Should Congestion Tolls Be Set by the Government or by the Private Sector? The Knight–Pigou Debate Revisited

21 Pages Posted: 12 Jun 2018

See all articles by Stephen W. Salant

Stephen W. Salant

University of Michigan; Resources for the Future

Nathan Seegert

University of Utah - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: July 2018

Abstract

This paper clarifies issues debated by A. C. Pigou and Frank Knight about correcting inefficient use of congestible resources, focusing for concreteness on their original example of road congestion. Instead of government‐imposed Pigouvian access fees, Knight favoured access fees set by private toll‐setters. We consider the case of n≥2 congestible roads and an uncongestible road of arbitrary speed. Knight argued that in the case of a single congestible road, a private toll‐setter would always choose the toll that Pigou recommended, hence the allocation would minimize aggregate commute time without government meddling. We find instead that two or more toll‐setters would never choose Pigouvian tolls except in the special case of a sufficiently fast uncongestible road. Moreover, for uncongestible roads of slower speed, the allocation of motorists under Knight's proposal is almost never efficient. Whenever it is inefficient, motorists are strictly worse off when they pay tolls set by private firms instead of paying government‐imposed tolls, and aggregate toll revenue is also lower. Nevertheless, if the private sector does set tolls, then the full cost to motorists can be limited if the government provides an uncongestible alternative, such as a train, to offer potential competition along the same route.

Suggested Citation

Salant, Stephen W. and Seegert, Nathan, Should Congestion Tolls Be Set by the Government or by the Private Sector? The Knight–Pigou Debate Revisited (July 2018). Economica, Vol. 85, Issue 339, pp. 428-448, 2018. Available at SSRN: https://ssrn.com/abstract=3192686 or http://dx.doi.org/10.1111/ecca.12259

Stephen W. Salant (Contact Author)

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Resources for the Future ( email )

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Nathan Seegert

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States

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