The economics of cordon tolling: General equilibrium and welfare analysis

We study optimal cordon tolling in a general equilibrium model of the Chicago MSA. Adjustments in travel, housing and labor markets blunt the toll's impact. Residence relocations drive job relocations and vice versa. The outflow of jobs and residences out of the cordoned area is checked by switches to public transit. Higher output outside the cordon exceeds output losses within the cordon and total real and nominal gross MSA product rises. Optimal downtown and City cordons achieve up to 65% of the gains from Pigouvian pricing on all major roads, but 50% of these gains can be from annualized real estate value increases. In the case of an outer cordon encircling the inner suburbs, toll-avoidance causes jobs, residences and real output to increase within the cordon. Such outer cordons though less efficient in pricing congestion can concentrate activity toward the centers an issue that was inconclusively debated 20 years ago.