Congestion and Tax Competition in a Parallel Network

This paper studies the effects of tolling road use on a parallel network when different governments have tolling authority on the different links of the network. The paper analyses the tax competition between countries that each maximise the surplus of local users plus tax revenues. Three types of tolling systems are considered: (i) toll discrimination between local and transit traffic, (ii) uniform tolls on local and transit traffic, (iii) only local tolls can be imposed. The paper characterises the optimal toll levels chosen in a Nash equilibrium for the three tolling systems. The numerical illustration shows that introducing transit taxes generates large welfare effects and that toll systems that only apply to local users only generate a low welfare gain. Nash equilibrium toll discrimination between local and transit traffic generates slightly higher welfare than the solution where both tolls have to be uniform