bridge access. The actual congestion pricing proposal was not really market-based; compared to a true market system, it was heavily interventionist. Regional fuel taxes would be worse. Whereas congestion pricing (if not linked to subsidies) is economically defensible in light of the current system of rationing by queuing, fuel taxes do not target congestion per se. The result of fuel taxes would be decreased mobility with heavy congestion remaining (but the MTC would get its money).

The underlying problem with the political planners is they fail to understand that market prices are the result, not the cause, of efficient economic behavior. A free-market price system causes efficiency, but the actual dollar amounts of the prices themselves result from the market process. Invariably when planners invoke "market-based solutions," they are referring to imposing a certain price from above in the hopes of altering economic behavior in some desired way. In the case of the Bay Bridge, this means increasing the toll during commute hours to get commuters out of their cars. But the market approach does not presuppose that it is desirable to "get commuters out of their cars." The market approach would raise the tolls and internalize the congestion cost, letting the chips fall where they may. The market approach also recognizes that competition, innovation, entrepreneurship on the part of providers, and economizing behavior on the part of commuters lead to an equilibrium with desirable properties. The planning approach attempts to spell out everything in advance—to have all the transportation alternatives in place before establishing congestion pricing. This involves knowing all possible contingencies and all consumer tastes and preferences. Planners presume to know these tastes and preferences and believe the solution involves force-feeding the public more mass transit.

Getting commuters out of their cars seems to be common to all of the interventionist approaches. The transportation planners "know" through some unspecified process that the "solution" involves taxing motorists and subsidizing mass transit. Planners purport to know this too, even though every piece of economic information indicates otherwise. That commuters value their cars and highways is obvious. They clearly are willing to pay much more than the cost of maintenance and construction. Indeed, gasoline taxes, tolls, and license and registration fees pay for the costs of highways with money left over to subsidize transit. There is even evidence that the gasoline tax internalizes the pollution costs attributable to drivers.

That people are unwilling to pay for mass transit is also obvious. Nowhere do fares cover costs. The only way to get people to take mass transit is to reduce prices, shifting most of the costs onto third parties. Indeed, the true externality problem in transit is caused by riders of public transportation who impose costs on the community—not motorists who more than pay their own way.

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