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

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in _____________________________________________________________________________________Abstract 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.

Second‐Best Road Taxes in Polycentric Networks with Distorted Labor Markets*

“…Table provides a brief summary of the ORANGE model, which is fully documented in Online Appendix B. ORANGE is a polycentric, network‐based equilibrium model that adopts elements from the monocentric city models by Verhoef () and Tikoudis et al . (2015a, b). It also builds upon Anas and Liu () and other key contributions in the expanding literature of urban CGE models (Anas and Kim, ; Anas and Xu, ; Tscharaktschiew and Hirte, ; Anas and Hiramatsu, ; Hirte and Tscharaktchiew, ; Dröes and Rietveld, ).…”

“…While the Pigouvian tax rule is the most efficient intervention when road traffic externalities pose the only inefficiency, welfare losses can occur from it when a distortionary tax is present in the background. In line with previous findings (Parry and Bento, ; Tikoudis et al ., 2015a), the full network Pigouvian toll with revenue returned lump‐sum (FNP‐LS) is found to cause considerable welfare losses that account for 0.66 percent of the after‐tax income…”

“…The proposed numerical model expands: (i) the work by Anas and Kim (), Anas and Liu (), Anas and Hiramatsu (), and Rhee et al . (), contributions that consider a network structure but disregard tax interactions, and (ii) the earlier work that considered the double dividend without the use of a network structure (Tscharaktsiew and Hirte, ; Tikoudis et al ., 2015a).…”

“…That is, tax‐interaction effects in a monocentric setting are much more likely to fade out with distance from the CBD. This allows a cordon to tax, eclectically, the most inelastic parts of labor supply, which might locate further away from the CBD (Tikoudis et al ., 2015a). In a polycentric setting with cross‐commuting flows, however, the elasticity of labor supply will display a non‐monotonic variation across space.…”

“…This impedes the selective taxation of links where the tax‐interaction effect is low. In line with this, the relative efficiency of a cordon toll system is found to lie far below that of a flat kilometer tax (i.e., 64 percent versus 78 percent), a result that differs substantially from findings obtained from a monocentric model (Tikoudis et al ., 2015a).…”