Tarduno, Matthew “For Whom the Bridge Tolls: Congestion, Air Pollution, and Second-Best Road Pricing” (Revised September 2022) | WP-323R | Blog

Real-world congestion zones are imperfect because they charge heterogeneous road users uniform prices, and invite externality spillovers in space and time. I show that given these imperfections, calculating optimal prices requires (i) individual-level externalities, (ii) individual elasticities, and (iii) cross-price elasticities between priced and unpriced trips. Using tolling microdata from California, I estimate a model of driving demand that yields these parameters. I then estimate optimal prices for proposed zones in three U.S. cities. I find that leakage pushes second-best prices below trip-level externalities, and that optimal peak pricing recovers just 30-40% of the welfare gains of a first-best policy.