Congestion Options: A Market Solution to Congestion Externalities

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AbstractCongestion Options, A Market Based Solution to Congestion ExternalitiesTerry L. Friesz and Tao YaoPennsylvania State UniversityIn this project we study the idea of creating congestion rights that may be bought and sold, much as air pollution rights can now be traded. By creating a market for congestion, it is hoped that congestion can be tamed and mitigated. The main focus of our work is congestion securities, especially congestion options ? which are contracts that allow one to buy or sell the opportunity to initiate congestion-inducing movement or flow over a transport, data or voice network. Although passenger automobile traffic on metropolitan road networks is the principal focus of this research, we will also explore the impact of congestion options on urban logistics and telecommunications. Our principal tool in the study of congestion options will be computer-based models of option pricing informed by vehicular traffic and message flows in a dense urban setting, such as New York, Boston or Washington. These models will be instructed to consider circumstances like those a city dweller, commuter or tourist might experience in taking a taxi, driving to a dental appointment, sending a package or exchanging information via a PDA. In this way we will gather synthetic data describing the impacts of congestion options and markets for congestion rights. That data will be analyzed to determine the financial, economic and social implications of congestion options.This research will provide the infrastructure engineering community with case studies, instructional aids and software useful for teaching undergraduate and graduate students how to construct and analyze markets for congestion rights. It will also provide material for informing the general public about the potential role of congestion options and congestion markets in alleviating one of the great social problems of the modern age, namely congestion. If successful, this research may establish congestion securities as a new field of specialization within financial engineering that has the potential to literally change how people commute, telecommute and employ freight services in urban environments with substantial congestion. Additionally, our research will illuminate how congestion options may be used to promote social justice for the poor when congestion pushes their jobs farther and farther from their places of residence and makes commuting by public transit prohibitively time consuming. In particular, we will show how congestion options may be written assuring payments to such groups when congestion creates an untenable commuting environment for them.