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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

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.

Suggested Citation

  • Parry, Ian & Bento, Antonio, 1999. "Revenue Recycling and the Welfare Effects of Road Pricing," RFF Working Paper Series dp-99-45, Resources for the Future.
    • Handle: RePEc:rff:dpaper:dp-99-45
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L68 - Industrial Organization - - Industry Studies: Manufacturing - - - Appliances; Furniture; Other Consumer Durables

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