Individual tradable permit market and traffic congestion: An experimental study

Many applications of the individual tradable permit system in road transport combine it
with other tools or treat congestion as a by-product of the main target. For example, in
Raux and Marlot (2005) fuel consumption is allocated according to the number of
permits given to road users. The permit corresponds to the right to emit CO2 equivalent
to a liter of fuel. The permit can be transacted in the open market and its cost is additional
to the price of fuel. This encourages change to more fuel-efficient and environmentally
friendly vehicles but does not reduce total road usage. The attempt to phase down lead in
gasoline is a classic example of successful application of tradable permits (Hahn and
Hester (1989)). In car ownership, the trading of permits to own a car involves auctions of
certificates of entitlement. The number of permits is determined by annual traffic
condition and road capacity (Koh and Lee (1994)). In controlling road usage, Verhoef et
al. (1997) propose the use of tradable permits of vehicle miles. Under this scheme, each
individual receives a certain number of miles of travel which can be traded in the open
market. The disadvantages of the system, however, are the costly implementation and
monitoring of consumption.

In this paper, we consider a simple double auction market for trading driving rights to
mitigate the problem of over-consumption in road usage directly. Our aim is to
investigate the potential of tradable permit systems in allocating scarce resources. We
conduct this investigation in an experimental set-up.

In controlling road usage, the level of consumption reduction is guaranteed by the
number of permits allocated in the market. In our experiment, the permits are given free
to the drivers. This inefficiency is corrected when drivers can trade the permit in an
auction market. Drivers will not drive (sell permit) as long as the permit price is higher
than the cost of not driving. Drivers will drive (buy permit) when the cost is higher than
the price of the permit. This self-determining of costs helps to allocate the permit
according to the cost or willingness to pay of the drivers. In the main result in section 3,
we observe a significant number of transactions from low cost sellers to high cost buyers.
The system proves to be an effective allocative mechanism in the peak hours when those
with high willingness to pay (those with high costs of not using the road) have to pay a

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