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Revenue Recycling and the Welfare Effects of Road Pricing

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

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Abstract

This paper explores the interactions between taxes on work-related traffic congestion and pre-existing distortionary taxes in the labor market. A congestion tax raises the overall costs of commuting to work and discourages labor force participation at the margin, when revenues are returned in lump-sum transfers. The authors find that the resulting efficiency loss in the labor market can be larger than the Pigouvian efficiency gains from internalizing the congestion externality. In contrast, if congestion tax revenues are used to reduce labor taxes the net impact on labor supply is positive, and the efficiency gain in the labor market can raise the overall welfare gains of the congestion tax by as much as 100 percent. Recycling congestion tax revenues in public transit subsidies produces a positive, but smaller, impact on labor supply. In short, results indicate that the presence of pre-existing tax distortions, and the form of revenue recycling, can crucially affect the magnitude, and possibly even the sign, of the welfare effect of road-pricing schemes. The efficiency gains from recycling congestion tax revenues in other tax reductions can amount to several times the Pigouvian welfare gains from congestion reduction.

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Paper provided by Resources For the Future in its series Discussion Papers with number dp-99-45.

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Date of creation: 01 Aug 1999
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  5. Kraus, Marvin & Mohring, Herbert & Pinfold, Thomas P, 1976. "The Welfare Costs of Nonoptimum Pricing and Investment Policies for Freeway Transportation," American Economic Review, American Economic Association, vol. 66(4), pages 532-47, September. [Downloadable!] (restricted)
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  12. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April. [Downloadable!] (restricted)
  13. Parry, Ian W. H. & Williams, Roberton III & Goulder, Lawrence H., 1999. "When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets," Journal of Environmental Economics and Management, Elsevier, vol. 37(1), pages 52-84, January. [Downloadable!] (restricted)
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  14. Verhoef, Erik & Nijkamp, Peter & Rietveld, Piet, 1996. "Second-Best Congestion Pricing: The Case of an Untolled Alternative," Journal of Urban Economics, Elsevier, vol. 40(3), pages 279-302, November. [Downloadable!] (restricted)
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  20. Mohring, Herbert, 1970. "The Peak Load Problem with Increasing Returns and Pricing Constraints," American Economic Review, American Economic Association, vol. 60(4), pages 693-705, September. [Downloadable!] (restricted)
  21. Parry, Ian & Oates, Wallace, 1998. "Policy Analysis in a Second-Best World," Discussion Papers dp-98-48, Resources For the Future. [Downloadable!]
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  24. Lawrence H. Goulder & Ian W. H. Parry & Dallas Burtraw, 1996. "Revenue-Raising vs. Other Approaches to Environmental Protection: The Critical Significance of Pre-Existing Tax Distortions," NBER Working Papers 5641, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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