Second-Best Urban Tolls in a Monocentric City with Housing Market Regulations

Tinbergen Institute Discussion Paper 15-006/VIII

24 Pages Posted: 17 Jan 2015

See all articles by Ioannis Tikoudis

Ioannis Tikoudis

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute

Erik T. Verhoef

VU University Amsterdam - Department of Spatial Economics; Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute

Jos N. van Ommeren

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute

Date Written: January 15, 2015

Abstract

This paper investigates second-best congestion pricing in a monocentric city characterized by distortionary, rigid regulatory mechanisms in the housing market (building height restrictions, zoning and property taxation). The Pigouvian toll is shown to retain its optimality under any setting with quantity restrictions in the housing market. However, the extent of the quantity restriction determines the volume of the welfare gains in a non-monotonic fashion. This finding introduces a warning to cost-benefit analyses: our numerical results suggest that the actual gains of a road tax might be 40% lower than the gains predicted by a model that disregards maximum building height restrictions, and 80% higher than the gains suggested by a model that disregards zoning. In general, this implies that decision making on urban road pricing can ignore quantitative restrictions in the related markets of land, housing and labor insofar as the determination of optimal marginal tax rules is concerned; the tax levels stemming from those rules will be affected by the restrictions. However, this is not the case in the presence of a tax-induced distortion. Introducing an ad-valorem property tax on housing, we show that adjustments of the Pigouvian toll can lead to small, but not negligible welfare gains.

Keywords: road pricing, building height restrictions, zoning, property tax, monocentric city, cost-benefit analysis

JEL Classification: R48, R52, R13, H21, H23, D61

Suggested Citation

Tikoudis, Ioannis and Verhoef, Erik T. and van Ommeren, Jos N., Second-Best Urban Tolls in a Monocentric City with Housing Market Regulations (January 15, 2015). Tinbergen Institute Discussion Paper 15-006/VIII, Available at SSRN: https://ssrn.com/abstract=2550205 or http://dx.doi.org/10.2139/ssrn.2550205

Ioannis Tikoudis (Contact Author)

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Erik T. Verhoef

VU University Amsterdam - Department of Spatial Economics ( email )

De Boelelaan 1105
1081HV Amsterdam
Netherlands
+31 020 4446094 (Phone)
+31 020 4446004 (Fax)

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Jos N. Van Ommeren

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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