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Revenue recycling and the welfare effects of road pricing

  • Parry, Ian W.H.
  • Bento, Antonio Miguel R.

The authors explore the interaction between taxes on work-related traffic congestion and preexisting 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 resulting efficiency loss in the labor market can be larger that the Pigouvian efficiency gains from internalizing the congestion externality. By contrast, if congestion tax revenues are used to reduce labor taxes, the net impact on the 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 the labor supply. In short, the authors'results indicate that the presence of preexisting tax distortions, and the form of revenue recycling, can crucially affect the size - 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 The World Bank in its series Policy Research Working Paper Series with number 2253.

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Date of creation: 31 Dec 1999
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Handle: RePEc:wbk:wbrwps:2253
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  1. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
  2. 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.
  3. 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.
  4. Krupnick, Alan & Harrington, Winston & Alberini, Anna, 1998. "Overcoming Public Aversion to Congestion Pricing," Discussion Papers dp-98-27, Resources For the Future.
  5. 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.
  6. 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.
  7. 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.
  8. Williams, Roberton III, 2002. "Environmental Tax Interactions when Pollution Affects Health or Productivity," Journal of Environmental Economics and Management, Elsevier, vol. 44(2), pages 261-270, September.
  9. 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.
  10. 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.
  11. Parry, Ian & Goulder, Lawrence & Williams III, Roberton, 1997. "When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets," Discussion Papers dp-97-18-rev, Resources For the Future.
  12. Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 77(1), pages 11-23, March.
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  15. Parry, Ian & Bento, Antonio, 1999. "Tax Deductible Spending, Environmental Policy, and the "Double Dividend" Hypothesis," Discussion Papers dp-99-24, Resources For the Future.
  16. Small, K.A. & Kazimi, C., 1994. "On the Costs of Air Pollution from Motor Vehicules," Papers 94-95-3, California Irvine - School of Social Sciences.
  17. 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.
  18. Hau, Timothy D., 1992. "Economic fundamentals of road pricing : a diagrammatic analysis," Policy Research Working Paper Series 1070, The World Bank.
  19. Richard Arnott & Alex Anas & Kenneth Small, 1997. "Urban Spatial Structure," Boston College Working Papers in Economics 388., Boston College Department of Economics.
  20. 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.
  21. 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.
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  24. 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.
  25. 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.
  26. 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.
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