Regulation versus taxation: Efficiency of zoning and tax instruments as anti-congestion policies

Abstract

The following two types of instruments may be used to combat the congestion of road and nonroad infrastructure: first, zoning as quantity regulation favored by planners; and second, congestion charges as tax instruments favored by economists. In contrast to the instrument choice literature in environmental economics, urban economics and planning studies seldom analyze these types of instruments together. We analyze these instruments in a general equilibrium spatial model with spatial heterogeneity. We examine their working mechanisms and efficiencies and extend the instrument choice approach to the externalities caused by infrastructure congestion. When the instrument design is optimal, zoning can be more efficient than, as efficient as, or less efficient than, congestion charges, depending on the relative strength of road and nonroad congestion. However, when, for whatever reason, there are deviations from the optimal instrument level, zoning not only becomes inferior to congestion charges, but is also likely to reduce welfare.