Document Type

Article

Journal/Book Title/Conference

Economics Research Institute Study Paper

Volume

10

Publisher

Utah State University Department of Economics

Publication Date

2001

Rights

Copyright for this work is held by the author. Transmission or reproduction of materials protected by copyright beyond that allowed by fair use requires the written permission of the copyright owners. Works not in the public domain cannot be commercially exploited without permission of the copyright owner. Responsibility for any use rests exclusively with the user. For more information contact the Institutional Repository Librarian at digitalcommons@usu.edu.

First Page

1

Last Page

19

Abstract

A Pigouvian tax, in the form of an entrance fee or a toll, has been proposed to be an efficient resolution of a congestion externality. This proposition is founded on the theoretical basis of the profit maximization principle. We, however, have not found literature that examines a Pigouvian tax as a resolution of a congestion externality on the basis of utility maximization. In this sense, the aim of this paper is to show that a Pigouvian tax is also an adequate policy resolution of a congestion externality to attain Pareto optimality under utility maximization. Taking, for example, the open access freeway, we will not only identify both marginal private benefit and marginal social benefit, but also assess the divergence between marginal private benefit and marginal social benefit. As a consequence, we will investigate the price-taker individual's contribution to the congestion externality and measure, in the theoretical sense, how large an entrance fee or toll that should be charged to attain Pareto optimality. In particular, since an open access freeway has the characteristics of common property resource, we will prove that average social congestion cost is essentially equal to marginal private congestion cost in our modeling framework. Finally, we will show that the optimal value of trip derived in our model is the same as that generated on profit maximization approach.

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