The policies that cities adopt regarding such things as taxes, transportation infrastructure investment, zoning, schools, and police have important and often unpredictable effects on where businesses locate and individuals decide to live and work. In turn, these location decisions have real consequences for cities’ general welfare and economic health. So to fully understand the long-term effects of their policies, cities must consider the complex ways by which firms, residents, and workers go about choosing where to locate.

Take, for example, London’s decision in 2003 to implement a new plan to reduce congestion in the center of the city. At the time, development was booming and traffic congestion was becoming increasingly troublesome. Rather than try to increase capacity through construction of more highways and other automobile infrastructure, London introduced a congestion pricing policy. The idea of congestion pricing is simple and has wide support from economists and policy analysts. Because congestion has many negative social effects, including slower travel times, increased carbon emissions, and reduced local air quality, a tax on congestion can have net positive effects for society by encouraging people to travel by other modes or at different times.

This article appeared in the First Quarter 2014 edition of Business Review. Download and read the full issue.