Social Optimality of Cordon Area Congestion Pricing in a Monocentric City

Traffic congestion is a global epidemic that at time has put cities to a state of paralysis. From a microeconomics point of view, congestion can be approached as a negative externality that merits a Pigovian tax to correct the suboptimal equilibrium. Externalities manifest in delays and wasteful urbanization. While the efficiency of congestion pricing has been well established since the late 1970s, policy adoption and implementation have been delayed due to technological constraints. One the most popular form of congestion pricing is cordon charging where inbound commuters are charged a certain fixed fee. The efficiency of cordon pricing has been explored by numerous empirical and simulation studies. However, theoretical explanations of results are largely missing. I consider a monocentric city model to explore the effect of cordon charging schemes on urban density and housing demand (equilibrium rent). Cordon pricing increases rents at the center and also the slope of the bidrent curve. Most importantly, these quantities are functions of cordon parameters which suggest that efficiency is affected by planners' choice of cordon parameters.