FAR regulations and unpriced transport congestion

Using a fully closed monocentric urban setup with unpriced transport congestion, this paper discusses a second best allocation implemented by spatially-variable excise subsidies, or taxes, on housing and the possibility of replacing it by floor area ratio (FAR) regulations. It turns out that the marginal cost exceeds the demand price (bid rent) of housing close to the city center and is exceeded by it close to the boundary. In both cases, the excess burden of the deviations from marginal cost pricing, either by fiscal or zoning instruments, is the cost of reducing the excess burden of unpriced transport congestion. Efficient deviation from marginal cost pricing requires that any marginal (in terms of the movers' size) residential relocation does not change the aggregate excess burden of both distortions. The present study also shows that FAR optimal regulations render urban growth boundary (UGB) redundant but it cannot always replace the fiscal instruments for achieving the second-best utility.