Revenue recycling within transport networks

In this paper, we analyse second-best pricing and investment policy for transport networks with a revenue recycling mechanism in which the toll revenue is used for transport investments or subsidies, as in London’s congestion-charging scheme. The results of this paper demonstrate that the way toll revenue is used modifies the usual results significantly, which are typically based on assuming a lump-sum transfer. First, recycling revenue as investment increases the second-best toll when the benefits from the investment exceed the costs and when demand is inelastic with respect to the toll. Recycling revenue as a subsidy has no such effect. Second, “partial” cost–benefit analysis that focuses only on the targeted transport mode would usually lead to erroneous conclusions about whether toll revenues should be used for transport investment, subsidies, or general tax revenues. Thus, “full” cost–benefit analysis, which accounts for changes in consumer and producer surpluses in all transport modes, is necessary.