Scale, Congestion and Growth

Abstract

This paper explores the relationship between aggregate and relative congestion, returns to scale and economic growth. Aggregate congestion reduces the effective productivity of capital; relative congestion reduces the effective productivity of labour. Both forms of congestion adversely affect the equilibrium growth rate, although their relative effects depend upon aggregate returns to scale. The two forms of congestion have contrasting effects on the transitional dynamics. Relative congestion retards the rate of adjustment; aggregate congestion accelerates it. The externalities generated by congestion and non-optimal expenditure can be fully corrected, both during the transition and in steady state, by a time-invariant income tax.