Pigouvian tax and the congestion externality: a benefit side approach

A Pigouvian tax, in the form of an entrance fee or a toll, has been proposed to be an efficient resolution of a congestion externality. This proposition is founded on the theoretical basis of the profit maximization principle. We, however, have not found literature that examines a Pigouvian tax as a resolution of a congestion externality on the basis of utility maximization. In this sense, the aim of this paper is to show that a Pigouvian tax is also an adequate policy resolution of a congestion externality to attain Pareto optimality under utility maximization. Taking, for example, the open access freeway, we will not only identify both marginal private benefit and marginal social benefit, but also assess the divergence between marginal private benefit and marginal social benefit. As a consequence, we will investigate the price-taker individual’s contribution to the congestion externality and measure, in the theoretical sense, how large an entrance fee or toll that should be charged to attain Pareto optimality. In particular, since an open access freeway has the characteristics of common property resource, we will prove that average social congestion cost is essentially equal to marginal private congestion cost in our modeling framework. Finally, we will show that the optimal value of trip derived in our model is the same as that generated on profit maximization approach.