DECENTRALIZED ROAD INVESTMENT AND PRICING IN A CONGESTED, MULTI-JURISDICTIONAL CITY: EFFICIENCY WITH SPILLOVERS

Abstract

This paper shows that the inefficiency of fiscal decentralization in the presence of spillovers, a main tenet of the decentralization literature, is overturned in a particular transportation context. In a monocentric city where road (bridge) capacity is financed by budget-balancing user fees, decentralized capacity choices (made by individual zones within the city) generate the social optimum despite the presence of spillovers. Optimality also requires the correct population distribution across the city's zones, conditional on bridge capacities. This outcome is achieved because the user fees function as optimal congestion tolls, a result that follows from the famous self-financing theorem of transportation economics.