Econometrica: May 1971, Volume 39, Issue 3

Congestion Interdependence and Urban Transit Fares<565:CIAUTF>2.0.CO;2-S
p. 565-576

Roger Sherman

If each automobile pays average rather than marginal social cost of a highway trip, there will be too much auto travel during periods of congestion. By using only inputs taxes, adjustments in fares on alternative transit modes, and income redistribution, we solve this problem in two ways: (i) complete (first-best) optimality in peak periods and second-best optimality in off-peak periods; or (ii) first-best optimality in off-peak periods and second-best optimality at the peak. We show that with congestion interdependence, as when automobiles and buses contribute to one another's congestion, the second-best peak solution can warrant an urban but transit fare below average cost, calling for a subsidy. And under a first-best peak solution, involving both an inputs tax and a transit fare adjustment, we show a companion second-best off-peak transit fare that will mitigate the (then inappropriate but still effective) inputs tax.

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