Optimal urban transport pricing in the presence of congestion, economies of density and costly public funds

Using a numerical model of the urban transportation sector, calibrated to data for Brussels and for London, we calculate the optimal transport price structure and its effect on the transport equilibrium and on welfare. Removing existing subsidies to transit and to parking, internalising transport externalities (mainly congestion) and optimising the frequency of transit service increases welfare by approximately 2%. Optimal prices are higher than current prices in most transport markets, so that optimal transport demand is below current demand. There is a strong shift to public transport in the peak period. Finally, calculations for Brussels of optimal public transport prices for unchanged reference car taxes indicate that only limited welfare gains can be obtained by charging near-zero transit fares in peak hours. (C) 2008 Elsevier Ltd. All rights reserved.