Pigou road example

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    Trying to understand what Pigou was getting at with his road example.

    In regards to the example where you have a congested but desirable road that has a toll and a substitute non-toll road without congestion, and you divvy up the toll revenue evenly back to the whole population, I don’t understand how it supposedly yields a more desirable social outcome to have the toll than not.

    If we take a person deciding between the roads with no toll and then compare deciding between the roads with a toll, it seems like the real cost of the toll is the toll minus the kickback from the government after toll revenues are collected. It seems like the whole example hinges on the fact that the person technically has no idea how much of their toll they will get back, thus they’d better be prepared to lose their whole toll. However, it could be the opposite, where they might be the only person taking the toll road and they get a lot of their toll back, or anywhere on the spectrum between there and getting almost nothing back. If the person knew exactly what they were getting back, it seems like there is no gain in social benefit, because the exact amount that toll road users lose (toll cost minus kickback) would be the exact amount that the non-toll-road users would gain with the kickback. The whole idea is that everyone to the left of center values the desirable toll road at the cost of the toll while the marginal person in the middle indifferent between the two was no worse off, and everyone to the right gets a kickback, am I understanding correctly? Thus if we can actually point to the exact cost of the toll the middle margin shifts right (more people taking the toll road) because the exact cost of the toll would be at least marginally less than the full cost of the toll. This means that some people (if they knew what they were getting back) have now made the wrong decision because of the toll.

    Thus really all the toll has done is confuse the public about what their choice is, right? Does this make any sense? I feel like I am misunderstanding this one.


    Sorry about the delay in answering this; I didn’t realize there was a pending question.

    Let me clarify one thing about these types of examples, and tell me if this solves your problem. (I’m happy to continue discussing with you until you see it.) And of course, obviously I’m not trying to say, “I, Bob Murphy, endorse this plan of having the government own all the roads and achieving a social optimum via taxation.” Rather, I just want to make sure you see the logic of it, from the Pigovian perspective.

    If any individual motorist takes the nice road and pays the toll, then total revenues go up by the toll amount. Let’s say it’s $10. Then, at the end of the period, the government sends everybody a lump-sum check that equally divides up the total revenue collected.

    So if there are (say) 10 total people in the community, then the motorist would think, “If I pay this $10 toll, at the end of the month my check from the government will be $1 higher than it otherwise would have been, so effectively I’m only paying $9 to take this nice road right now.”

    But of course there are more than 10 total people. Suppose there are (say) 1,000 people. Then in that case, the extra $10 in toll receipts gets divided up over 1,000 people, so everybody’s check that month goes up by one penny, if the motorist takes the nice road. So the motorist would think, “In reality, instead of costing me $10, this road is really only costing me $9.99.”

    And then, if there are 10,000 total people in the community who get those checks, then the marginal cost to any motorist of taking the toll road is $9.999, etc.

    So the idea is, people’s decisions about the toll road only have a very slight impact on how much they get in a lump-sum rebate check from the government. With a large enough community, the individuals can treat those lump-sum checks as “given,” even though in the aggregate the total amount rebated must equal the total amount collected in tolls.

    Once you’ve digested this clarification, see if my discussion makes sense. If not, I’m happy to keep working with you, but it seemed the above clarification was the thing you needed?

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