The Road to Ruin: Parasitic Suburbs and the Fundamental Law of Traffic Congestion

We examine the strategic relationship between a city and a satellite suburb. Living costs are lower in the suburb but its residents must commute to the city to utilize an amenity that cannot be made available in the suburb. The road between the city and the suburb is subject to congestion. In the first-best solution, welfare is always increasing in the size of the road but a larger road can nonetheless lead to more congestion even though road use is priced correctly. If the city and the suburb instead act independently and noncooperatively then two types of distortion arise: a free-rider incentive for residents to live in the suburb so as to avoid paying city taxes; and a congestion externality associated with unpriced road use. A larger road can reduce or raise congestion, depending on whether the public good and private consumption are substitutes or complements respectively, but always reduces welfare either way.