New Findings in the Theory of Optimal Congestion Taxes, with an Application to Road Transportation

Abstract

It is generally assumed that optimal taxes in the case of congestion tend to reduce output. However, in those cases where congestion is worst, the effect of the tax may in fact be to increase output. Furthermore, an increase in demand leads to a fall in output in those cases. Also, the optimal tax may then appear to be a subsidy, and has led some to conclude that the optimal tax formula is unsatisfactory. It is satisfactory, once properly interpreted. Finally, the tax may raise after-tax welfare of resource users.