Pricing Urban Congestion*

This paper reviews literature on the optimal design of pricing policies to reduce urban automobile congestion. The implications of a range of complicating factors are considered; these include traffic bottlenecks, constraints on which roads and freeway lanes in the road network can be priced, driver heterogeneity, private toll operators, other externalities besides congestion, and interactions between congestion taxes and the broader fiscal system. I also briefly discuss the incidence of congestion taxes and experience with this policy in the United States and elsewhere. Although the economics literature on congestion pricing has advanced considerably over the past 20 years, research is still needed on the empirical measurement of second-best efficient tolls for urban centers and whether alternative design features have substantial implications for efficiency. More research is also needed on the design of schemes to promote feasibility by compensating adversely affected groups with minimal loss in economic efficiency.