Congestion and residential moving behaviour

we study how congestion and residential moving behaviour are interrelated, using a two-region job search model. Workers choose between interregional commuting and residential moving, in order to live closer to their place of work. This choice affects the external costs of commuting, due to congestion. We focus on the equilibrium in which some workers currently living in one region accept jobs in the other, with a fraction of them choosing to commute from their current residence to the new job in the other region and the remainder choosing to move to the region in which the new job is located. The welfare-maximising road tax is derived, which is essentially the Pigouvian tax, given the absence of a tax on moving. Given the presence of moving taxes, which are substantial in Europe, the optimal road tax for commuters is the Pigouvian tax plus the amortised value of the moving tax, evaluated at the first-best equilibrium. As a consequence, the road tax should be higher for commuters than for other travellers. Our numerical example demonstrates that the naive optimal road tax, which ignores the effect of the moving tax, is substantially below the optimal road tax. (C) 2008 Elsevier B.V. All rights reserved.