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Microsoft Word - Networksim.doc THE GENERALIZED SECOND-BEST NETWORK CONGESTION PRICING PROBLEM Erik T. Verhoef* Department of Spatial Economics Free University Amsterdam De Boelelaan 1105 1081 HV Amsterdam The Netherlands Phone: +31-20-4446094 Fax: +31-20-4446004 E-mail: [email protected] This version: 30/06/00 Key words: congestion, road pricing, networks, second-best JEL codes: R41, R48, D62 Abstract This paper considers the second-best problem where not all links of a congested transportation network can be tolled. The paper builds on earlier work in which the second- best tax rule for this problem was derived for general static networks, so that the solution presented is valid for any graph of the network, and for any set of tolling points available on that network. The solution is now applied in an illustrative simulation model, in which various second-best problems can be studied that might arise with the implementation of different archetype pricing schemes. Apart from the benchmark of first-best pricing, these include for instance a toll-cordon, parking policies in the city centre, and pay-lanes and ‘free-lanes’ on major roads feeding into the city. An exploratory analysis is given of a possible method for selecting the optimal location of toll points in case not all links can be tolled. *The author is affiliated to the Tinbergen Institute, Keizersgracht 482, 1017 EG Amsterdam. The research of Erik Verhoef has been made possible by a fellowship of the Royal Netherlands Academy of Arts and Sciences. � 1. Introduction Second-best issues in transport regulation have received ample attention in the recent literature. This is often motivated by the observation that the first-best policy for a congested road network – tolls equal to marginal external costs on each individual link – is a rather theoretical construct. Various considerations often lead transport regulators to consider second-best solutions only, in which n

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