Private Access Fees and Congestion: Is There a Role for Government After All?

Abstract

We reframe an important debate between Pigou and Knight about the need for government intervention in allocating congestible resources like roads. Knight showed that private toll-setting would achieve an efficient allocation if some motorists commuted to work on an alternative route that was uncongestible. Government intervention was unnecessary. Others have shown that Knight's laissez-faire solution fails if the other road was also congestible but marred their demonstration by excluding private toll-setting on that road as well. We consider a game with simultaneous toll-setting on every congestible road. When we discover that the laissez-faire allocation is inefficient, we consider how the government can improve the private allocation by providing motorists an actual or potential alternative to the privately-priced, congestible resources. Our results apply to a wide range of allocation problems involving congestion: simultaneous tuition setting in private (or charter) schools when students can instead attend a public-school or simultaneous prize-setting in contests to cure diseases when researchers can instead work at NIH.