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Estimating the Welfare Effect of Congestion Taxes: The Critical Importance of Other Distortions within the Transport System

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Parry, Ian () (Resources for the Future)
Bento, Antonio

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Abstract

This paper uses analytical and numerical models to illustrate how the presence of other distortions within the transport system changes the overall welfare effect of a congestion tax. These other distortions include a transit fare subsidy, congestion on competing (unpriced) routes, accident externalities, gasoline taxes, and pollution externalities. Each of these pre-existing distortions can substantially alter the welfare effect of a congestion tax that would be predicted by a first-best analysis. If congestion taxes encourage travel on other congested routes, they can produce sizeable indirect welfare losses. In addition, induced reductions in the demand for gasoline can lead to substantial welfare losses when, as appears to be the case for European countries, gasoline taxes significantly exceed marginal pollution damages. On the other hand, congestion taxes may produce significant welfare gains by offsetting accident externalities, though these gains are partially offset by increased accidents on competing roadways. To the extent that congestion taxes increase the demand for transit, they can induce significant welfare gains or losses, depending on whether transit fares are above or below marginal supply costs. The importance of other distortions varies considerably across different transport systems and across different countries. Our generic analysis illustrates the proportionate change in the welfare effect of a congestion tax due to each of these distortions over a wide range of parameter scenarios.

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Paper provided by Resources For the Future in its series Discussion Papers with number dp-00-51.

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Date of creation: 01 Nov 2000
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Handle: RePEc:rff:dpaper:dp-00-51

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  7. Small, K.A. & Kazimi, C., 1994. "On the Costs of Air Pollution from Motor Vehicules," Papers 94-95-3, California Irvine - School of Social Sciences.
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  10. Mohring, Herbert, 1972. "Optimization and Scale Economies in Urban Bus Transportation," American Economic Review, American Economic Association, vol. 62(4), pages 591-604, September. [Downloadable!] (restricted)
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  13. Small, Kenneth A. & Gomez-Ibanez, Jose A., 1999. "Urban transportation," Handbook of Regional and Urban Economics, in: P. C. Cheshire & E. S. Mills (ed.), Handbook of Regional and Urban Economics, edition 1, volume 3, chapter 46, pages 1937-1999 Elsevier. [Downloadable!] (restricted)
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  1. Sheila M. Olmstead & Robert N. Stavins, 2008. "Comparing Price and Non-price Approaches to Urban Water Conservation," Working Papers 2008.66, Fondazione Eni Enrico Mattei. [Downloadable!]
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  2. Olga Ivanova, 2004. "An influence of road pricing upon the performance of bus transit services in Oslo," ERSA conference papers ersa04p107, European Regional Science Association. [Downloadable!]
  3. Calthrop E. & De Borger B. & Proost S., 2006. "Externalities and partial tax reform: Does it make sense to tax road freight (but not passenger) transport?," Working Papers 2006017, University of Antwerp, Faculty of Applied Economics. [Downloadable!]
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  4. Parry, Ian, 2000. "Comparing the Efficiency of Alternative Policies for Reducing Traffic Congestion," Discussion Papers dp-00-28, Resources For the Future. [Downloadable!]
    Other versions:
  5. Parry, Ian & Harrington, Winston & Nelson, Per-Kristian & Safirova, Elena & Mason, Dave & Gillingham, Kenneth, 2003. "Welfare and Distributional Effects of Road Pricing Schemes for Metropolitan Washington, DC," Discussion Papers dp-03-57, Resources For the Future. [Downloadable!]
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  6. Calthrop, Edward, 2001. "On Subsidising Auto-Commuting," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  7. Timilsina, Govinda R. & Dulal, Hari B., 2008. "Fiscal policy instruments for reducing congestion and atmospheric emissions in the transport sector : a review," Policy Research Working Paper Series 4652, The World Bank. [Downloadable!]
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