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Economists will tell you that the way to utilize resources efficiently is to get the prices right. If something is free, then it will be used down to the point where the last user gets just the most trivial amount of benefit from it, but the cost that last user imposes may be much more than trivial. If the resource is priced right, then the last user gets just as much benefit as the cost he or she imposes. In the jargon of economics, there is an efficient adjustment at the margin.

One recent trend has been a growing use of tolls. More roads are being tolled and in many cases the toll is adjusted by time of day. That makes sense in terms of efficient use of the road, for the more crowded the road is, the more an additional car slows down the other cars and thus the higher the cost that last car imposes. It also maximizes toll collections by raising the charge during the morning and evening peaks, when demand is greatest.

One new wrinkle in the matter of toll roads is that the building and operation of toll roads is attracting private capital. One notable example in the east is the Dulles Toll Road that connects the Washington, DC Beltway (I-495) with Dulles Airport. People value their time, sometimes quite highly, and investors are realizing that there is money to be made in selling people time savings. From the municipal or state perspective, the privately built toll road achieves the public goal of improving traffic flow without the expenditure of public funds and the creation of public debt.

Private capital is being attracted not only to the construction of toll roads, but also to the operation of existing roads on a toll basis. In a case that received widespread notice, the city of Chicago sold a 99-year lease for the toll rights on the Chicago Skyway to a group of investors for $1.8 billion. The city took the position that the money would be used for investments that would have a long-term payoff for the city and that the sale was thus well advised. The skeptic could argue that politicians, who stand for election on a two- or four-year cycle, have a short time horizon and that in the long term, selling that significant revenue source will turn out to be a mistake.

The trend toward the privately built or operated toll road was given a considerable boost by federal legislation, the Safe, Accountable, Flexible,

Efficient Transportation Equity Act: A Legacy for Users (SAFETY-LU). The law permits investors to build toll roads using tax-exempt revenue bonds. The term revenue bond means a bond whose interest and principal are paid out of the revenues earned by the project built with the bond. The term tax-exempt means that the buyers of the bonds do not have to pay income tax on the interest payments that they receive from the bonds. This, in turn, means that the bonds can be issued at lower interest rates, thus reducing the debt service costs of the investors in the toll road. That constitutes an implicit federal subsidy (a tax expenditure as discussed in Chapter 11) in the building of the road. On a billion-dollar road the cumulative interest cost savings from the tax-exemption feature might come to several hundred million dollars.

Another feature of the law expands the types of roads that states can subject to tolls. In a number of states, major roads in metropolitan areas have high-occupancy vehicle (HOV) lanes, open only to vehicles with at least two or three occupants during the morning and evening rush. SAFETY-LU permits states to convert these HOV lanes into high-occupancy toll (HOT) lanes.19 Vehicles with the required number of passengers will still be able to use the lane free of charge, but the lane will also be open to singleoccupant vehicles if they pay a toll. The most high-tech HOT lane is one that uses dynamic tolling. The charge for using the lane can vary as often as every six minutes and the rate is posted on electronically operated signs along the roadway so that motorists can adjust their choice of HOT lane or untolled lanes accordingly. A transponder in the automobile is tripped electronically when the car is in the HOT lane and the motorist is billed periodically. The system brings in revenue and puts any excess capacity in the HOT lanes to use, thus reducing congestion on the remainder of the roadway. The dynamic tolling feature permits optimizing traffic flow since, as the number of vehicles in the HOT lane rises sufficiently to cause significant congestion, the fares rise to discourage use of the lane. It was feared that these so-called Lexus Lanes would be used only by upper-income drivers, but a multiyear experiment on HOT lanes on San Diego's I-15 has not shown this to be the case. HOT lanes are now in use in California, on I-10 in Houston, in Denver, and are now in the planning stage in the Washington, DC area. In the case of the DC area, HOT lanes planners are now thinking in terms of charges that may top $1 per mile at peak times, a clear indication that they believe motorists will pay substantially to ease the pain of their daily commute.

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