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Revenue Recycling and the Welfare Effects of Road Pricing

  • Parry, Ian

    ()

    (Resources for the Future)

  • Bento, Antonio

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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Handle: RePEc:rff:dpaper:dp-99-45
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  1. Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 77(1), pages 11-23, March.
  2. Newbery, David M, 1988. "Road Damage Externalities and Road User Charges," Econometrica, Econometric Society, vol. 56(2), pages 295-316, March.
  3. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
  4. Krupnick, Alan & Harrington, Winston & Alberini, Anna, 1998. "Overcoming Public Aversion to Congestion Pricing," Discussion Papers dp-98-27, Resources For the Future.
  5. Newbery, David M, 1990. "Pricing and Congestion: Economic Principles Relevant to Pricing Roads," Oxford Review of Economic Policy, Oxford University Press, vol. 6(2), pages 22-38, Summer.
  6. Liu, Louie Nan & McDonald, John F., 1998. "Efficient Congestion Tolls in the Presence of Unpriced Congestion: A Peak and Off-Peak Simulation Model," Journal of Urban Economics, Elsevier, vol. 44(3), pages 352-366, November.
  7. 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.
  8. Parry, Ian & Oates, Wallace, 1998. "Policy Analysis in a Second-Best World," Discussion Papers dp-98-48, Resources For the Future.
  9. Mayeres, Inge & Proost, Stef, 1997. " Optimal Tax and Public Investment Rules for Congestion Type of Externalities," Scandinavian Journal of Economics, Wiley Blackwell, vol. 99(2), pages 261-79, June.
  10. Small, Kenneth A. & Kazimi, Camilla, 1995. "On the Costs of Air Pollution from Motor Vehicles," University of California Transportation Center, Working Papers qt0sx81025, University of California Transportation Center.
  11. Hau, Timothy D., 1992. "Economic fundamentals of road pricing : a diagrammatic analysis," Policy Research Working Paper Series 1070, The World Bank.
  12. Braid, Ralph M., 1996. "Peak-Load Pricing of a Transportation Route with an Unpriced Substitute," Journal of Urban Economics, Elsevier, vol. 40(2), pages 179-197, September.
  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.
  14. Anas, Alex & Arnott, Richard & Small, Kenneth A., 1997. "Urban Spatial Structure," University of California Transportation Center, Working Papers qt835049q3, University of California Transportation Center.
  15. Edward Calthrop & Stef Proost, 1998. "Road Transport Externalities," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 11(3), pages 335-348, April.
  16. 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.
  17. Snow, Arthur & Warren, Ronald Jr., 1996. "The marginal welfare cost of public funds: Theory and estimates," Journal of Public Economics, Elsevier, vol. 61(2), pages 289-305, August.
  18. 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.
  19. Winston, Clifford, 1985. "Conceptual Development in the Economics of Transportation: An Interpretive Survey," Journal of Economic Literature, American Economic Association, vol. 23(1), pages 57-94, March.
  20. Browning, Edgar K., 1994. "The non-tax wedge," Journal of Public Economics, Elsevier, vol. 53(3), pages 419-433, March.
  21. Victor R. Fuchs & Alan B. Krueger & James M. Poterba, 1998. "Economists' Views about Parameters, Values, and Policies: Survey Results in Labor and Public Economics," Journal of Economic Literature, American Economic Association, vol. 36(3), pages 1387-1425, September.
  22. Martin Feldstein, 1999. "Tax Avoidance And The Deadweight Loss Of The Income Tax," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 674-680, November.
  23. Glaister, Stephen & Lewis, Davis, 1978. "An integrated fares policy for transport in London," Journal of Public Economics, Elsevier, vol. 9(3), pages 341-355, June.
  24. Roberton C. Williams, 2000. "Environmental Tax Interactions When Pollution Affects Health or Productivity," NBER Working Papers 8049, National Bureau of Economic Research, Inc.
  25. Parry, Ian & Bento, Antonio, 1999. "Tax Deductible Spending, Environmental Policy, and the "Double Dividend" Hypothesis," Discussion Papers dp-99-24, Resources For the Future.
  26. 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.
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