When consumers can decide not to pay a tax: enforcing and pricing urban on-street parking space

Governments may be hindered in setting taxes on markets in which the consumer can choose to consume the good but not pay the tax. An example is urban on-street parking. If government attempts to ration demand to supply via a peak-load fee, but fails to invest in costly enforcement, drivers park but do not pay the meter fee. This paper examines optimal enforcement levels and meter fee rates for on-street parking. It is shown that, when enforcement is sufficiently costly, peak-load pricing is not desirable. In addition, some positive amount of illegal parking remains in the optimum. Finally, the model is used to explore the behaviour of local government, when, as was the case in the U.K., it does not receive the revenues from fine payments. It is shown that this might lead local government to set meter fees and enforcement levels that are too low - something that has been widely observed in the U.K.