On the design of sustainable cities: Local traffic pollution and urban structure

This paper investigates the impact of local traffic pollution on the formation of residential and business districts. While firms benefit from local production externalities, households commute to their workplaces with private vehicles and exert a local pollution externality on the residents living along the urban transport networks. The spatial location of firms and residents endogenously results from the trade-off between the production and pollution externalities and the commuting costs. The analysis shows that in monocentric cities the benefits associated with a fall in per-vehicle pollution are absorbed by rents paid to absentee landlords. When a city includes business and residential districts as well as a district mixing both agents, a lower per-vehicle pollution enlarges the residential districts and shifts the business districts closer to the geographical center of the city. The paper finally studies the optimal city structure. The first-best policies that fully internalize the externalities still foster business agglomeration.