The environment has emerged, in the last decade, as a central issue in the UK transport policy debate (Royal Commission on Environmental Pollution, 1994; House of Commons Transport Committee, 1994). Important issues in this debate are the environmental impacts of transport, road building, road pricing, reducing demand for transport and the diversion of demand to more environmentally sensitive modes of transport. Deregulation and privatization of public transport have taken place at the same time as a greater public debate and concern over environment and transport. Even though the private sector will have a greater role in financing transport initiatives in the future, the public sector is likely to maintain an important role in funding public sector transport systems and investing in transport infrastructure in general. This chapter addresses these questions through the development of a model which estimates the full social cost of transport for each mode and uses the resulting efficient prices to predict shifts in demand in the short and long run. The full social costs are measured by estimating the marginal external costs of each transport mode and imposing these costs as taxes on the private costs of each mode. Where the demand for a mode increases, the model estimates the implied need for new investment in infrastructure. There are thus shortrun and long-run solutions with associated tax revenues as well as implied investment needs and operational deficits.