Scale, Congestion and Growth

This paper explores the relationship between aggregate and relativecongestion, returns to scale and economic growth. Aggregate congestionreduces the effective productivity of capital; relative congestion reducesthe effective productivity of labour. Both forms of congestion adverselyaffect the equilibrium growth rate, although their relative effects dependupon aggregate returns to scale. The two forms of congestion havecontrasting effects on the transitional dynamics. Relative congestionretards the rate of adjustment; aggregate congestion accelerates it. Theexternalities generated by congestion and non‐optimal expenditure can befully corrected, both during the transition and in steady state, by atime‐invariant income tax.