Road tolls, diverted traffic and local traffic calming measures: who should be in charge?

The paper studies the traffic problems of a small town that is located parallel to a motorway and faces through traffic. We assume that the federal government can control traffic levels on the motorway using tolls, whereas a local government controls local accident risks and congestion using non-price measures such as speed bumps, traffic lights and explicit access restrictions for through traffic. We show the following results. First, competition between the federal and local authority leads to a Nash equilibrium where the toll is too high and there is too much traffic calming compared to the second-best social optimum. Second, if the local government uses traffic calming measures, imposing a federal toll on the main road is welfare-reducing, unless congestion on the main road is severe and accident risks in the small town are unimportant. Third, traffic diverted from the main road to the local community gives the latter strong incentives to close the local road for through traffic, even when it is socially undesirable to do so. In this sense, granting authority over such drastic local traffic calming measures to local governments may be welfare-reducing. Fourth, if the access restriction only applies to through traffic by trucks, the conflict between federal and local authorities disappears: both will agree on prohibiting access to trucks, unless they have the local town as final destination. Finally, we find that the inefficiency of vertical competition between local and federal governments can largely be avoided by introducing a hierarchy of roads and having separate independent agencies negotiate over tolls and traffic calming measures