Abstract
Abstract Economists have long advocated road pricing as an efficiency-enhancing solution to traffic congestion, yet it has rarely been implemented because it is thought to create losers as well as winners. In theory, a judiciously designed toll applied to a portion of the lanes of a highway can generate a Pareto improvement, even before using the toll revenue. This paper explores the practical relevance of this theoretical possibility by using survey and travel time data, combined with a structural model of traffic congestion, to estimate the joint distribution of agent preferences over three dimensions—value of time, schedule inflexibility, and desired arrival time—and evaluate the effects of adding optimal time-varying tolls. I find that adding tolls on half of the lanes of a highway yields a Pareto improvement. Further, the social welfare gains from doing so are substantial—up to $1,740 per road user per year.
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