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

Abstract

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. Keywords: congestion pricing, value pricing, Pareto improvement * I am especially grateful for the guidance and support that Gary Becker and Eric Budish have given me. I am also grateful for helpful feedback from

Congestion Tolling for Mixed Urban Freight and Passenger Traffic

“…This shows the possibility of two interesting extensions to our current model. The first would be to examine the second-best pricing policy to freight and passenger traffic, for example in the form of freight dedicated lane [24] or pricing a portion of lanes [25]. The second is to make the productivity increasing rate in our model endogenous.…”

An Invitation to Market Design

“…However, the conventional view that congestion pricing is only redistributive is now being challenged: If congestion not only lengthens traffic queues but also reduces throughput, then congestion pricing can eliminate bottlenecks and thus be Pareto-improving without the need for compensation (J. Hall, 2017).…”

Pareto-improving social optimal pricing schemes based on bottleneck permits for managing congestion at a merging section

“…Song et al (2014) applies road space rationing in addition to congestion pricing to achieve a Pareto improvement. Hall (2015) classified bottleneck capacity into "tolled" and "free" and showed the Pareto improvement can be practically achieved. The all of the studies take strategy of classification to achieve a Pareto improvement without using revenue.…”