A Discriminatory Mechanism to Reduce Urban Congestion

In this article, we propose an optimal mechanism to reduce congestion when information is asymmetric. Each car driver receives a quantity of traffic rights such that his adjusted marginal benefit is equal to the marginal cost of congestion and payments are based on willingness to pay. We show that the level of congestion achieved is lower and each car user can receive more or fewer rights than under complete information. With symmetric beliefs, the payment rule results from a second-degree price discrimination. When beliefs are asymmetric, it results simultaneously from a second-degree price discrimination and from a third-degree price discrimination and high willingness-to-pay car users are discriminated against. The revenue raised can be used to reduce distortionary taxes, thereby gaining public acceptability.