Economic efficiency of second-best congestion pricing schemes in urban highway systems

This paper examines urban highway congestion pricing in the instance in which it is not possible to levy a congestion toll on a major portion of the urban road system. This case is pertinent because of technical and/or political constraints. The paper uses economic theory of the second best and a simulation model to compare first-best, second-best and no-toll solutions for a model with two routes and two time periods (peak and pre-peak). The main findings from the simulation results are: (1) the second-best scheme is effective but less efficient than the first-best scheme in reallocating traffic volumes; (2) the second-best tolls are appreciably smaller than the first-best tolls; (3) the welfare gains from the second-best policy are much smaller than the welfare gains that are possible with a complete set of first-best tolls. It is also shown that the nature of the simulation results is not sensitive to reasonable cost and demand parameters.