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Tolls, Earmarking, and Optimal Road Capacity

ABSTRACT A classic question in transportation economics is whether optimal road capacity is greater with or without congestion tolls. This article addresses the question under two complications. One is that tolls are levied not only to relieve congestion but also to generate revenues. The other is that toll revenues may be earmarked. Under most plausible assumptions, capacity is found to be greater without tolls. The main exception is when the marginal cost of public funds is high, and revenues are earmarked to the toll road so that capacity investments are effectively “protected” from competing demands for scarce public funds.