Consumption Externalities in Models of Urban Transportation

Abstract

A two-sector, two-commodity model, in which the consumption externalities of one good are treated as public “bads,” is used to evaluate diagrammatically the case for consumption subsidies for the other good. The model is discussed within the context of urban transportation where public bads are assumed to be generated by the consumption of private transportation. Of particular interest is whether a transfer of purchasing power through public transportation subsidies from one (higher-income) group to the other (lower-income) group can, by reducing the consumption of private transportation by the latter, improve the respective welfare levels of both parties (i.e., produce a Paretian improvement). It is shown that while a subsidy may result in a Pareto efficient allocation of resources, the likelihood of Paretian improvements is remote. The equity and efficiency implications of alternative subsidy proposals are also examined.

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