Abstract – Economic theory prescribes a (pigouvian) congestion tax in order to alleviate the negative effects of traffic congestion. It is simply a matter of internalizing a negative externality. However, traffic congestion is a pervasive problem in cities across the world, and a congestion tax is seldom applied. This paper tries to understand why this is the case. In order to do so, we estimate the welfare and traffic effects of alternative policies to be applied to the city of Sao Paulo; a congestion charge and a rotation system (or license plate restriction). With a dataset containing information on origin, destination and mode choice, we estimate a individual demand model for transportation mode. These demands are in turn used to run counter-factuals to evaluate the welfare costs of both policies. The results show that the congestion tax performs better than the rotation system in terms of aggregate welfare, but the distribution of these losses are very distinct. The congestion tax negatively affects a larger number of people with lower intensity than the rotation. Plus, the rotation system concentrates the heavier losses in an even smaller group, and thas little or no effect on driving decisions of those who owns more than one car. These results support the argument that the rotation system is chosen since it affects less people and causes little or no welfare loss on the richer portion of the population.

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