Environmental effects of transport: a model of optimal pricing and investment for the UK

Abstract

This paper models the effects of imposing efficient pricing on interurban passenger travel in the United Kingdom and passenger travel in London. Both the internal and external costs of the main modes are estimated. The resulting efficient prices are used to predict the changes in demand for each mode, together with implied tax revenues, operators' aggregate surplus or deficit, and the implied investment needs. Efficient pricing and taxation of externalities does not lead to substantial shifts to modes of transport with lower external costs and thus does not substantially reduce the impact of transport on the environment. In the long run, demand changes are driven mainly by the growth of income. The assumption made about the appropriate scale economies present is an important determinant of the degree of change and overall effects. In the London model, sufficient revenue is generated to cover the deficits incurred by public transport operators.