Congestion and tax competition in a parallel network

The purpose of this paper is to study the effects of tolling road use on a parallel road network where each link can be tolled by a different government. Using both theoretical and numerical models, the paper analyses the potential tax competition between countries that each maximise the surplus of local users plus tax revenues in controlling local and transit transport. Three types of tolling systems are considered: (i) toll discrimination between local traffic and transit, (ii) only uniform tolls on local and transit transport are acceptable, (iii) tolls on local users only. The results suggest that the welfare effects of introducing transit tolls are large, but that differentiation of tolls between local and transit transport as compared to uniform tolls does not yield large welfare differences. Also, the welfare effects of toll cooperation between countries are relatively small in comparison with the welfare gains of non-cooperative tolling of transit. The numerical model further illustrates the effects of different transit shares and explicitly considers the role of asymmetries between countries. Higher transit shares strongly raise the transit toll and slightly decrease local tolls. With asymmetric demands, the welfare gains of introducing differentiated tolling rise strongly for the country with lower local demand.