University of California Transportation Center

Consider users who can choose between using two modes of travel (say a road and mass transit), and who can choose to incur a fixed cost that reduces the future cots of using mass transit. A congestion toll on the road may serve two purposes. First, it can induce users in the current period to use transit instead of the congested road. Second, users who anticipate the imposition of tolls may be induced to incur the aforementioned fixed cost, thereby reducing demand for use of the congested road in future periods. This paper focuses on such investment decisions, showing that when government cannot credibly commit to future tolls, the optimal road toll in each period may be low and congestion may be high.