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

Research output: Contribution to JournalArticleAcademicpeer-review

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.
Original languageEnglish
Pages (from-to)32-47
JournalJournal of Urban Economics
Volume89
Issue numberSeptember
DOIs
Publication statusPublished - 2015

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congestion
recycling
taxes
pricing
revenue
welfare
road
labor
public transport
marginal utility
efficiency
road pricing
labor supply
taxation
city
effect
tax
Congestion pricing
Revenue
Welfare effects

Cite this

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title = "On revenue recycling and the welfare effects of second-best congestion pricing in a monocentric city",
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.",
author = "I. Tikoudis and E.T. Verhoef and {van Ommeren}, J.N.",
year = "2015",
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pages = "32--47",
journal = "Journal of Urban Economics",
issn = "0094-1190",
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}

On revenue recycling and the welfare effects of second-best congestion pricing in a monocentric city. / Tikoudis, I.; Verhoef, E.T.; van Ommeren, J.N.

In: Journal of Urban Economics, Vol. 89, No. September, 2015, p. 32-47.

Research output: Contribution to JournalArticleAcademicpeer-review

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AB - 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.

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