Optimal level of MultipleTypes of Transportation with Several Externalities

Abstract:

There exist several types of transportation, each causing several externalities. E.g., both transportation of persons by cars and trains cause noise, accidents and emissions of CO2.

Analysing a socially optimal situation by independently analysing the partial optimal level of each transportation type based on the marginal costs of reducing and the marginal value (negative) of the externalities it creates is not satisfying. The marginal value of an externality depends on its level. The marginal benefit from reducing this externality by lowering one kind of transportation is therefore dependent on emissions from other kinds of transportation. Here, the theoretical background for the problem is analysed and the rules for an optimal solution are found.

Estimating and running a partial equilibrium model based on a valuation in monetary terms of externalities for Denmark shows that the optimal level of transportation requires reductions in transportation. Compared with a world without taxes on transportation, there are significant welfare gains from reducing transportation to the optimal level. The existing tax system on transportation improves welfare relative to a system without taxes, but is still inoptimal. There are significant efficiency costs of reducing the number of taxes, but the major part of the welfare gain can be achieved with only one optimal tax. If administrative costs are taken into account, a single tax might be preferred to multiple taxes. If uncertainty is introduced, pricing instruments should be preferred for quantity instruments. This is caused by damage curves with relatively small slopes and corresponds the Weitzman result.