The Marginal Cost of Traffic Congestion and Road Pricing: Evidence from a Natural Experiment in Beijing

Severe traffic congestion is ubiquitous in large urban centers, especially those in middle-income countries and emerging markets. Using road pricing as the first-best policy to address congestion has been drawing increased attention from policy makers. This paper provides the first causal estimate of the relationship between traffic density and speed, the key component in estimating the marginal external cost of traffic congestion (MECC) and optimal congestion charges, using real-time traffic data from over 1500 monitoring stations in Beijing. The identification of the causal effect relies on plausibly exogenous variation in traffic density induced by Beijing's driving restriction policy. Our analysis shows that the MECC during rush hours in the city center is 1.98 Yuan (or $0.30) per vehicle-km, more than 60 percent higher than the estimate obtained from OLS regressions and larger than the estimates from transportation engineering models. Optimal congestion charges range from 5 to 39 cents per km depending on time and location. Road pricing would increase traffic speed by 11 percent within the city center and lead to an annual welfare gain of 1.5 billion Yuan from reduced congestion and revenue of 10.5 billion Yuan.