Revealed Preferences, Externalities and Optimal Pricing for Urban Transportation

Abstract

What is the right price for transportation services? Economic theory suggests that prices are correctly set and resources are efficiently allocated when prices reflect social marginal costs. If market prices are distorted, from a social point of view, ‘Pigouvian’ taxes and subsidies could be introduced to bring prices in line with social marginal costs. In principle, the determination of such an optimal tax structure would imply the identification of all positive and negative externalities, and the valuation of all of them. In practice, things are more complicated. For urban transportation services, for example, difficulties may arise because (1) it may not be easy to single out all positive and negative externalities associated with transport activities, especially in the case of negative environmental externalities, because the impact on the environment of some pollutants may be uncertain; (2) the valuation of externalities may be subjective, because of the need to attach values to things like human health and life. Alternative methods can then be used to assess the monetary value of externalities, but there is not a single best method available for all circumstances; (3) marginal costs may not be constant. If marginal costs depend on activity levels, demand-supply interactions in the markets should be taken into account. This is made more complicated by the fact that the market for transport services is a very complex one. Transport modes are imperfect substitutes and are sometimes linked by complementarity relationships.

This paper is partly based on some preliminary results obtained by a model developed within the research projects Trenen (Joule II) and Trenen II Stran (Transport) of the European Commission (DG XII). Research assistance from Stefania Pasquon, Laura Valentini, and Silvio Pancheri is gratefully acknowledged. Detailed comments by Kenneth Small and an anonymous referee helped to improve earlier versions of this work. However, the usual dis­claimer applies.