On revenue recycling and the welfare effects of second-best congestion pricing in a monocentric city |
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Institution: | 1. Sciences-Po, Banque de France, CEPII and CEPR. 28 rue des Saints-Pères, Paris 75007, France;2. INSEE-Crest, 15 bd Gabriel Pêri, Malakoff 92240, France;1. Institute of Science and Engineering, Kanazawa University, Kakuma-machi, Kanazawa 920-1192, Japan;2. Graduate School of Information Sciences, Tohoku University, Japan |
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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. |
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Keywords: | Second-best road pricing Revenue recycling Double-dividend Monocentric city |
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