Abstract
This study develops a model for the optimal investment of capital and urban land on the housing and transportation sectors. Although optimal congestion tolls yield an efficient resource allocation, they are difficult to implement because of high administrative costs. It is shown that in the second-best economy with unpriced (or sub-optimally priced) congestion, the usual benefit-cost criterion obtained in the first-best economy leads to overinvestment of capital and land in roads, and market mechanism leads to cause underinvestment of capital and overinvestment of land near the CBD and contrastingly overinvestment of capital and underinvestment of land near the edge of the city in housing.
