Scale, congestion and growth

This paper explores the relationship between aggregate and relative congest ion, returns to scale and economic growth. Aggregate congestion reduces the effective productivity of capital; relative congestion reduces the effecti ve productivity of labour. Both forms of congestion adversely affect the eq uilibrium growth rate, although their relative effects depend upon aggregat e returns to scale. The two forms of congestion have contrasting effects on the transitional dynamics. Relative congestion retards the rate of adjustm ent; aggregate congestion accelerates it. The externalities generated by co ngestion and non-optimal expenditure can be fully corrected, both during th e transition and in steady state, by a time-invariant income tax.