A Dynamic Model of Two Competing Cities: the Effects of Competition on Tolls and Land Use



A Dynamic Model of Two Competing Cities: the Effects of Competition on Tolls and Land Use

Authors

S Shepherd, C Balijepalli, ITS, University of Leeds, UK

Description

This paper analyses the impacts of competition between cities when considering demand management strategies on both the optimal tolls and upon longer-term decisions such as business and residential location choices.

Abstract

Cities compete with each other. For more than fifty years, Public Choice Theory has explored the notion that cities compete to attract and retain residents and businesses (Tiebout, 1956). Likewise, the Public Finance & Tax Competition literature identifies competition between cities on tax-and-spend policies (Wilson, 1999).

Research in the transport literature, however, has focused predominantly on intra-city issues. The strong focus in recent years has been on road user charging, economic theory suggesting benefits will accrue to a city from a combination of congestion relief and recycling of revenues within the city (Walters, 1961). Beyond the theoretical benchmark of full marginal cost pricing, the design of practical charging schemes (e.g. Transport Innovation Fund bids), have generally focused on pricing cordons around single, mono-centric cities (Shepherd et al, 2008).

This paper is part of a larger research project which aims to answer the following policy questions:
- In what ways do and could cities compete using fiscal demand management policies?
- How should cities design their policies to achieve individual and collective best outcomes?
- Should cities consider sharing revenue streams - should they compete or co-operate?
- How significant are these policies to the redistribution of business and residents between cities?

Early work by Marsden and Mullen (2012) has looked at the motivations of decision-makers in local government in different towns and cities of four major city regions in England. It showed that towns and cities both compete and collaborate to maximise their own competitive position. The major cities are seen as the main powerhouses of growth, with other towns and cities trading on particular distinctive skills sets or tourist offers and spill over effects from the major cities. Working together they can act as a more powerful voice to argue for investment from central government.

The aim of this paper is to model the impacts of competition between cities when considering demand management strategies on both the optimal tolls and upon longer-term decisions such as business and residential location choices. The research uses a dynamic land use transport interaction model of two neighbouring cities to analyse the impacts by setting up a game between the two cities who are assumed to maximise the welfare of their residents. The work builds on our earlier work by Koh et al (2012) who studied competition in a small network using a static equilibrium approach for private car traffic alone. Our research extends this by setting up a dynamic model which includes all modes and longer term location responses.

The model is used first to study an isolated city (representative of Leeds) and a simplified welfare function is used to determine the optimal toll around the central area and its impacts on location decisions and other transport indicators. A twin city is then added to the model thus introducing traffic between the cities. This traffic may be charged to enter the central area along with own residents, however the revenue may be retained by the city - a form of tax exporting behaviour which would in theory increase the welfare of the city. However as shown by Koh et al (2012), both cities will have an incentive to charge and a game may evolve where in the long run both cities may be worse off in terms of welfare than if none had charged in the first place.

With this simple model set up we will study the impact on the optimal tolls set by the cities and how the game develops between cities, first of equal size and amenity and second with cities which differ in size and amenity. The impact on location decisions and other transport indicators will be investigated as will the implications for regulation and the development of cities within regional partnerships.
References:
Koh, A., S.Shepherd and D.Watling (2012) Competition between Two Cities using Cordon Tolls: An Exploration of Response Surfaces and Possibilities for Collusion, Transportmetrica (Forthcoming)
Marsden, G. and Mullen, C. (2012) How does competition between cities influence demand management? Proc. of Universities? Transport Study Group, January 2012, Aberdeen.
Shepherd SP, May AD & Koh A (2008). How to design effective road pricing cordons. Proceedings of the Institution of Civil Engineers, Transport: Road User Charging, 161, TR3, 155-165.
Tiebout CM (1956). A Pure Theory of Local Expenditures. Journal of Political Economy 64(5), 416-424.
Walters A (1961). Theory & Measurement of private & social cost of highway congestion. Econometrica 29(4),676-699.
Wilson, J.D. (1999) Theories of tax competition, National Tax Journal, 52(2), 269-304

Publisher

Association for European Transport