Cordon Pricing and Land‐Use Regulation

• Author: Hiroya Kawaguchi,Tatsuhito Kono
• Date: 01 April 2017
• DOI: http://doi.org/10.1111/sjoe.12167
• Published date: 01 April 2017

Scand. J. of Economics 119(2), 405–434, 2017

DOI: 10.1111/sjoe.12167

Cordon Pricing and Land-Use Regulation∗

Tatsuhito Kono

Tohoku University, Sendai 980-8579, Japan

kono@plan.civil.tohoku.ac.jp

Hiroya Kawaguchi

Tohoku University, Sendai 980-8579, Japan

kawaguchi@plan.civil.tohoku.ac.jp

Abstract

This study explores the simultaneous imposition of cordon pricing and land-use regulations

in a continuous and closed monocentric city with homogeneous households. Results reveal

the optimal level of a single cordon toll and its location and the optimal floor area ratio

(FAR) regulation, clarifying what distortions remain in the existence of cordon pricing and

FAR regulation. Among other results, this paper shows that, with an optimal cordon toll,

FAR regulation should alternate between a minimum and a maximum regulation, both inside

and outside the cordon line.

Keywords: Congestion; cordon pricing; floor area ratio; land-use regulation; road investment;

urban growth boundary

JEL classification:R11; R13; R14

I. Introduction

Many cities suffer from severe traffic congestion, which wastes a massive

amount of time and fuel. Cordon pricing can mitigate traffic congestion,

and it has already been implemented in several cities. Apart from cordon

pricing, many cities have imposed land-use regulations, such as regulations

on building size or height, lot size, and city size, in order to control

urban externalities including traffic congestion. Indeed, London, Milan,

Oslo, Singapore, and Stockholm, which impose cordon or area pricing, all

∗This research was supported by grants from the Japan Research Center for Transport Policy

and the Ministry of Education, Culture, Sports, Science and Technology (Grant-in-Aid for

Scientific Research (B) 26289169), which are gratefully acknowledged. We would like to

thank two anonymous reviewers for helpful comments. Furthermore, we thank David Pines

because this paper develops a proposition in a paper co-authored by him. We are grateful

to Steve Beacall and Dave Talsma for proofreading the manuscript. Despite assistance from

many sources, any remaining errors in the paper are the sole responsibility of the authors.

CThe editors of The Scandinavian Journal of Economics 2015.

406 Cordon pricing and land-use regulation

impose land-use regulations.1So, how should cordon pricing be imposed

along with land-use regulations?

We address this question for a closed monocentric city with traffic

congestion. In particular, we clarify a mechanism among all the relevant

distortions caused not only by congestion but also by cordon pricing and

land-use regulation themselves in a continuous space. In addition, from

the mechanism, we derive some theoretical properties of optimal regulation

and cordon pricing, which are different from current practices.

In a cordon pricing scheme, a vehicle is charged a fixed toll when it

passes a specified cordon line in the inbound and/or outbound direction.

Cordon pricing cannot generally correct negative externality completely un-

like the first-best congestion pricing. The congestion pricing should vary at

each point of driving time such that every motorist always faces marginal

social cost, so it is difficult to implement because of enormous implemen-

tation costs and others, as indicated by Rouwendal and Verhoef (2006).

However, despite the simple toll-collecting method of cordon pricing, as

Mun et al. (2003) point out, it is not an easy task for governments to ra-

tionally determine the toll rate and the location of the cordon line, because

they have to take into account changes in the distortions in the related

market.

Land-use regulations, which can control population density, are effective

against urban externalities including traffic congestion. Land-use regula-

tions are common worldwide. For example, according to Pendall et al.

(2006), 92 percent of the jurisdictions in the 50 largest US metropolitan

areas have zoning ordinances of some kind in place. Only 5 percent of the

metropolitan population lives in jurisdictions without zoning.

However, as a policy against traffic congestion, as in cordon pricing,

land-use regulations are generally insufficient to achieve the first-best al-

location, generating deadweight losses in the regulated market, as shown

in Kono et al. (2010). In a conventional urban model where housing is

represented only by land, lot-size restrictions that follow the optimum –

maximum restrictions near the central business district (CBD) and mini-

mum ones farther out – can achieve the first-best population distribution.2

In a model with floor space production, the regulation of building heights

can approximate the effect of lot-size regulation in that conventional model,

but not fully, given that individual floor space is freely chosen. Only if the

floor area per household is fixed due to inelastic demand or government

1The main target of practical cordon pricing is not necessarily to mitigate congestion. Indeed,

the cordon pricing in Oslo was designed primarily for revenue generation.

2In a monocentric closed city with houses represented only by land, Pines and Sadka (1985)

and Wheaton (1998) show that regulating density through lot-size zoning, or housing taxation

equivalent to that regulation, achieves a result similar to a first-best congestion toll.

CThe editors of The Scandinavian Journal of Economics 2015.