Strategies of state and local government in management of urban transport problems - A case of Delhi

In India, different layers of Government control different policy instruments to tackle transport externalities which might result in coordination problems and possible efficiency losses. This paper, therefore, addresses the coordination problem resulting from the division of policy instruments between two different government levels that face different types of externalities in varying degrees of magnitude in the urban transport sector by developing three types of theoretical models: the Full Control Centralised Model where the state government has full control over all pricing instrument; a Nash equilibrium model where each of the government levels controls only one instrument and takes the behaviour of the other as given; and a Stackelberg equilibrium mode where the behaviour of the state government is influenced by the fact that one of the price instruments is controlled by the local government. With an empirical illustration of the model for Delhi, the paper finds that since there are many interactions and many externalities between the two levels of government, a division of roles between them does not guarantee an efficient pricing outcome and the efficiency of pricing would depend on the institutional set up and on the correspondence between the objective functions of the two government levels.