Commuting, Migration or Both: the Role of Transportation Tariffs

Transport infrastructure that connects more productive urban region and peripheral region with lower labour productivity makes them compete for workers and residents. An individual choice of residential location and working place is largely driven by commuting policy that is viewed differently by the competing jurisdictions. In a simple model we show how inter-regional migration and commuting flows are determined by transport tariffs being set by the regions independently or jointly. Peripheral region aims to set lower than socially optimal commuting tariff attracting migrants from the urban region and stimulating demand for transportation services while urban region opts for the opposite. We then suggest a balanced approach when socially optimal tariff is set by an inter-regional partnership with the particular share structure that also shapes the allocation of financial burden between the regions that jointly support the transport infrastructure. An introduction of proportional income taxes in the model makes the problem of free-riding in the inter-regional competition less pronounced. We show that fiscally constrained governments should use tariff and tax instruments to finance transport infrastructure complementarily.