The dissertation studies the use of the pricing mechanism to regulate externalities related to road transport and private car ownership, with an emphasis on China. It begins with a literature review of the theory and practice of road pricing in several countries and regions. This is followed by an empirical study of the road pricing system in China, which reveals the inefficiency of the system in tackling motor vehicle-related externalities, and explores the political economy underpinning the system. To illustrate the current status of externalities, an estimation of external costs related to motor vehicles is presented based on data in Beijing in 2000, including peak time congestion, air pollution, noise pollution and accidents. The estimation suggests that road transport related external costs account for 1.7 to 5.3 per cent of GDP in Beijing.

Following that, the diamond effect – a special phenomenon related to private car ownership – is discussed. A diamond effect exists when the consumer’s utility depends on the exchange value rather than, just the intrinsic consumption effect of the good. The study of the diamond effect comprises two parts. The first part is a theoretical model of mixed diamond goods. This part is a combination of three different, but related, models discussing the general case, the case of a Cobb-Douglas utility function and the case of income tax. All of the three models show the desirability of imposing higher tax on a mixed diamond good with a stronger diamond effect. Moreover, the models imply that the tax burden on mixed diamond goods may be less than normal goods. The second part is an empirical study to test the existence of the diamond effect in private car ownership in China. The researcher conducted a survey in three Chinese cities and a series of follow up interviews in Beijing. The results are supportive to the diamond effect hypothesis.

On the basis of above research, a comprehensive proposal addressing externalities including congestion, pollution, the diamond effect and accidents in China is presented. The proposal suggests that both demand and supply management are important for an efficient road transport system. Besides supply management, demand management methods such as petrol tax, a higher tax on private car ownership, and congestion pricing needs to be introduced as well.