Pareto Improvements from Lexus Lanes
The effects of pricing a portion of the lanes on congested highways Jonathan Hall
Northwestern University

Introduction

Additional externality

Model

Theory

Empirics

Counterfactuals

Conclusion

A barrier to congestion pricing is the belief that it hurts many road users
Academics
“First-best congestion pricing . . . introduces severe disparities in direct welfare impact.”
Small, Winston, and Yan, 2005

Policy makers
“[Congestion pricing is] unfair in terms of the economic impact.” Maryland Gov. Parris Glendening

Pundits
“Exalted [toll] lanes leave the average Joe in the dust.”
Marc Fisher, The Washington Post

Public
“Turkeys don’t vote for Christmas and motorists won’t vote for more taxes to drive.”
Voter in Manchester, UK
1/20

Introduction

Additional externality

Model

Theory

Empirics

Counterfactuals

Conclusion

Key result: A carefully designed toll on a portion of the lanes can be a Pareto improvement before revenue is spent

2/20

Introduction

Additional externality

Model

Theory

Empirics

Counterfactuals

Conclusion

Key result: A carefully designed toll on a portion of the lanes can be a Pareto improvement before revenue is spent

2/20

Introduction

Additional externality

Model

Theory

Empirics

Counterfactuals

Conclusion

Key result: A carefully designed toll on a portion of the lanes can be a Pareto improvement before revenue is spent

Give up some potential Kaldor-Hicks efficiency for a Pareto improvement Kaldor-Hicks improvement - Winners gain more than losers lose
Pareto improvement - Helps at least one person without hurting anyone

2/20

Introduction

Additional externality

Model

Theory

Empirics

Counterfactuals

Conclusion

Key result: A carefully designed toll on a portion of the lanes can be a Pareto improvement before revenue is spent

Give up some potential Kaldor-Hicks efficiency for a Pareto improvement Kaldor-Hicks improvement - Winners gain more than losers lose
Pareto improvement - Helps at least one person without hurting anyone

If this allows us to overcome political opposition then we’re trading potential efficiency gains for actual efficiency gains

2/20

Introduction

Additional externality

Model

Theory

Empirics

Counterfactuals

Conclusion

Key result: A carefully designed toll on a portion of the lanes can be a Pareto improvement before revenue is spent

Give up some potential Kaldor-Hicks efficiency for a Pareto improvement Kaldor-Hicks improvement - Winners gain more than losers lose
Pareto improvement - Helps at least one person without hurting anyone

If this allows us to overcome political opposition then we’re trading potential efficiency gains for actual efficiency gains
What allows me to get this new result?
Identifying a second externality using insights from traffic engineering literature

2/20

Introduction

Additional externality

Model

Theory

Empirics

Counterfactuals

Conclusion

Key result: A carefully designed toll on a portion of the lanes can be a Pareto improvement before revenue is spent
Main theoretical result
It is a Pareto improvement to price some portion of the lanes if there are two “families” of agents, one rich and the other poor before adding tolls some rich agents travel at the peak of rush hour 3/20

Introduction

Additional externality

Model

Theory

Empirics

Counterfactuals

Conclusion

Key result: A carefully designed toll on a portion of the lanes can be a Pareto improvement before revenue is spent
Main theoretical result
It is a Pareto improvement to price some portion of the lanes if there are two “families” of agents, one rich and the other poor before adding tolls some rich agents travel at the peak of rush hour Main empirical result
Pricing 1/2th of lanes on CA SR-91 is a Pareto improvement and social welfare gains are $1,800/road user/year.

3/20

Introduction

Additional externality

Model

Theory

Empirics

Counterfactuals

Conclusion

An additional driver can impose two