The optimal pricing, finance and supply of urban transportation in general equilibrium: A theoretical exposition
We present a general equilibrium framework of optimal allocation treating the pricing, finance and supply of urban transportation. Uncongested public transportation technology with economies of scale supports the city's existence; and a congested road system subject to constant returns limits urban size. Optimal investment in public transit and in roads follow Samuelson's rule. With optimally determined urban population, roads are fully financed by Pigouvian congestion tolls while aggregate differential land rents fully finance public transit and any other activity with internal or external economies of scale (Henry George Theorem). Marshallian agglomeration from production in the core and the suburbanization of jobs to avoid congestion are treated. We also see how the optimal rules and the Henry George Theorem are modified when the demand for location is determined by a random utility model.
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