Pigouvian Tolls and Welfare Optimality with Parallel Servers and Heterogeneous Customers

Congestion externalities are a well-known phenomenon in transportation and communication networks, healthcare etc. Optimization by self-interested agents in such settings typically results in equilibria which are sub-optimal for social welfare. Pigouvian taxes or tolls, which impose a user charge equal to the negative externality caused by the marginal user to other users, are a mechanism for combating this problem. In this paper, we study a non-atomic congestion game in which heterogeneous agents choose amongst a finite set of heterogeneous servers. The delay at a server is an increasing function of its load. Agents differ in their sensitivity to delay. We show that, while selfish optimisation by agents is sub-optimal for social welfare, imposing admission charges at the servers equal to the Pigouvian tax causes the user equilibrium to maximize social welfare. In addition, we characterize the structure of welfare optimal and of equilibrium allocations.

Optimal Mitigation Policies in a Pandemic: Social Distancing and Working from Home

We study an economy’s response to an unexpected epidemic. The spread of the disease can be mitigated by reducing consumption and hours worked in the office. Working from home is subject to learning-by-doing. Private agents’ rational incentives are relatively weak and fatalistic. The planner recognizes infection and congestion externalities and implements front-loaded mitigation. Under our calibration, the planner reduces cumulative fatalities by 48% compared to 24% by private agents, although with a sharper drop in consumption. Our model can replicate key industry and/or occupational-level patterns and explain how large variations in outcomes across regions can stem from small initial differences.

Inequality, Growth, and Congestion Externalities

We describe and numerically simulate the aggregate and distributional properties of an endogenous growth model with an infrastructure externality which is subject to relative congestion. We show that the congested externality induces higher growth, greater inequality, labor/leisure trade-off ambiguities and an ineffective capital income tax for the government to achieve long-term redistribution goals. We demonstrate the economic implications of congestions in production and consumption externalities on the public to private capital ratio, growth and income distribution. Finally, we discuss alternative tax options for promoting inclusive growth.

Henry George and Mohring–Harwitz Theorems: Lessons for Financing Smart Cities in Developing Countries*

Developing countries are embarking on ‘smart city’ programmes to rejuvenate their cities as engines of economic growth, applying smart solutions and managerial innovations. However, they ignore the powerful externalities of cities and are far from adopting ‘smart’ ways of financing urban infrastructure and services based on known theories and international practices. This article combines the Henry George Theorem (HGT) from Urban Economics and Mohring–Harwitz Theorem (MHT) from Transport Economics to suggest a robust strategy of financing infrastructure in cities. While the HGT emphasizes the taxation of urban land value, the MHT advocates the pricing of congestion externalities. The article suggests that if ‘beneficiaries pay’ and ‘congesters pay’ principles are combined, cities in developing countries like India can generate adequate revenues to service long-tenor debt incurred for core infrastructure facilities. It presents a toolbox of instruments to finance urban infrastructure.