Evaluating urban transport improvements: cost-benefit analysis in the presence of agglomeration and income taxation

There is a substantial empirical literature quantifying the positive relationship between city size and productivity. This paper studies the implications of that relationship for evaluations of urban transport improvements. A theoretical model is developed and used to derive a cost-benefit measure that includes the impact of transport improvements on city size and hence on the productivity of new and existing city workers. The size of such effects is illustrated in a simple computable equilibrium model. It is argued that these productivity effects, particularly when combined with distortionary taxation, are quantitatively important, substantially increasing the gains attributable to urban transport improvements.