Evaluating Urban Transport Improvements: Cost-Benefit Analysis in the Presence of Agglomeration and Income Taxation

There is a substantial empirical literature quantifying the positive relationship between city size and productivity. The paper draws out the implications of this productivity relationship for evaluations of urban transport improvements. A theoretical model is developed and used to derive a wider cost-benefit measure that includes productivity effects. The order of magnitude of such effects is illustrated by calculations in a simple computable equilibrium model. It is argued that productivity effects, particularly when combined with distortionary taxation, are quantitatively important, substantially increasing the gains that are created by urban transport improvements. JEL classification: R200, R420