Optimal Urban Transportation Policy: Evidence from Chicago

We characterize optimal urban transportation policies in the presence of congestion and environmental externalities and evaluate their welfare and distributional effects. We present a framework of a municipal government that implements different transportation equilibria through its choice of public transit policies—prices and frequencies—as well as road pricing. The government faces a budget constraint that introduces monopoly-like distortions. We apply this framework to Chicago, for which we construct a new dataset that comprehensively captures transportation choices. We find that road pricing alone leads to large welfare gains by reducing externalities, but at the expense of consumers (travelers), whose surplus falls even if road pricing revenues are fully rebated. The largest losses are borne by middle income consumers, who are most reliant on cars. We find that the optimal price of public transit is close to zero and goes along with a reduction in the frequency of buses and an increase in the frequency of trains. Combining these transit policies with road pricing eliminates budget constraints. This allows the government to implement higher transit frequencies and even lower prices, in which case consumer surplus increases after rebates.