Congestion on U.S. highways is a well-known social and economic problem that becomes progressively worse every year.1 Travel delays impose large costs, currently approaching some $40 billion annually, on motorists, truckers, and shippers.2 Economists have repeatedly attributed the problem to policymakers' failure to implement marginal cost congestion tolls to charge road users efficiently for their contribution to delays.
By undercharging vehicles for using the nation's roadways, policymakers have also reduced the per-mile cost of commuting (including out-of-pocket and travel time costs) for most motorists and distorted the development of metropolitan areas by inducing households to live in more distant, lower-density locations, thereby contributing to urban sprawl. Precise definitions of sprawl and estimates of its costs are elusive, because it is difficult to characterize an optimal pattern of land use.3 At the same time, it is likely that households' decisions regarding residential location—while maximizing households' utility—have resulted in socially inefficient outcomes because they reduce economies of agglomeration.
For instance, according to the U.S. census, between 1970 and 2000 the metropolitan population in the United States grew approximately 60 percent. We therefore would expect in a given city that a representative central city neighborhood that housed 10,000 residents in 1970 would house an additional 6,000 people in 2000. These people would live in new and converted housing, pay taxes, and consume city services. Neighborhood schools might add a new wing for more classrooms, police and fire departments might hire additional employees, and so forth. But, in fact, such expectations have not been realized. According to the U.S. census, central city density declined roughly 35 percent between 1970 and 2000—that is, 3,500 people moved out of the neighborhood. In effect, 9,500 people (6,000 plus 3,500), nearly the entire original population of the neighborhood, chose to live in newly constructed homes farther from the urban center on land that may not have been part of the metropolitan area in 1970.
Of course, those residents were able to buy more house per dollar in the suburbs, but they also incur the costs of longer commutes and other trips that sharply increase per capita vehicle miles traveled within the metropolitan area. In addition, they live in lower-density residential areas where each household requires more feet of utility lines, more miles of school bus routes, and longer police and fire department response times than are required in dense neighborhoods closer to the urban center. Meanwhile, the schools and fire and police departments in more centrally located neighborhoods might now have excess capacity because the population has decreased. If the communities close to and the communities far from the urban center are located in different municipalities, as is almost always the case in U.S. metropolitan areas, then extra resources are not likely to be reallocated.
In sum, although residents' location choices reflect their self-interest, the city's economy would be more efficient if current residents remained and new residents relocated to higher-density urban communities or subcenters instead of to lower-density suburbs. The divergence between residents' choices and land use efficiency can be explained by public investments in limited access highways and the undercharging of highway travel during congested periods.4 In addition, zoning laws and other land use controls also may induce households to make choices that conflict with the public interest.
It is well-known that congestion pricing can reduce travel delays and smooth the flow of highway traffic throughout the day, but its effect on land use has received little empirical attention. This paper presents rough estimates of the costs and benefits of congestion pricing, accounting for its effects on land use that could help reduce inefficient urban sprawl. Quantifying the full effects of road pricing is important because policymakers are giving it unprecedented consideration as a way to reduce congestion and provide stable, long-term financing for the nation's highways without unduly affecting households' welfare.5
Because we expected road pricing's effects on road users' travel time and out-of-pocket expenses to be capitalized in property values, we developed a hedonic model of housing prices that...