Abstract
Social interactions among economic agents that underlie the formation of cities are important for economic performance. There exist communication externalities in face-to-face interactions among agents. In addition, face-to-face contacts include travel behaviours so that they are inevitably accompanied by traffic congestions. Interaction choices depend not only on physical distance but also on social distance among agents, which is often measured using social networks. We consider the problem of implementing optimal levels of interactions. The planner would like to design a toll scheme under which an social optimum is achieved in the long-run without knowledge of the structure of social networks. In this paper, a second-best toll scheme is proposed in which the planner can lead an economy to an optimum by internalizing the externalities evaluated at current traffic in each period.
