Cost-Based Congestion Pricing in Network Priority Models Using Axiomatic Cost Allocation Methods

Abstract

Congestion effects are the negative externalities or social costs that users generate on each other when using a shared network resource. Under a congestion-based pricing scheme, networks with enough slack capacity should reflect a very low priced negative externality, while a network with reduced capacity to provide one more unit of the requested resource should reflect the negative effects in the form of higher prices for the use of network resources. This chapter deals with the efficient distribution of congestion costs among network users. First, we present a review of different approaches found in the literature, ranging from methods that advocate for congestion-based pricing to methods that, after being critical about considering congestion, advocate for price definition based on the investors’ need for return on their investment. We then proceed to introduce an axiomatic approach to congestion pricing that takes into account some of the prescriptions and conclusions found in the literature. The method presented here is defined on the grounds of axioms that represent a set of fundamental principles that a good allocation mechanism should have.