London-type congestion tax with revenue-recycling

Road pricing in London attracts a great deal of interest. A challenging aspect of the London scheme is that congestion tax revenue is used to upgrade public transit networks. Although Parry and Bento (2001) show that the total social surplus would increase if congestion tax revenues are used to cut labor taxes, political difficulties exist in implementing revenue-recycling between congestion taxes and labor taxes. Given such political difficulties, the London scheme seems to be very attractive. In this paper, we develop a model that can expressly deal with the London-type revenue-recycling between congestion tax and investment in public transit, and analyze its effects.