Labor market effects of road pricing in a population with continuously distributed value of time : paper for ERSA special session on road pricing, 19-23 August, 2010

The purpose of the presentation is to analyze the labor market effects of a congestion charge when commuters have continuously distributed value of time. Since a congestion charge raises the cost of commuting to work, it can decrease employment at the extensive margin in a similar way as an income tax. Without any form of revenue recycling, the resulting welfare loss from the decreased employment can even exceed the Pigouvian welfare gain from internalizing the congestion externality. A common conclusion in the literature, when comparing different revenue recycling schemes, is that it in general is more effective to use the revenues to cut taxes in the labor market compared to subsidizing public transport or returning them in a lump-sum transfer. A critical assumption in many of the previous cost-benefit analyses of congestion charges is however that there only exists a single value of time. This is somewhat surprising since one of the main features of a congestion charge is that it sorts people according to their value of time, given the existence of feasible transport alternatives. This paper intends to challenge this conclusion by analyzing how previous results hold if we, instead of using a representative individual, consider a population with a continuously distributed value of time. The model used in the paper is created with the Stockholm congestion charging trial in mind, but the analysis can just as well be applied to any city with a well developed public transport service. In the paper a simple traffic model is embedded within a general equilibrium framework where a large number of individuals with different values of time choose labor supply at the extensive margin and mode of transportation. In contrast to previous models, a modal-choice approach is used to model how the value of time for different individuals affects their choice of travel mode. The disaggregated travel demand model makes it possible to analyze how self-selection of mode choice affects labor supply, total welfare and the relative performance of the different revenue recycling schemes. Special attention will also be given to the distributional impacts of the different recycling schemes.