Optimal road capacity with a suboptimal congestion toll

Abstract In this paper we extend J. Wilson's (J. Urban Econom. 13, 337–357, 1983) capacity with unpriced congestion. We show that whether second-best capacity is larger or smaller than first-best capacity depends on the “demand” and “cost” effects of the congestion toll. This in turn depends on two key parameters—the price elasticity of demand for travel and the elasticity of substitution of consumers' travel time for highway capacity in the production of trips.