Revenue Recycling and the Welfare Effects of Road Pricing

Abstract

This paper explores the interactions between taxes on work-related traf®c congestion and preexisting distortionary taxes in the labor market. A congestion tax raises the overall costs of commuting to work and discourages labor force participation. The resulting welfare loss in the labor market can easily exceed the Pigouvian welfare gain from internalizing the congestion externality. However, if congestion tax revenues are used to reduce labor taxes, the net impact on labor supply is positive, and this can raise the overall welfare gain from the congestion tax by around 100 percent. Nonetheless the optimal congestion tax still equals the Pigouvian tax.

Transport Taxes with Multiple Trip Purposes

“…Assuming a single trip purpose, they find optimal deviations from Pigouvian tolls because of revenue-raising issues and interactions with existing distortionary taxes. The welfare potential of second-best congestion tolls is seen to critically depend on revenue use: reducing labour taxes is preferable to lump-sum redistribution, as in Parry and Bento (2001), unless the welfare function exhibits sufficient inequality aversion; as in Mayeres and Proost (1997).…”

Pricing of Transport Networks, Redistribution, and Optimal Taxation

“…Transport trips, though necessary for commuting, may provide some utility to the individual (which could be interpreted as an additional purpose of the trip, such as escorting kids to school, i.e., "trip chaining"), or disutility (e.g., stress). In this I follow Parry and Bento (2001) and Van Dender (2003).…”

“…While labor supply plays a central role in models of income taxation, little attention has been dedicated to the impact of policies that affect commuting to work. Parry and Bento (2001) and Van Dender (2003) consider 5 Cremer et al (1998) and Kaplow (2006) studied environmental levies in the presence of nonlinear income taxation. They consider a model where commodities do not require any time for consumption.…”

Design and evaluation of road pricing: state-of-the-art and methodological advances

“…The gradual adjustments of travel costs, in conjunction with long-term adaptations in the transport behavior of households and firms, lead to changes in productivity. Especially, congestion pricing can considerably affect labor supply and net wages, according to the charge imposed on trips of different purposes [88] and the redistribution of revenues [281]. Additionally, it has been found to adversely influence urban retail business activity in the short run [295], while there are arguably positive effects in the long run, dependent on the improvements on public transport and urban quality [392,393].…”