The inefficiency of marginal cost pricing on roads

The economic principle of road pricing is that a road toll should equal the marginal cost imposed by an additional user, since this will lead to efficient use of the transport facility. However, when the road is used by traffic both from the road providing region as well as by traffic from another region, the supplied road standard is likely to be too low, since the consumer surplus of the users from outside the region is not taken into account. This can be solved by letting an authority level higher than the road supplier use taxes and earmarked transactions to raise the road standard. (In Europe we see this done in the Trans European Network). To do this the higher authority needs very detailed information about the road and the users on local level. Further raising taxes and transactions also involve costs that can be substantial. Another problem is that transactions of this type it is hard to separate from other political interference. This paper analyzes how a limited toll on top of the marginal cost can serve the purpose of solving this problem locally, without involving a higher authority.