We study a system of optimal taxes and transfers under private information (Mirrlees 1971) in an urban setting (Mirrlees 1972). We show that rationed, subsidized housing (i.e. public housing) is generally part of the optimal policy whenever the optimal income tax policy leads to bunching. Under a plausible calibration, this public housing is situated in the high value, downtown area of the city.
Working with Lars Nesheim.