The Implementation of Marginal External Cost Pricing in Road Transport

This paper discusses a number of issues that will become increasingly important now that the concept of marginal external cost pricing becomes more likely to be implemented as a policy strategy in transport in reality. The first part of the paper deals with the long-run efficiency of marginal external cost pricing. It is shown that such prices not only optimize short-run mobility, given the shape and position of the relevant demand and cost curves, but even more importantly, also optimally affect the factors determining the shape and position of these curves in the long run. However, first-best prices are a hypothetical bench-mark only. The second part of the paper is therefore concerned with more realistic pricing options. The emphasis is on the derivation of second-best pricing rules. Four types of second-best distortions are considered: distortions on other routes, in other modes, in other economic sectors, and, finally, due to government budget constraints.