Road price and capacity policies subject to a fiscal constraint in a city

This paper explores the efficient capacity of the bottleneck and road pricing in a city, subject to the fiscal constraint financing the whole urban road network including the bottleneck. To do this, considering that most cities collect their public fund from property tax, we set three regimes: Regime 1, where congestion pricing is imposed with property tax; Regime 2, where the flat per-kilometer charge is imposed with property tax; Regime 3, where floor area ratio (FAR) regulations and flat per-kilometer charge are imposed with property tax. We derive theoretical properties in each regime. First, in Regime 1, even subject to fiscal constraints, the congestion pricing formula is equal to that of Arnott et al. (1990, 1993), but the optimal capacity should be smaller than that in the presence of a lump-sum tax, reflecting the endogenous marginal cost of public funds. As a result, the congestion pricing revenue exceeds the cost of optimizing the bottleneck capacity. In addition, we show that, only in Regime 3, property tax does not generate deadweight losses owing to the imposition of FAR regulation. Finally, setting the regime of property tax only as the base, our quantitative simulations show that Regime 1 has about 90 % of the welfare increase of the first best, Regime 3 has about 50 % of the increase, and Regime 2 has about 15 % of the increase.