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PIGOU, KNIGHT, DIMINISHING RETURNS, AND OPTIMAL PIGOUVIAN CONGESTION TOLLS

Published online by Cambridge University Press:  30 July 2013

JOHN F. McDONALD
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Abstract

Arthur Pigou introduced the iconic two-road model in the first edition of The Economics of Welfare (1920), and it has been thought that this model was intended to demonstrate the need for Pigouvian taxes to mitigate traffic congestion. However, Pigou’s intention was to show that efficient output for industries subject to decreasing returns required a tax on output. Pigou was incorrect, but the two-road model (correctly considered) became the starting point for the analysis of traffic congestion in the 1950s. This paper recounts the doctrinal history of decreasing returns industries and the two-road model.

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Journal of the History of Economic Thought , Volume 35 , Issue 3 , September 2013 , pp. 353 - 371
Copyright
Copyright © The History of Economics Society 2013 

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