Conventional economic models of traffic congestion assume that the relation between road use and speed is a technical one. In this paper we derive the speed-flow relationship from more fundamental considerations concerning driving behaviour. We develop a structural model in which drivers choose their own optimal speed, by trading off various cost aspects of making a trip: time costs, expected accident costs and fuel costs. Since the optimal speed depends on the presence of other drivers on the road, we can derive a speed flow relationship on the basis of this behaviour. It is demonstrated that the relationship between the various cost components should be taken into account in computing the external costs of traffic. For tolls alone, it is demonstrated that a regulator ignoring the fundamental relation will otherwise fail to set optimal tolls, and will underestimate the efficiency gains of congestion pricing. Moreover, the overall welfare optimum in our model is found to be off the speed-flow function, and off the average and marginal cost functions derived from it in the conventional approach. This full optimum requires tolls to be either accompanied by speed policies, or to be set as a function of speed. Using an empirically calibrated numerical simulation model, we illustrate these qualitative findings, and attempt to assess their potential empirical relevance.
