Efficient Urban Sprawl and Alternative Public Finance Policies in a System of Replicable Cities

We study a system of replicable (identical) cities with un-priced traffic congestion where each city requires a minimum investment in infrastructure setup costs. We consider alternative planning regimes (or, equivalently, market with profit-maximizing developers), differing from each other according to the public policy for financing the infrastructure. These policies play two roles: 1) providing the revenues that defray the costs of city setup; 2) internalizing the congestion externality. When congestion is unpriced, there are two resource allocation distortions. In the intensive margin, too many workers-residents live in the suburbs; while in the extensive margin, the number of cities is too few. The tax menu we consider includes differential land rent tax, congestion toll, head tax, and suburban land tax. The first-best policy consists of a confiscatory tax on differential land rent (a Henry George tax), together with a toll on traffic congestion. When tolls are not available, the head tax and suburban land tax, should together supplement the Henry George tax. If, in addition to tolling, one of these two taxes is also unavailable, the other should supplement the Henry George tax. We rank these policies according to efficiency, economic sprawl (total travel cost) and geographic sprawl (aggregate land used).We identify conditions under which the efficient policies, reduce congestion by spreading the population among more but smaller cities, inducing more land use and lower average densities on aggregate which is an essential process for reducing the externality of congestion.