PIGOU, KNIGHT, DIMINISHING RETURNS, AND OPTIMAL PIGOUVIAN CONGESTION TOLLS

John McDonald

Journal of the History of Economic Thought, 2013, vol. 35, issue 3, 353-371

Abstract: Arthur Pigou introduced the iconic two-road model in the first edition of The Economics of Welfare (1920), and it has been thought that this model was intended to demonstrate the need for Pigouvian taxes to mitigate traffic congestion. However, Pigou’s intention was to show that efficient output for industries subject to decreasing returns required a tax on output. Pigou was incorrect, but the two-road model (correctly considered) became the starting point for the analysis of traffic congestion in the 1950s. This paper recounts the doctrinal history of decreasing returns industries and the two-road model.

Date: 2013
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