Optimal Fuel Taxation with Suboptimal Health Choices

Research Seminars

Transport has a large number of significant externalities including carbon emissions, air pollution, accidents and congestion. Increased active travel such as cycling and walking can reduce these externalities. Moreover, public health research has identified large additional social gains from active travel due to health benefits of increased physical exercise. The authors introduce health benefits and active travel options into a model of transport externalities to study appropriate policy responses. They characterise the optimal second-best fuel tax analytically: when physical exercise is considered welfare-enhancing, the optimal fuel tax increases. Under the central assumptions, the increase is 34 % in the US and 38 % in the UK when health benefits from physical exercise are included. The authors argue that fuel taxes should be implemented jointly with other policies aimed at increasing the uptake of active travel to reap the full health benefits.