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On revenue recycling and the welfare effects of second-best congestion pricing in a monocentric city

Ioannis Tikoudis (), Erik Verhoef () and Jos van Ommeren ()

Journal of Urban Economics, 2015, vol. 89, issue C, 32-47

Abstract: This paper examines congestion taxes in a monocentric city with pre-existing labor taxation. When road toll revenue is used to finance labor tax cuts, 35% of the optimal road tax in our numerical model does not reflect marginal external congestion costs, but rather functions as a Ramsey–Mirrlees tax, i.e. an efficiency enhancing mechanism allowing for an indirect spatial differentiation of the labor tax. This adds a quite different motivation to road pricing, since welfare gains can be produced even in absence of congestion. We find that the optimal road tax is non-monotonic across space, reflecting the different impacts of labor supply elasticity and marginal utility of income, which both vary over space. The relative efficiencies of some archetype second-best pricing schemes (cordon toll, flat kilometer tax) are high (84% and 70% respectively). When road toll revenue is recycled lump-sum, the optimal toll lies below its Pigouvian level. Extensions in a bimodal framework show that the optimality of using road toll revenue to subsidize public transport depends on the initial inefficiency in public transport pricing.

Keywords: Second-best road pricing; Revenue recycling; Double-dividend; Monocentric city (search for similar items in EconPapers)
JEL-codes: R41 R48 H23 H71 J20 R13 R14 (search for similar items in EconPapers)
Date: 2015
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Working Paper: On Revenue Recycling and the Welfare Effects of Second-Best Congestion Pricing in a Monocentric City (2013) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:juecon:v:89:y:2015:i:c:p:32-47

DOI: 10.1016/j.jue.2015.06.004

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