The European Road Pricing Game: How to Enforce Optimal Pricing in High-Transit Countries Under Asymmetric Information

Abstract

A federal government tries to force local governments to implement welfare optimal tolling and investment. Welfare optimal tolling requires charging for marginal external costs. Local governments have an incentive to charge more than the marginal social cost whenever there is transit traffic. We analyze the pricing and investment issue in an asymmetric information setting where the local governments have better information than the federal government. The case of air pollution and of congestion are discussed.

Keywords: road pricing, federalism, asymmetric information, implementation congestion pricing