Achieving Equity Through Urban Transport Pricing?
Professor Stef Proost
University of Leuven (Belgium)
In this paper we discuss the equity issues associated to a reform of urban transport pricing
policy. The goal of the paper is not to survey the equity effects of different pricing systems in
European cities. Our ambition is rather to offer a fresh look at equity issues starting from
We work in three stages. We first spend some time in explaining how economists struggled
with the equity concept and what is now the standard equity concept that is used in the
profession. This standard definition has been used in difficult issues as there are indirect and
direct tax reform. We expect the same concepts to be useful in a reform of transport pricing.
The social welfare function concepts we will use allow us to work with different views on the
relative weights for equity and efficiency.
Our equity concept will be based on a broad definition of real income. Translating a reform
of urban transport pricing into real income changes is not easy and is therefore discussed in
part two. The well known effects (valuation of time, use of revenues) are mentioned and we
spend more time on a few less well-known effects that can be important in a transport pricing
reform. We discuss here briefly issues like the interaction with existing taxes, the funding of
public transport, the tax co-ordination between different government’s etc.
In the third part of this study we illustrate the equity – efficiency trade-off by examining the
welfare effects of a reform of different types of transport taxes, taking into account the full
effects on the economy. This will guide us in proposing pricing reform directions.
The major drawback of this paper is its purely economic approach. Probably every discipline
(psychology, sociology) and even every individual have their views on equity. These views
are probably more accessible and more intuitive than the economic approach. The economic
approach is probably narrow minded but is systematic. One of the results of this paper could
be some cross-fertilisation between different approaches.
URBAN WHAT DOES AN ECONOMIST MEAN BY EQUITY?
Equity and fairness are concepts that are commonly used to judge government policies. They
are particularly useful in political negotiations because everybody can use his own
interpretation of the concept. The concepts that are used fit in general very well the interests
of the party using them. Equity is a valid concern and is at the heart of our tax systems. To
make equity a useful concept in discussing a reform we need to agree on a definition and
identify more clearly where one can disagree. Economics is particularly helpful here as it can
offer a relatively clear and rigorous definition of equity
There are two strands in the literature. There is the social welfare function approach that uses
a weighed sum of changes in real income and there is the approach that starts from specific
moral judgements. According to the second approach, an economic situation is equitable if no
one prefers the bundle of goods (housing, salary, transport conditions etc.) of somebody else.
This approach is not very useful here mainly because it is a lexicographic criterion (it is
equitable or not). A non-equitable allocation of salaries (and capabilities) can probably never
be corrected by transport policy decisions alone.
The social welfare function approach we will use is more general and flexible.
The social welfare approach
The social welfare approach starts from the idea that a change in economic conditions can be
judged using a weighed sum of real income changes of the different individuals or
The real income change is the net income equivalent of all the changes that result from the
policy and that are important for a household. This includes a much broader range of effects
than the extra expenditure that motorists have to pay for their trips as a result of say tolls. It
includes gains in time, lower environmental damage, reduction in other taxes etc. We will
return to the translation of policies into real income effects in the next section.
To illustrate the idea we use an example with 2 individuals. Before the introduction of road
pricing, Mister Rich uses his car intensively and Mister Poor uses his car much less. Their
initial real income levels are Ypoor and Yrich. Measuring their real income level before the
change is not an easy task because the real income level takes into account not only nominal
income level but also leisure time, family size, handicaps, etc. We will assume that mister
Rich has a higher real income level because he earns a larger wage per hour as consultant
than mister Poor who is a low skilled worker. This particular distribution of real income is
also the result of present tax policies.
Imagine now that there are several transport pricing reforms that are possible. We show three
policy reforms in Table 1 and they are illustrated in Figure 1. The different reforms are for
illustrative purposes only but reflect guesstimates of the author of this paper.
The first reform is a Free Bus reform where public transport is made free. This will generate
two types of effects. First it can improve to a small extent the congestion problems by
moving car users to the transit system and this is beneficial. Second there will be a strong
extension of bus use, also by non car users and this means that many trips are made for which
the willingness to pay is much smaller than the marginal social cost. The cost of the
unjustified trips can easily be larger than the saved congestion costs on the car market. The
strong increase in transit use means also a strong increase in investment and operating costs.
This increase in costs needs to be financed by increasing probably income taxes. Income
taxes are strongly distortionary (they create a wedge between marginal product of labour and
the net wage) so that we need to account for an extra loss in economic efficiency. One of the
reasons why free public busses are favoured in Europe is that they are more intensively used
by some low-income groups. The result in terms of real income changes may be a small
welfare gain for the poor (+6) but a large income loss to the rich (-10).
The second type of reform is pure and simple road pricing where revenues are used to
decrease existing labour taxes (RPLLT). This policy will benefit probably more the rich
because the rich travel more by car, have a higher value of time and pay more labour taxes,
for them this is an important efficiency improvement (+20). The poor will gain also but much
The third type of reform consists in implementing road pricing but to use the revenues to
increase the subsidies to the poor. This policy will still benefit the rich but somewhat less
because they miss the decrease in labour taxes and they do not benefit from the subsidies
(+10). The poor will favour this proposal because they will benefit from road pricing and
from the subsidies (+6). The total gain in real income is somewhat smaller when the revenues
are used for subsidies to the poor (10+6 versus 20+2). The main reason is that the
distortionary labour tax remains at a higher level than in the previous reform.
ABLE 1 Illustrative example of weighted welfare comparisons
Policy Change Change Efficiency Weighted welfare Weighted welfare
in in effect (gain to effect (gain to
Yrich Ypoor Poor is 2 times poor is 4 times
gain to Rich) gain to Rich)
Free Buses paid by -10 +6 -4 +2 +14
higher local income (=12-10) (=24-10)
Road pricing where +20 +2 +22 +24 +28
revenue is used to (=4+20) (=8+20)
lower labour taxes
Road pricing where +10 +6 +16 +22 +34
revenue is used to (=12+10) (=24+10)
increase subsidies to
low income groups
We can compare the effects of the three reforms using four types of criteria.
Pareto-criterion: only accept a policy change if there are no losers. This criterion is
interesting when co-operation of all parties concerned is necessary. This is the case in
voluntary schemes or in international negotiations where the different groups will simply not
participate if there is no gain for them. The problem with this criterion is that it does not
allow comparing all reforms because most reforms have always a loser if one details
sufficiently the different categories. For that reason it strongly favours the status quo.
In Table 1 this would mean that one could only accept the two road pricing alternatives but
one could not choose among the two. In Figure 1 this would mean that only the quadrant to
the North – East could be compared to the reference O.
Efficiency criterion: only the total real income matters, this is also called the compensation
criterion: if losers can be (not are) compensated by the winners, the reform is beneficial. This
is called efficiency because no attention at all is paid to the distribution of real income. Most
economists implicitly use this criterion in evaluating transport pricing reforms. This criterion
is sometimes called total welfare.
Most transport economists like this criterion because they assume that income distribution
can be achieved more efficiently and at no cost by other means. Therefore one can best
concentrate transport policies on achieving maximal efficiency and leave distributional
questions aside. Equity is then not relevant in transport policy.
In Table 1 the efficiency criterion is computed in the third column. In Figure 1, this
corresponds to the 45° parallel lines, called social indifference curves. One is indifferent
between all points on the same level curve and one tries to reach a level curve that is as far
right as possible. The criterion favours clearly the RPLLT (Road Pricing with Lower Labour
Weighted welfare criterion: according to this criterion one takes a weighted sum of the
changes in real income; the more the policy maker is averse to income inequality the higher
the weight for the poor. In this criterion one can give a high value to equity.
The two last columns in Table 1 illustrate the use of the weighted welfare weights. Scores can
only be compared within one column. When the equity concern is not too important (gain to
poor is two times more important than to the rich), one still chooses the RPLLT reform.
When equity becomes more important, one prefers the third alternative where part of the
efficiency gains of lower labour taxes are sacrificed to increase the transfers to the poor. In
Figure 1, this corresponds to the use of social indifference curves that have a steeper slope
What reform is best for the policy maker depends on three elements:
- the efficiency of the transport pricing reform itself: to what extent does a pricing reform
bridge the gap between prices paid and marginal social costs, including the secondary
effects on other distorted markets like the labour market?
- the distributional impact of the reform
- the weight the policy maker attaches to efficiency and equity considerations
What do we know about the distributional weights of the policy maker? We could try to
discover the implicit weights used by the policy maker in two ways. We could use stated
preference techniques and submit different policy experiments to the policy maker and see
what ranking he uses. Policy makers do not like to participate in such experiments.
We could also use a revealed preference technique by analysing the implicit welfare weights
that correspond to the present tax system. The present tax system tries to redistribute income
from rich to poor by using income taxes. Because labour taxes also create dead-weight losses,
the present tax system can be seen as a trade-off between efficiency and equity. How does
If the dead-weight loss associated to the labour tax (called also MCPF or marginal cost of
public funds) is 1.5 this can give us an idea about the revealed weights of the policy maker. If
the MCPF is associated to a tax instrument (progressive labour tax) that takes tax revenue
away mainly from the rich and distributing it only to the poor, a 1.5 value implies that the
policy maker is prepared to lose 1.5 units of income for the rich if he can give the poor 1 unit
of income. The implied weight is than 0.66 for the rich and 1 for the poor. If we know that
the real after tax income of the rich is twice as large as the after tax income of the poor, we
know the relation between the relative real incomes and the welfare weight.
KNOWN AND LESS WELL KNOWN IMPACTS OF PRICING REFORMS
Well known impacts of road pricing
The impact of road pricing has been studied intensively over the last years. The analyses vary
in the level of sophistication between a simple analysis of relative use of transport modes per
income class to detailed micro-simulation models. Most efforts have been devoted to the
measurement of the impact on users of the road transport system.
To study the effect on the users of the system it is common to use a demand and supply
diagram in terms of generalised prices. Figure 2 is such a Diagram where we represent only
the peak car use and aggregate the urban transport network into one speed flow link (see De
Borger & Proost (2001) for a detailed explanation). We represent on this graph a congestion
externality (MECC) and another externality (air pollution, traffic accidents, ..). The initial
equilibrium is E1 where the users’ price equals the willingness to pay of the last user. The
correction of the externalities requires using a tax on peak car use. After the implementation
of the optimal tax we reach a more efficient equilibrium E3. In this equilibrium we have X1 –
X3 suppressed trips. The efficiency gain equals the shaded area: this is for the suppressed
trips, the difference between the marginal social cost and the willingness to pay.
This diagram allows us to identify the first round winners and losers:
- the suppressed users lose E3 K E1 or half the increase in generalised price times the
suppressed number of trips
- the remaining users lose P3 E3 K P1 : they pay more taxes and this is only partly
compensated by higher speeds
- the beneficiaries of existing taxes (t): the revenues decrease because the tax base is
smaller: loss of M E1 B J
- the beneficiaries of the new taxes: P3 E3 M H
- the victims of other external effects: gain : E3 G N R (congestion is already included in
time gains to remaining users)
It is not our objective to survey the literature on the measurement of effects by income class.
There are 4 important findings in the literature (see Small (1983) and Giuliano (1994)):
- The sum of total collected toll revenues is much larger than the time savings (4 or more
times as large as can be seen on Figure 2); this implies that the redistribution of the
revenue will be important to know the real welfare impact. The consequence is that no
equity judgment is possible without discussing the use of the revenues
- most remaining car users (that are not car pooling) are high income users with a high
value of time or are business trips, the individuals with the highest value of time may
benefit from the toll even before any redistribution of toll revenue – this is hidden in the
aggregate welfare computation in Figure 2
- some remaining car users may have a relatively low value of time but a very low
flexibility in their trips: they are the group that is most affected before redistribution of
the revenues (the typical example is here working mothers that need to bring their
children to school)
- With a very large variety of users within each income group it is impossible to find
redistribution schemes that make sure that all households experience a net gain. In a
recent paper on road pricing in the Netherlands, Verhoef and Rietveld (2001)
distinguished a few million categories of different users (combining location, value of
time, trip motive, income class etc.), it is clear hat they will always find a category that
will not gain after redistribution.
The less well known impacts
Impact on air pollution, noise and traffic safety
These effects are recognised by most people but their exact magnitude and the identity of the
beneficiaries is unclear.
For air pollution, an important part of the benefits are interregional rather than local. Effects
on acid rain, global warming, troposheric ozone formation and the small particulates damage
are the most important damage categories but they are mostly interregional and even
intercontinental. Moreover the order of magnitude of these benefits is much more uncertain
than in the case of time savings (cfr. uncertainty of climate change damage and of
particulates). Finally it can be expected that these benefits will decrease strongly with the use
of cleaner vehicles (cfr.Proost (2000)).
Public transport effects
Whenever there is a change in the pricing of road use, there will be substitution effects to
public transport. When transit fares equal social marginal costs and there are no returns to
scale, we do not have to take these effects into account. The reason is that they are already
included in the surplus measures taken into account for the car market. However these
assumptions do in general not hold.
First of all, public transport is often heavily subsidised and priced below the marginal social
cost. When demand expands due to the increase in road tolls, there is a need for increased
subsidies in order to meet the expanded demand.. This is certainly the case in the peak period
as bus or rail capacity will have to be expanded. The need for extra public transit subsidies
and the increased external costs (air pollution, accidents) are to be considered as an economic
loss because transit fares do not cover the marginal social cost. The fact that these losses can
easily be recovered financially via increased revenues of road tolls makes people forget that
they remain a loss.
This effect can be important because most urban areas rely heavily on very cheap and high
quality public transport to decrease the use for cars. Once one starts to introduce road pricing,
the free public transport policy is no longer optimal and there is a need to increase public
transit fares and this is not easily understood and accepted.
Second, expanded demands allow for positive density of demand effects. An increase in the
number of users allows to increase the service frequency or to use larger busses. This is a
positive external effect: one extra user decreases the travel time of other public transport
users. This is better known as the Mohring effect (Mohring (1972)). Van Dender & Proost
(2001) studied this effect for Brussels and London and found it relatively small.
Interaction with existing taxes
A large part of the transport economic literature on congestion pricing concentrates its
attention solely to transport markets. Setting optimal prices on the transport market is
however only justified under two conditions: if there are no equity considerations and if there
are no important pricing distortions on other markets. Most of the literature assumes that
there are perfect income distribution instruments available (the so called lump-sum taxes and
transfers), an issue on which we return in the next section. For the sake of simplification we
assume here provisionally that there is no equity. More and more attention is paid to the
second assumption: we can not assume that there are no other taxes in the economy. Probably
the most important other tax that does exist in the economy is the labour tax (and social
security contributions that have the same effect as a labour tax). Recent studies of
environmental taxes (Goulder et al.1999) and of congestion taxes (Mayeres & Proost, (1997),
have brought important insights to the design and implementation of congestion taxes in the
presence of a labour tax.
The basic problem of a congestion tax in the presence of a labour tax is that a congestion tax
may decrease the supply of labour. This decrease in labour supply has a very high cost
because the initial distortion is already very important. This has important implications:
1. Whenever congestion taxes raise tax revenue, the tax revenue should be used to decrease
labour taxes. This way one alleviates existing distortions. Allocating the revenues to
higher public transport subsidies or to other purposes implies that the congestion tax
should stay below the marginal external cost.
2. It is probably optimal to allow for a different tax regime for commuter trips and non-work
related trips. This can be achieved by allowing tax deductibility of commuting expenses.
The different tax treatment is necessary because non work related trips should be taxed at
marginal external cost while taxes should be smaller for work related trips.
3. Implementing road pricing via handing out (tradable) peak transport rights or parking
rights to all existing users (whatever the purpose of their trip) may be very inefficient
because this takes away the revenue that can be used to decrease existing labour taxes
Effects on location changes and property values are almost always neglected. Sullivan’s
analysis (Sullivan, 1983)) shows that these effects are mostly small. In a monocentric city,
congestion taxes will lead to a more concentrated city.
Multi-level government issues
Most literature deals with only one government level and all transport users are voters or
citizens of that government. This is clearly not the case when urban road pricing is
implemented. This raises two additional issues: vertical tax interactions and horizontal tax
Vertical tax interactions means that the urban government can, by implementing road pricing,
decrease the revenues of the federal government because the federal tax base (gasoline taxes,
income taxes) can shrink as a result of road pricing. An urban government will in principle
not care about the federal tax base because they only receive a small share of that tax base via
revenue sharing grants.
Horizontal tax interaction means that every urban area does not take into account the positive
or negative effect of its actions on the tax base of neighbouring jurisdictions. These problems
are better known as tax exporting and tax competition. Tax exporting means that one urban
region will try to set up a road-pricing scheme where the non-inhabitants pay more than the
marginal external cost. In this way they can earn tax revenue very easily. In Europe this
practice is widely known since the Middle Ages and can have important efficiency costs. It
makes road pricing more acceptable for the urban government but is not particularly fair and
efficient. Tax competition means that different urban governments compete for the same tax
base, this can be businesses that look for an appropriate location. Here there is a risk that
different urban governments, in their competition tend to charge insufficient business or
congestion related taxes (“race to the bottom”).
TOWARDS A GLOBAL VIEW ON TRANSPORT PRICING REFORM
It is generally accepted that the introduction of road pricing should be part of a global tax
reform package in which all taxes can be revised. This is probably the best way to have a
reform that is equitable and as efficient as possible. Obviously this is a task beyond the
responsibility of urban governments concerned with road pricing because they can only
decide on a minor part of the tax system. This exercise can however be useful to know what
urban governments can do and what are the co-ordination issues to be solved.
Mayeres and Proost (2001) looked into the problem of marginal tax reform with a highly
stylised model. This means that they examined what taxes should best be increased and what
other taxes should be decreased so as to keep total government revenue constant and improve
efficiency and equity. They defined efficiency as the sum of all real incomes and equity was
taken into account using welfare weights that vary with income (cfr. section 2). The theory is
applied to urban areas in Belgium where there is a congestion problem and where there is not
yet any congestion pricing.
They distinguish between 5 commodities: labour (the only production factor), peak car
transport, off peak transport, public transport and other consumption. Only peak car transport
produces congestion problems. There are 5 income groups in the model. The lower income
groups have a lower wage, consume less car transport but more public transport and have a
lower value of time. This is illustrated in Table 2. One sees that there are differences in
budget shares but they are less pronounced than you would think.
A Table 2: Information on the Income Quintiles
Quintile Quintile Quintile Quintile Quintile Total
1 2 3 4 5
Spending (% of total 100% 100% 100% 100% 100% 100%
spending by quintile)
Composite commodity 90.59% 89.58% 89.01% 89.18% 90.23% 89.72%
Peak car transport 3.66% 4.11% 4.91% 4.82% 4.52% 4.53%
Off peak car transport 5.13% 5.75% 5.54% 5.46% 4.87% 5.26%
Public transport 0.62% 0.56% 0.54% 0.55% 0.39% 0.49%
Valuation of reduction 1 1.12 1.55 1.55 2.02
in the externality
(quintile 1 = 1)
To simplify the model they only consider 5 tax instruments and the level of public spending
on road capacity as the policy variables. The 5 instruments considered are a proportional tax
on labour, a tax on peak car transport, a tax on off peak transport and a tax (or subsidy) on
public transport. There is also a poll transfer foreseen. This poll transfer should be considered
as part of the income tax scheme. Because working with a non-linear (progressive tax) was
analytically more difficult, increasing the poll transfer is a way of increasing the progressivity
of the income tax scheme. Table 3 summarises the initial tax rates. One sees high tax rates for
car use (excises on fuels and other taxes on cars) but the taxes are not differentiated between
peak and off peak. There is also an important poll transfer, which means that the income tax
schedule is progressive. The poll subsidy takes almost half (47.71%) of all public
expenditures. The only types of expenditures that can still be varied are expenditures on road
capacity. They represent only a small fraction of total expenditures. Expanding road capacity
(and lowering congestion) requires either higher tax revenue or lower poll transfers.
Decreasing road capacity allows a decrease in taxes.
B Table 3: the Policy Instruments
Tax rates Observed tax rates
(% of producer price)
Composite commodity 11.89%
Peak car transport 43.20%
Off peak car transport 43.20%
Public Transport -69.53%
Public spending Observed
(% of total tax revenue)
Poll transfer 47.71%
Road infrastructure 2.85%
C Table 4 : The Welfare Weights
Degree of income inequality aversion measured by
= 0 =1 =5 = 10
group1 1 1 1 1
group2 1 0.87 0.50 0.25
group3 1 0.78 0.29 0.09
group4 1 0.66 0.12 0.02
group5 1 0.44 0.02 0.00
In table 4 we present alternative views on equity that correspond to the definitions we
proposed in section 1. If only the sum of all real incomes counts, one gives equal weights to
all income groups. When the aversion to income inequality increases (“equity more
important”) the lower income groups receive a relatively higher weight. In the most extreme
case, the highest quintile receives a weight close to zero.
Table 5 presents the central results of the tax reform exercise. This table gives the social
welfare cost of raising 1 EURO of government revenue in different ways. A tax reform
means in our case raising some taxes and decreasing other taxes . Inspecting the first row of
Table 5, the welfare cost of raising 1 EURO via an increase of the indirect tax on peak car
transport is 0.99 EURO, while the welfare cost of raising 1 EURO via an increase in the
labour tax equals 1.90 EURO. As a consequence, we can conclude it is beneficial to increase
marginally the tax on peak car transport and to decrease marginally the labour tax; this would
keep the government budget unchanged and result in a net welfare gain of 0.91 EURO.
The cost of raising government revenue is the result of three factors. The first factor is the
economic distortion associated to an increase in taxes: the higher the price elasticity and the
higher the initial tax rate, the higher will be the efficiency cost of raising taxes. The second
factor is the effect on the congestion externality: a tax that discourages peak car traffic
(directly or indirectly via cross price elasticities) will be more interesting. The third factor is
the equity criterion. If a commodity is consumed proportionally more by the poorest, taxing
this commodity brings a higher welfare loss.
In Table 5, we represent results for an increasing degree of inequality aversion, starting from
pure efficiency in column 1 (=0) to an extremely high weight for equity (=10). The last
column is a control column to check what would be the results if there were no effect on
A good tax reform is a tax reform that increases the tax with the lowest welfare cost of raising
tax income and decreases the tax with the highest cost of raising tax revenue. In the lower
half of Table 5 the different tax instruments are ranked according to this criterion. We can
draw the following conclusions from this illustration:
1. Raising the tax on peak car transport ( t2 ) is an important element of the tax reform even
for very high concerns for equity because the tax is the best instrument to address the
2. Decreasing the public transport subsidies ( t4) (increasing public transport prices) appears
to be a second important part of a tax reform. Even for very high weights for equity
(=10), too high subsidies for public transport or so inefficient that this is not the
appropriate way to improve the welfare position of the poorest.
3. The uses of tax money are a reduction of the labour taxes ( t1) and an increase in road
capacity when only efficiency counts. When equity becomes very important an increase
in the poll transfer (P) becomes interesting too.
Obviously these conclusions do depend on the particularities of the Belgian transport
problems. What is important is to understand the different mechanisms that play a role in
transport tax reform. First equity can be an important factor but does not automatically imply
that taxes on public transport need to be low or that all congestion tax revenues should be
used to increase the poll transfer. Second the best use of the revenues, even after taking into
account equity considerations can still be to decrease labour taxes or to increase road
E Table 5: The Total Marginal Welfare Costs (MCF) of the Various
Degree of inequality aversion
=0 =1 =5 = 10 =0
labour tax t1 1.90 1.24 0.44 0.25 1.91
Indirect tax on peak car tp t2 0.99 0.64 0.22 0.12 1.06
Indirect tax on off peak car t3 1.70 1.12 0.41 0.23 1.70
tp t4 0.77 0.52 0.20 0.12 0.77
Indirect tax on public tp P 1.27 0.96 0.50 0.35 1.27
Poll transfer (decrease) R 4.74 2.95 0.90 0.46 3.28
Road capacity (decrease)
Low MCF t4 t4 t4 t2 t4
t2 t2 t2 t4 t2
P P t3 t3 P
t3 t3 P t1 t3
t1 t1 t1 P t1
High MCF R R R R R
° the original results were obtained using labour as the untaxed good – as transport is only a
small part of the consumption bundle, we interpret the other commodity tax as a labour tax
Obviously the model used by Mayeres and Proost is highly stylised. The model is much too
simple in that it considers only 5 income groups while one could segregate the population is
many other ways. The model also only considers a few tax instruments and infrastructure as
policy levers while some more focused instruments could be useful.
This paper has taken a broader look at equity issues in urban transport pricing. We have
broadened the perspective in two ways. First we have argued that the effect of a pricing
change should be computed in a more complete way. Secondly we have argued that the
equity value judgment needs to be based on the relative income position of the parties
The relative real income effect of a transport reform on one income group is not easily
determined. This real income effect should include not only the direct loss of consumer
surplus and gain in time but also the other external effects (safety, environment) and the
direct and indirect effects of the use of the revenues of the tolls. This requires a careful
analysis, sometimes at the level of the economy as a whole.
A value judgement on the equity effect of a reform should ideally consist of a weighted sum
of real income changes. The weights can accommodate different trade-offs between equity
and efficiency. Equal weights mean that efficiency is the sole objective. Weights that are
inversely related to the real income level translate a larger concern for equity issues. The
weights are to be determined by the policy maker but this assessment scheme is consistent
Is this type of procedure feasible? We demonstrated that this approach is feasible but may
require many assumptions. Compared to the more traditional approaches to equity, our
approach makes all assumptions in a more explicit way and allows to trade-off equity and
efficiency in a consistent way.
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