Abstract

This paper studies tradable mobility permit schemes in a monocentric city with a distorting labor tax, considering spatially differentiated allocations of permits to households. Numerical results show that an allocation of permits proportional to labor supply reaches about 99.9% of first-best welfare, clearly outperforming a scheme with lump-sum allocation of permits, and being more efficient than the second-best tax for levels of the labor tax of 20% or higher. This is due to the welfare gains of incentivizing labor supply, which has an effect similar to the revenue recycling effect of conventional road pricing, and that can be optimized by the social planner by exploiting spatial differences. Other alternatives, such as an allocation of permits proportional to distance from the CBD and a cordon-based scheme do not reach those high levels of efficiency. Our results provide insights into the efficiency of tradable driving permit schemes as an alternative to road pricing to tackle present externalities, showing that a spatial differentiation of the allocation of permits can be a powerful instrument in the hands of the regulator.