Zoning in cities with traffic congestion and agglomeration economies

•We summarize and extend the existing literature on zoning.•When second-best policy instruments are used separately in cities with traffic congestion and agglomeration economies, their welfare performances are disappointing.•However, when zoning instruments are combined properly with the other second-best instruments, the welfare gain could be as much as the first-best's.

We analyze land use regulations in cities with traffic congestion and production spillovers. Land is allocated between residential and industrial uses inside the city boundary or between urban and rural uses at the city boundary. The production is dispersed over the city, and people and firms freely choose locations of residence and production. We derive conditions for optimally adjusting land uses expressed in terms of observable data, and modify and extend the findings of the literature. According to numerical simulations, the land use control combined with production subsidy is almost as efficient as the first-best policy mix.