Internalizing emission externality on road networks

This paper addresses issues relevant to internalizing traffic emission externality on road networks with fixed travel demands. In addition to marginal social cost pricing (MSC) congestion pricing schemes are considered that yield a traffic flow distribution with minimum total travel time as first-best. We give a counterexample showing that MSC and other first-best congestion pricing schemes do not necessarily lead to less traffic emissions. Without using any subsidy, we indicate that there always exists a charging scheme that induces a traffic flow distribution with minimum emissions. We also provide a bound on the percent reduction in traffic emissions achievable by any charging scheme, and then offer methods for computing charges in a manner that allows decision makers to trade-off between two conflicting objectives, alleviating congestion versus reducing traffic emissions.