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On Revenue Recycling and the Welfare Effects of Second-Best Congestion Pricing in a Monocentric City

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  • Ioannis Tikoudis

    (VU University Amsterdam)

  • Erik T. Verhoef

    (VU University Amsterdam)

  • Jos N. van Ommeren

    (VU University Amsterdam)

Abstract

This discussion paper resulted in a publication in the 'Journal of Urban Economics' . This paper explores the interactions between congestion pricing and a tax-distorted labor market within a monocentric urban equilibrium model. We compute the efficiency gains of various second-best policies, i.e. combinations of toll schemes and revenue recycling programs, with a predetermined level of public revenue. We find that 35% of the space-varying road tax does not reflect marginal external congestion costs, but rather functions as a Ramsey-Mirrlees tax, i.e. an efficiency enhancing mechanism allowing space differentiation of the labor tax. Such a space-varying tax adds a quite different motivation to road pricing, since it can produce large welfare gains even in the absence of congestion. We show that both a cordon toll and a flat kilometer tax achieve over 80% of these gains when combined with specific types of revenue recycling, such as labor tax cuts or public transport subsidies. Sensitivity analysis shows that the optimal type of revenue recycling depends on the level of inefficiency in the provision of public transport prior to the introduction of congestion pricing.

Suggested Citation

  • Ioannis Tikoudis & Erik T. Verhoef & Jos N. van Ommeren, 2013. "On Revenue Recycling and the Welfare Effects of Second-Best Congestion Pricing in a Monocentric City," Tinbergen Institute Discussion Papers 13-031/VIII, Tinbergen Institute.
  • Handle: RePEc:tin:wpaper:20130031
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    3. De Borger, Bruno & Russo, Antonio, 2018. "The political economy of cordon tolls," Journal of Urban Economics, Elsevier, vol. 105(C), pages 133-148.
    4. 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.
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    6. 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.
    7. 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).
    8. 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.
    9. Hirte, Georg & Tscharaktschiew, Stefan, 2020. "The role of labor-supply margins in shaping optimal transport taxes," Economics of Transportation, Elsevier, vol. 22(C).
    10. Hörcher, Daniel & Tirachini, Alejandro, 2021. "A review of public transport economics," Economics of Transportation, Elsevier, vol. 25(C).
    11. 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.
    12. 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.
    13. 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.
    14. Jyh-Fa Tsai & Shao-Yu Lu, 2018. "Reducing traffic externalities by multiple-cordon pricing," Transportation, Springer, vol. 45(2), pages 597-622, March.
    15. 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).
    16. 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.
    17. 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.
    18. 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).
    19. Julius Berger & Waldemar Marz, 2024. "Fuel Economy Standards and Public Transport," CESifo Working Paper Series 11061, CESifo.
    20. 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).
    21. 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.
    22. Romain Gaté, 2019. "Efficiency of road pricing schemes with endogenous workplace locations in a polycentric city," Working Papers halshs-02335766, HAL.
    23. 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.
    24. 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).
    25. 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.

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    More about this item

    Keywords

    Second-best road pricing; revenue recycling; 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
    • H76 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Other Expenditure Categories
    • 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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