Vehicle ownership and usage charges

We present a simple model to study the welfare effects of a shift from ownership to usage taxes for cars. We consider a model in which a single representative consumer derives utility from consuming two goods consumption of motor vehicle kilometers, and an aggregate consumption good treated as numeraire. We characterize the optimal consumption of car kilometers by a representative car user and find that a shift from ownership towards usage taxes is not necessarily welfare-improving: while a revenue-neutral shift makes the representative car user worse off; a utility-neutral shift leads to a significant loss of revenue to the government. An empirical analysis based on Singapore data is also consistent with our theoretical results. (C) 2010 Elsevier Ltd. All rights reserved.