||Tra<br>|nsport subsidization<br>|rate<br>|
|---|---|---|---|
||1/3|1/2|2/3|
|<br>0: Absentee<br>landowners(cca)|0.2%|1.3%|5.2%|
|Share of land<br>ld<br>0.2|0.3%|1.4%|5.4%|
|rents recyce in<br>th ll b<br>0.5|0.4%|1.6%|5.7%|
|e oca uran<br>econom<br>0.8|0.4%|1.7%|5.9%|
|y<br>1: Public ownership<br>of land(ccp)|0.5%|1.8%|6.1%|

**Table 1: Consumption-related welfare impacts of replacing a transport subsidy by a lump sum transfer as a function of subsidization rates and ratio of land rents which are recycled into the local urban economy.**

Table 1 shows that potential welfare gains are large with a lump sum transfer rather than a transport subsidy, especially if subsidization rates are high and land rents are recycled in the local urban economy, which is the case in Buenos Aires. This warrants a more in depth exploration of the welfare impact of transit subsidies in a more realistic model tailored for the urban area of Buenos Aires.

This picture omits two important dimensions of the discussion. The first is the dynamics of urbanization and in particular how each policy influences urban sprawl and its associated infrastructure costs and transport emissions. The second is the re-distributional impacts of each policy. To look into these dimensions we need a model which is spatially explicit so as to capture realistically the urbanization trajectory of the urban area of Buenos Aires and how the poor will be affected by an increase in public transport fares. The next section will present the model that we use in the rest of this paper while sections 6 and 7 will address the urban sprawl, environmental, welfare and political economy issues involved with public transit subsidies and other alternative policy options.

# 5 Dynamic model NEDUM-2D

## 5.1 General principles of NEDUM-2D

A theoretical framework that reflects the interplay between households’ localization decisions, project developers’ construction decisions and transport costs is required to evaluate the impacts of removing public transport subsidies in an urban area. The NEDUM-2D model (Non Equilibrium Dynamic Urban Model) developed in CIRED (Viguié and Hallegatte 2012) is well suited to conduct such a study.

This tool is an extension of the standard urban economic model such as defined by Fujita (1989) building on the pioneering works of Alonso, Mills and Muth at the end of the 1960s (Alonso 1964; Mills 1967; Muth 1969). It aims at explaining the variation in land costs in cities and thus the level of real estate prices together with the distribution of the households and buildings in an urban area. Classically, it is based on two very simplified, yet realistic, fundamental mechanisms. First, households, when choosing where to live, trade off between the proximity to the city center and the level of real estate prices (or equivalently between the proximity to the city center and the size of the dwelling they will occupy). Second, the project developers (or landowners<sup>4</sup> ) maximize their profits and choose to build more or less housing surface in a given place depending on the level of real estate prices. The higher the real estate prices, the denser the developers choose to build. We assume that the land is publicly owned (or equivalently owned in equal value shares by all households of the urban area) and that the annual rents generated are entirely recycled 4 A standard calculation (Fujita, 1989) proves that this hypothesis does not change the results of the model : in the model, the reasoning and the calculations that are conducted are identical whether project developers have to rent or buy the land from landowners.

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