congestion may exceed the targeted level during the driving days and direct demand
management through pricing, such as Malaysia's earmarked tax or road toll collection,
leaves the total road usage unaffected.
A tax policy fixes the price of the usage and leaves the quantity to be determined by the
market. Since road users pay a fixed price, the external cost is underrepresented by the
price, especially during peak hours when everyone wants to reach a destination at the
same time. Another form of direct demand management is gasoline or carbon tax. For the
tax to reflect the true individual marginal cost is not possible and it has to be done
through trial and error (Wadud (2010)). The mechanism has been proven to be ineffective
in reducing car usage because road users do not base their consumption on fuel tax saving
(Graham and Glaister (2002)), its effectiveness is diminished when the price of fuel
decreases (Raux (2004)) and the price elasticity of fuel demand is inelastic in the short to
medium run (Raux and Marlot (2005)).
The policies mentioned above do not provide direct incentive to road users to reduce road
consumption. A decentralized market by means of a personal tradable permit system
could, however, insure quantitative achievement of congestion level at minimum cost.
The system is effective particularly when one does not possess full information on
individual cost of not using the road (Raux (2008)) (such cost refers to the value drivers
place on using the road; cost and value are used interchangeably in the paper). The
regulator can decide on a road usage level and allow the market to trade on the permit
price. Since the price of the permit depends on the number of permits available in the
market and the overall demand, any road users whose cost of not using the road is more
than the permit price would buy it but would sell the permit if their cost of not using the
road was lower than the permit price. Therefore, this possibility of reselling permits in the
market provides incentive for road users to adjust driving behavior. Permits would be
sold by those whose value from using the road is very low to others who place a high
value on using the road.