Tradable location tax credit scheme for balancing traffic congestion and environmental externalities

Abstract

This article proposes a novel urban system equilibrium model for design of a tradable location tax credit scheme to balance traffic congestion and environmental externalities. In the proposed model, the interaction between the location tax credit scheme and households' residential location choices is explicitly considered. It is assumed that the authority initially allocates the credits to all households in a uniform way, and the households pay a certain amount of credits for housing consumptions, relying on the traffic congestion and environmental externalities that they cause. The credits are traded among households through a free market, and the tax revenue due to credit trading is considered as a part of household's income to be redistributed through household's income budget constraint. For a given credit scheme, households' residential location choices and housing market structure in terms of housing prices and space can be endogenously determined by the urban system equilibrium and the price per unit of credit is governed by the credit market equilibrium. A social welfare maximization model is presented to determine the total amount of credits issued. The results show that implementation of the tradable location tax credit scheme can rationalize the urban residential density and promote the efficiency of the urban system in terms of social welfare.