OPTIMAL TAX AND PUBLIC-INVESTMENT RULES FOR CONGESTION TYPE OF EXTERNALITIES

Optimal government policy is considered in a second-best framework whe re consumers and producers cause an externality of the congestion type and income distribution issues are taken into account. The theoretica l results of the optimal tax literature are adapted using the concept of the net social Pigouvian tax. An illustrative AGE model uncovers th e relative importance of its components. The model demonstrates that t he level of the externality tax does not depend strongly on distributi on concerns, as reoptimization of the other taxes ensures that the inc ome distribution objective is reached. The model also allows us to stu dy the interaction between externality taxes and public abatement.