Second-Best Road Taxes in Polycentric Networks with Distorted Labor Markets*

This paper examines the interaction of road taxes with spatially invariant labor taxation in a polycentric network. It derives analytical expressions for the network counterparts of the traditional double-dividend effects (i.e., Pigouvian, tax-interaction, and revenue-recycling effects), and computes them under different policy regimes. The analysis reveals a series of conditions under which a system of cordons around the major nodes of a network might be more efficient than marginal external cost pricing. With a high elasticity of labor supply and limited public transport coverage, it is shown that the Pigouvian tax rule might reduce welfare even when the generated revenue is used to finance labor tax cuts.