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Revenue recycling and the welfare effects of road pricing, Volume 1
 
Author:Parry, Ian W.H.; Bento, Antonio Miguel R.; Collection Title:Policy, Research working paper ; no. WPS 2253
Date Stored:2000/01/11Document Date:1999/12/31
Document Type:Policy Research Working PaperSubTopics:Environmental Economics & Policies; Economic Theory & Research; Banks & Banking Reform; Labor Policies; Municipal Financial Management; Public Sector Economics
Language:EnglishMajor Sector:Finance
Report Number:WPS2253Sub Sectors:Financial Adjustment
Volume No:1  

Summary: 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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