Using Road Pricing Revenue: Economic Efficiency and Equity Considerations

Issues of economic efficiency, equity, external costs, and political feasibility as they can help determine the distribution of road pricing revenue are examined. Economic efficiency requires only that revenue be used to benefit society and that it not be refunded to users in proportion to how much they have paid. Efficiency does not require that revenue be dedicated to transportation programs. Horizontal equity implies that revenues should be returned to vehicle users as a class but only after external costs are compensated. Because most estimates of motor vehicle external costs are larger than the expected revenue of road-pricing proposals, the horizontal equity justification for returning revenues to drivers is reduced or eliminated. Vertical equity requires that revenues benefit low-income drivers as a class at least as much as the costs they bear and that disadvantaged residents (including nondrivers) benefit overall. Current conventional thinking is that revenues must be dedicated to transportation improvements to be politically feasible, but some analyses indicate that alternative distributions that include broad tax reductions or financial rebates benefit the largest number of citizens and therefore may be more politically popular.