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Pareto Improvements from Lexus Lanes: The effects of pricing a portion of the lanes on congested highways

Listed author(s):
  • Jonathan D. Hall

This paper shows that a judiciously designed toll applied to a portion of the lanes of a highway can generate a Pareto improvement even before the resulting revenue is spent. I obtain this new result by extending a standard dynamic congestion model to reflect an important additional traffic externality recently identified by transportation engineers: additional traffic does not simply increase travel times, but also introduces frictions that reduce throughput. In particular, I show that as long as some rich drivers use the highway at the peak of rush hour, then adding tolls to a portion of the lanes yields a Pareto improvement. To confirm the relevance of this theoretical possibility in practice, I use survey and travel time data to estimate the joint distribution of driver preferences over arrival time, travel time, and tolls, and use these results to estimate the effects of adding optimal time-varying tolls. I find that adding tolls on up to half of the lanes yields a Pareto improvement, and that the social welfare gains of doing so are substantial—up to $1,740 per road user per year.

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Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-548.

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Length: Unknown pages
Date of creation: 15 Oct 2015
Handle: RePEc:tor:tecipa:tecipa-548
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References listed on IDEAS
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  1. Fosgerau, Mogens & Small, Kenneth A., 2013. "Hypercongestion in downtown metropolis," Journal of Urban Economics, Elsevier, vol. 76(C), pages 122-134.
  2. Arnott, Richard & Inci, Eren, 2010. "The stability of downtown parking and traffic congestion," Journal of Urban Economics, Elsevier, vol. 68(3), pages 260-276, November.
  3. Tyler Patterson & David Levinson, 2008. "Lexus Lanes or Corolla Lanes? Spatial Use and Equity Patterns on the I-394 MnPASS Lanes," Working Papers 000051, University of Minnesota: Nexus Research Group.
  4. Light, Thomas, 2009. "Optimal highway design and user welfare under value pricing," Journal of Urban Economics, Elsevier, vol. 66(2), pages 116-124, September.
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