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On revenue recycling and the welfare effects of second-best congestion pricing in a monocentric city

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  • Tikoudis, Ioannis
  • Verhoef, Erik T.
  • van Ommeren, Jos N.

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.

Suggested Citation

  • Tikoudis, Ioannis & Verhoef, Erik T. & van Ommeren, Jos N., 2015. "On revenue recycling and the welfare effects of second-best congestion pricing in a monocentric city," Journal of Urban Economics, Elsevier, vol. 89(C), pages 32-47.
    • Handle: RePEc:eee:juecon:v:89:y:2015:i:c:p:32-47
    DOI: 10.1016/j.jue.2015.06.004
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    2. Ioannis Tikoudis, 2015. "Congestion Pricing in Urban Polycentric Networks with Distorted Labor Markets: A Spatial General Equilibrium Model for the Area Randstad," Tinbergen Institute Discussion Papers 15-085/VIII, Tinbergen Institute, revised 26 Oct 2017.
    3. Hörcher, Daniel & Tirachini, Alejandro, 2021. "A review of public transport economics," Economics of Transportation, Elsevier, vol. 25(C).
    4. De Borger, Bruno & Russo, Antonio, 2018. "The political economy of cordon tolls," Journal of Urban Economics, Elsevier, vol. 105(C), pages 133-148.
    5. Tikoudis, Ioannis & Verhoef, Erik T. & van Ommeren, Jos N., 2018. "Second-best urban tolls in a monocentric city with housing market regulations," Transportation Research Part B: Methodological, Elsevier, vol. 117(PA), pages 342-359.
    6. Peng, Cong, 2019. "Does e-commerce reduce traffic congestion? Evidence from Alibaba Single Day shopping event," LSE Research Online Documents on Economics 103411, London School of Economics and Political Science, LSE Library.
    7. Schindler, Mirjam & Caruso, Geoffrey & Picard, Pierre, 2017. "Equilibrium and first-best city with endogenous exposure to local air pollution from traffic," Regional Science and Urban Economics, Elsevier, vol. 62(C), pages 12-23.
    8. Hirte, Georg & Tscharaktschiew, Stefan, 2020. "The role of labor-supply margins in shaping optimal transport taxes," Economics of Transportation, Elsevier, vol. 22(C).
    9. Tikoudis, Ioannis & Farrow, Katherine & Mebiame, Rose Mba & Oueslati, Walid, 2022. "Beyond average population density: Measuring sprawl with density-allocation indicators," Land Use Policy, Elsevier, vol. 112(C).
    10. Jin, Zhihua & Schmöcker, Jan-Dirk & Maadi, Saeed, 2019. "On the interaction between public transport demand, service quality and fare for social welfare optimisation," Research in Transportation Economics, Elsevier, vol. 76(C).
    11. Romain Gaté, 2019. "Efficiency of road pricing schemes with endogenous workplace locations in a polycentric city," Working Papers halshs-02335766, HAL.
    12. Tikoudis, Ioannis, 2023. "Revisiting the Pigouvian tax in urban roads: Housing supply restrictions, leaking profits and spatial inequality," Economics of Transportation, Elsevier, vol. 35(C).
    13. Shengxia Xu & Qiang Liu & Huihui Sun, 2022. "Economic coordination development from the perspective of cross‐regional urban agglomerations in China," Regional Science Policy & Practice, Wiley Blackwell, vol. 14(S2), pages 36-59, November.
    14. Ioannis Tikoudis & Walid Oueslati, 2023. "The future of transport-related emissions in dense urban areas: an analysis of various policy scenarios with MOLES," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 25(2), pages 205-268, April.
    15. Hörcher, Daniel & De Borger, Bruno & Graham, Daniel J., 2023. "Subsidised transport services in a fiscal federation: Why local governments may be against decentralised service provision," Economics of Transportation, Elsevier, vol. 34(C).
    16. Joto, Keigo & Konagane, Joji & Kono, Tatsuhito & Kuwahara, Masao, 2020. "Optimal Location-dependent Pricing Policies on Railways and Roads in a Continuous City," MPRA Paper 100446, University Library of Munich, Germany.
    17. Cong Peng, 2019. "Does e-commerce reduce traffic congestion? Evidence from Alibaba Single Day shopping event," CEP Discussion Papers dp1646, Centre for Economic Performance, LSE.
    18. Hörcher, Daniel & De Borger, Bruno & Seifu, Woubit & Graham, Daniel J., 2020. "Public transport provision under agglomeration economies," Regional Science and Urban Economics, Elsevier, vol. 81(C).
    19. Ioannis Tikoudis & Walid Oueslati, 2021. "MOLES: A New Approach to Modeling the Environmental and Economic Impacts of Urban Policies," Computational Economics, Springer;Society for Computational Economics, vol. 58(3), pages 641-690, October.
    20. Vandyck, Toon & Rutherford, Thomas F., 2018. "Regional labor markets, commuting, and the economic impact of road pricing," Regional Science and Urban Economics, Elsevier, vol. 73(C), pages 217-236.
    21. Ioannis Tikoudis, 2020. "Second‐Best Road Taxes in Polycentric Networks with Distorted Labor Markets," Scandinavian Journal of Economics, Wiley Blackwell, vol. 122(1), pages 391-428, January.
    22. Jyh-Fa Tsai & Shao-Yu Lu, 2018. "Reducing traffic externalities by multiple-cordon pricing," Transportation, Springer, vol. 45(2), pages 597-622, March.
    23. Candia, Diego & Verhoef, Erik T., 2022. "Tradable mobility permits in a monocentric city with pre-existing labor taxation: A general equilibrium perspective," Transportation Research Part B: Methodological, Elsevier, vol. 163(C), pages 145-165.
    24. Anna Straubinger & Erik T. Verhoef & Henri L.F. de Groot, 2021. "Will urban air mobility fly? The efficiency and distributional impacts of UAM in different urban spatial structures," Tinbergen Institute Discussion Papers 21-021/VIII, Tinbergen Institute.

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    More about this item

    Keywords

    Second-best road pricing; Revenue recycling; Double-dividend; Monocentric city;
    All these keywords.

    JEL classification:

    • R41 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Transportation: Demand, Supply, and Congestion; Travel Time; Safety and Accidents; Transportation Noise
    • R48 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government Pricing and Policy
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies
    • R14 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Land Use Patterns

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