Traffic externalities in cities: The economics of speed bumps, low emission zones and city bypasses

This paper considers various policy measures that governments can use to reduce traffic externalities in cities. Unlike much of the available literature that emphasized congestion, we focus on measures that reduce pollution, noise and some accident risks. These measures include noise barriers, speed bumps, traffic lights, tolls, emission standards, low emission zones, and bypass capacity to guide traffic around the city center. Using a simple model that distinguishes local and through traffic, we study the optimal use of these instruments by an urban government that cares for the welfare of its residents, and we compare the results with those preferred by a federal authority that also takes into account the welfare of road users from outside the city. Our results include the following. First, compared to the federal social optimum, we show that the city government will over-invest in externality-reducing infrastructure whenever this infrastructure increases the generalized cost of through traffic. We can therefore expect an excessive number of speed bumps and traffic lights, but the right investment in noise barriers. Second, when implementing low emission zones, the urban government will set both the fee for non-compliance and the emission standard at a more stringent level than the federal government. Moreover, at sufficiently high levels of through traffic the urban government will prefer imposing a toll instead of implementing a low emission zone. Third, whatever the tolling instruments in place, the city will always underinvest in bypass capacity. Finally, if it can toll all roads but is forced to invest all bypass toll revenue in the bypass, it will never invest in bypass capacity. Although the paper focuses on non-congestion externalities, most insights also hold in the presence of congestion.