Floor Area Ratio and Urban Boundary Regulation in Monocentric Cities with Traffic Congestion

For a monocentric city with traffic congestion, Wheaton [W. C. Wheaton, Land Use and Density in Cities with Congestion, Journal of Urban Economics, 43 (1998) 258-272] describes that, to optimize the congestion externality, lot size zoning requires upward adjustment to the market population density throughout the city and that optimal lot size regulation is the first-best policy. We show that, in contrast to lot size zoning, optimal Floor Area Ratio (FAR) regulation is at most a second-best policy and requires, in a closed city, not only upward adjustment to the market population density at central locations by minimum FAR regulation but also downward adjustment at boundary locations by maximum FAR regulation. In an open city, only the latter is required. Furthermore, the optimal urban boundary is more compact than the market equilibrium boundary irrespective of whether the city is closed or open