Pricing Congestion with Heterogeneous Agglomeration Externalities and Workers

Abstract

We consider an urban economy with two types of workers and two types of firms. The workers jointly use a congestion-prone network to commute to work, and the firms are subject to different degrees of agglomeration externalities. We show that, when no separate instruments are available to handle congestion and agglomeration effects, the optimal toll on commuting trades off congestion and agglomeration effects, so that it differs among workers. We use a numerical model to show the impact of constraints on tolls and on toll revenue redistribution schemes. The latter are shown to have a particularly strong downward impact on the welfare potential of tolling commuters.

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