Archive for the ‘Peak Usage’ Category

Congestion Pricing

August 8, 2007

Definition: Congestion pricing is increasing the price on something during peak usage.

Examples:

  • long-distance calls are more expensive during the day
  • airplane tickets are more expensive during the summer
  • in NYC the tolls on certain bridges and tunnels are increased during rush hour
  • in London people who drive their car into town between 7am and 6:30pm are charged a toll of £5

All of these are examples of price responding to demand: when demand for a resource is high, the price goes up, and when it’s low, the price goes down.

The telephone line, the seat on a plane, the bridge, the tunnel, and the road space are “resources”. They are not unlimited. When demand for a limited resource is high, the persons who are willing to pay the most get the resource.

Individuals weigh the cost of using the resource against its benefit. If the cost is too high, they find alternatives (such as calling during a non-peak time, or taking public transportation).

The goal of congestion pricing is to make the costs obvious to people. The hope is that when people are clearly aware of the costs they will make individual decisions that produce a collectively smart result, i.e. congestion is decreased.

— extracted from The Wisdom of Crowds by James Suroweicki