The purpose of this paper is to study welfare-optimal pricing of passenger and freight transport services in a federation. The prevalence of international transport flows in small open economies creates opportunities for tax competition and tax exporting. The latter strongly depend on the possibilities for price discrimination between domestic and international transport. Moreover, transport flows generate both local and trans-boundary externalities. Although these issues have been studied in isolation in the public economics literature, this paper integrates many of the complications associated with the international dimension of transport flows in a model specifically tailored towards the transport sector. Optimal pricing and investment rules are derived for individual countries and for the federation as a whole. It is shown that tax competition due to the mobility of the tax base may raise or reduce domestic taxes. Tax exporting induces higher transport taxes in countries with substantial international and transit freight transport. The model further identifies the role of external cost spillovers to other regions, it illustrates the role of differences in the shadow cost of funds, and it considers the role of potential price discrimination between local and international traffic. (Author/publisher).
Abstract