Strategic behavior under tradeable driving permits and congestion tolls: A political economy model

Abstract

This paper develops a political economy model to study strategic behavior related to the introduction of congestion policies. Our main focus is on tradeable permits, although we also study results under a congestion toll. We first study a two-period model where, in the first period, a majority decides whether or not to introduce a permit system in the next period. The model setup is such that tolls and permits can be made perfectly equivalent, both in terms of welfare effects and voting outcomes. We find that anticipatory behavior after the policy is announced but prior to its introduction induces people to drive more; the overall effect may be welfare reducing. Moreover, drivers oppose the policies even when they receive all permits for free, or toll revenues are distributed to drivers only. Consequently, strategic behavior makes it more difficult to get a political majority to support these congestion policies. We further show that, in an infinite horizon setting, tradable permits and congestion tolls are no longer equivalent. Permits are superior to congestion tolls in that they avoid strategic behavior once the system is implemented. In contrast, with congestion tolls the steady-state equilibrium implies continuing strategic behavior. One consequence is that it is easier to get a political majority for permits than for tolls: we find that drivers will always oppose congestion tolls, but they support permits if they receive a sufficient share of the permits for free.