ABSTRACT
In a “first-best” world, it would be optimal to correct for an externality by imposing a correcting charge equal to the short-run marginal external cost or a Pigovian tax. The transportation sector shows how this simple idea can be complicated because the damage function is so complex. The global, regional, and local components of the damage require different logic. In this chapter, we describe the damage function and discuss how it can be sufficiently simplified and stylized to serve as a starting point for the discussion of policy instruments, such as road pricing. Political interest in using pricing within the transportation sector appears to be increasing, as reflected in a green paper on fair and efficient pricing in transportation (European Commission 1995). Whereas no country has yet been able to implement advanced environmentally differentiated road pricing, some sophisticated examples of road pricing, area licensing, and mileage taxes include advanced traffic-management schemes in Singapore, toll roads in Norway, congestion fees in London and Stockholm, and a road pricing scheme in Switzerland that uses the Global Positioning System (GPS). The main reason for this interest in road pricing—besides a general increase in environmental awareness—is presumably the fact that modern information technology has made various road-pricing systems more realistic options.
