Optimal Urban Transportation Policy: Evidence from Chicago

We characterize and quantify optimal urban transportation policies in the presence of congestion and environmental externalities. We formulate a framework in which a municipal government chooses among 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 and the potential need to cross-subsidize modes. 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 travelers, whose surplus falls even if road pricing revenues are fully rebated. The optimal public transit price is near zero, with reduced bus and increased train frequencies. Combining transit policies with road pricing slackens the budget constraint, allowing for higher transit frequencies and lower prices, thereby increasing consumer surplus after rebates.