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The U.S. highway system, largely constructed with public funds from the federal road user tax, could be characterized as a public good if it were rarely congested. But like many public goods that are available at little or no charge, its quality has deteriorated with the intensity of use. Today, the nation's road system has turned into a "tragedy of the commons" as road users experience nearly 4 billion hours of annual delay.¹ Of course, even an efficient road system would force motorists to incur some delays, but the current level is regarded by most observers as excessive.

Historically, the public has had a status quo bias against economists' recommendations to use the price mechanism to reduce congestion.² Policymakers therefore have pursued other approaches, such as allocating reserved lanes to vehicles carrying two or more people. But recent evidence indicates that these high-occupancy vehicle (HOV) lanes sometimes carry fewer people than general-purpose lanes, attract many family members who would ride together anyhow, and shift some travelers from vanpools or buses to low-occupancy carpools.³ As a result, HOV lanes are losing favor among state transportation departments.

A recent innovation is to fill the reserve capacity not used by HOVs with solo drivers willing to pay a toll. These so-called high-occupancy toll (HOT) lanes can be found in the Los Angeles, San Diego, Houston, and Minneapolis- St. Paul metropolitan areas, and they are currently under consideration in other cities including Denver, Seattle, San Francisco, and Washington.

HOT lanes appeal to a broad set of motorists who are sufficiently inconvenienced by congestion to pay a sizable toll to travel on less-congested lanes, either daily or as dictated by their schedules. Although the adoption of HOT lanes in some urban areas indicates that the public is no longer opposed to all forms of congestion pricing, HOT lanes are questionable on welfare grounds for two reasons. First, motorists continue to impose high congestion costs on each other because most of the highway is unpriced. Second, the express lanes are still underused because a big price differential exists between the two roadways.⁴ Indeed, simulations show that HOT lanes sometimes lower welfare compared with keeping all lanes in general use, particularly if they are priced high enough to allow motorists to travel at approximately free-flow speeds—a condition that is achieved to promote the service advantages of the lanes among the public.

In short, HOV and HOT policies do not appear to have answered the longstanding call for efficient yet politically viable road pricing policies. In this paper we seek to identify such policies by analyzing the behavior of motorists traveling on California State Route 91 (SR91) in Orange County. These travelers have the option of traveling solo on the general lanes, paying a toll to use the HOT express lanes, or forming a carpool to use the express lanes at a discount. Because travelers are likely to vary in their preferences for speedy and reliable travel, we model the situation accounting for both observed and unobserved preference heterogeneity.⁵ We find that users of SR91 have high average values of travel time and travel-time reliability, and that the distributions of these values exhibit considerable dispersion.

We show that by designing differentiated pricing schemes for general and express lanes that cater to such varying preferences, it is possible to capture some of the efficiency that HOV and HOT policies sacrifice while generating welfare disparities among road users that are not only smaller than more-efficient pricing policies generate but small enough to be comparable to policies that have actually passed the test of political acceptability in a few urban areas.

Empirical Model of Travel Choices

California State Route 91 is a major limited-access expressway used heavily by long-distance commuters. A ten-mile stretch in Orange County includes four free lanes and two express lanes in each direction. Motorists who wish to use the express lanes must set up a financial account and carry an...