Externalities on highways

1. Externalities on highways Today: We apply externalities to a real-life example

2. Today • A real-life example with externalities • Automobile congestion • We can use some economic tools to analyze the situation • Equilibrium • Market failure

3. Congestion • We will look at possible solutions to the problem • Tolls on congested routes • Building our way out of congestion • HOV lanes • Private highways and express lanes • Monopoly power? • Public transit and city design

4. Choose between a highway and a bridge in each of the 4 rounds Travel time on HW: 20 minutes Travel time on bridge: 9 + T minutes, where T is the number of bridge travelers Recall route choice experiment from early in the quarter

5. Simple case with a toll • Suppose each car has 1 driver • If we charge a toll, let the toll be $5 per car

6. Route choice and externalities • Earlier this quarter, we used an activity to show that there is equilibrium on this route network w/o tolls: 11 cars on the bridge • However, there are externalities involved whenever an additional car travels on the bridge

7. Why charging a toll is useful • Without tolls, the bridge and highway have the same travel times in equilibrium • Take away the bridge and nobody’s travel time changes  No social value to the bridge • With tolls, some people can have shorter travel times

8. Aren’t tolls costs too? • If bridge tolls go to government, these are just transfers of money • Toll revenue can offset tax money that has to be collected • Remember that taxes have DWL, except in a case like this where externalities are present • In this case, an optimal tax can reduce DWL

9. Equilibrium with tolls • Each minute is $1 in time costs (per person) • Cost to travel on HW  $20 • Cost to travel on bridge  time cost + $5 • What is equilibrium? • Each person on the bridge has $15 in time cost  travel time of 15 minutes  6 cars on the bridge

10. In the following analysis… • …we assume 1 person per car • This is so that we can more simply determine efficiency • …we assume 20 cars that must travel from A to B

11. Efficiency: Lowest total minutes for all drivers

12. What is efficient?5 or 6 on bridge

13. Applying our problem to real traffic problems • Los Angeles metro area • Some refer many of these freeways to be parking lots during rush hours

14. What are some potential ways to solve this problem? • Some people believe that we can build our way out of congestion • Let’s examine this problem in the context of our activity

15. Suppose our activity from week 2 • No tolls • Bridge travel time is 9 + T, where T represents the number of bridge travelers • Equilibrium: T = 11, 20 minute travel times for all

16. Increased capacity on bridge • New technology leads to bridge travel time at 9 + 0.733T • Equilibrium: T = 15, 20 minute travel times for all

17. What happens with increased bridge capacity? • Increased capacity leads more people to travel on the bridge • This is known as the increased bridge capacity creating its own demand

18. In the real world • Increasing freeway capacity creates its own demand • Some people traveling during non-rush hour periods will travel during rush hour after a freeway is expanded • Freeway expansion often costs billions of dollars to be effective during peak travel periods

19. HOV lanes • HOV lanes attempt to increase the number of people traveling on each lane (per hour) • These attempts have limited success • Benefit of carpool: Decreased travel time • Cost of carpool: Coordination issues • Problem: Most big cities on the west coast are built “horizontally”  sprawl

20. Private highways • Look at a short video on LA traffic • WARNING: This video is produced by reason.tv, an organization that advertises “Free minds and free markets” • After the video • I would like your thoughts about whether or not you believe the suggestions in the video will help solve our commuting problems • We will discuss benefits and costs about private highways

21. Some references in the video Highway 405: Often one of the busier freeways in the LA metro area; however, recent expansion has helped some Highway 91 Express Lanes: Part success, part failure

22. Why could private highways be successful? • Uses prices to control congestion • Private financing would prevent tax money from having to be used • More private highways would decrease demand for free roads

23. Potential problems for private highways • Monopoly power • Positive economic profits if not regulated • Clauses against increasing capacity on parallel routes • Loss of space for expansion of “free” lanes • Contracts are often long (30-99 years) • Private highways are often built in places with low demand • Tollways in Orange County

24. Possible solution: Public control over priced highways • This is what happened on the 91 Express Lanes in Orange County (eventually) • If a highway is privately built • Monopoly problems • Public buy-out of the privately-built lanes • With public control, more carpooling has been encouraged

25. Benefits of public control of priced highways • Gasoline taxes can be reduced in congested areas to offset congestion pricing • Pricing increases efficiency, unlike taxes • Non-commuting traffic has an economic incentive to travel during times of little or no congestion • Trips with little economic value can be avoided • Remember: With externalities, these trips have Social MB < Social MC

26. 91 Express Lanes toll schedule $9.55 toll going eastbound on Thursdays, 4 pm hour

27. Public transit and city design • People often hope that public transit is the solution • However, many people hope that “someone else” takes public transit • Why? Slow, inconvenient, lack of privacy • See article on class website for a funny look at public transit • Public transit can only be a long-term solution if it is faster and less costly than driving

28. Public transit and city design • City designs usually make public transit difficult for many people to use effectively • Sprawl leads to people originating travel in many different places • Express buses are difficult to implement • Local buses are slow, used mostly by people with low value of time

29. Public transit and city design • City planners can make public transit more desirable • Increased population density near public transit • Areas with big workplace density, especially near bus routes and rail lines • Designated bus lanes to make bus travel faster than driving solo

30. Public transit and city design • The problem with these potential solutions • People in these cities want their single family homes, low density neighborhoods • People value privacy highly • This leads to the externality problems of congestion

31. Summary • Congestion is a big economic problem in the US, due to the externalities involved • There are many possible solutions • Each has its advantages and disadvantages