Private Access Fees and Congestion Is There a Role for Government After All?

We reconsider an important debate between Pigou (1920) and Knight (1924) nominally about congestible roads. Contrary to Knight's contention, allowing independent players to set tolls on congestible roads does not necessarily induce an efficient allocation of motorists. Toll- setting does result in efficient allocation in the limit of a large economy even in the absence of any uncongestible road. But in the more realistic circumstance of a finite economy, toll- setting—unlike Pigouvian taxes—will not in general achieve efficiency. We use these results to demonstrate a role for government in producing an uncongestible option that provides the necessary “competitive conditions” for toll-setting to reach the efficient outcome. These results are important for other allocation problems involving congestion. They even apply to the allocation of researchers across different contests where prize setters offer each winner a monetary prize and must compete with other prize setters and with jobs offering riskless compensation.