In this paper, we study the problem of optimal road pricing, incorporating public transport into our analysis. We find that when public transport and private transport are substitutes, the welfare implications of optimal road pricing are very different from those when public transport is neglected. In particular, road pricing may lead to Pareto improvement even in the absence of redistribution of toll revenues to road users. We also explain why our result is compatible with the prevalence of opposition to an increase in road toll in everyday experience.
Ho, L. S., & Pun, W. C. (1995). Congestion pricing and public transport (CPPS Working Paper Series No.27). Retrieved from Lingnan University website: http://commons.ln.edu.hk/cppswp/20/