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Chapter 10 Externalities from Autos

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•Axiom 3: Externalities cause inefficiency

•Solution: Internalize the externalities with pricing (taxes)

•Automobile externalities: congestion, environmental damage, collisions

Introduction

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•Nationwide cost of congestion

•Typical commuter spent 47 hours per year in traffic

•Extra gasoline and diesel fuel = $5 billion

•Sum of time and fuel cost = $63 billion (5 times amount in 1982)

•Modeling congestion

•Commute distance = 10 miles

•Monetary Cost = $0.20 per mile

•Time cost = opportunity cost of $0.10 per mile

Congestion

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• Column B: Trip time increases with volume as drivers slow for safe distances• Column C: Private trip cost = $2 monetary cost + $0.10 per minute • trip time• Column D: Increase in time per vehicle• Column E: Increase in total travel time = D • vehicles• Column F: External trip cost = E • $0.10• Column G: Social trip cost = C + F

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Benefits and Costs of the Congestion Tax

•Benefits: Decrease in trip time from reduced volume; Reduction of other taxes

•Cost: Tax for drivers; Lost consumer surplus for former drivers

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Congestion Taxes and Urban Growth

•Will the imposition of a congestion tax cause the city to grow or shrink?

•Congestion tax improves efficiency of urban economy

•Consider two-city region with fixed population

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•Estimates of Congestion Taxes

•San Francisco: $0.03 to $0.05 (off peak); $0.17 to $0.65 (peak)

•Minneapolis: average of $0.09; up to $0.21 on most congested routes

•Los Angeles: $0.15 average for peak

•Implementing the Congestion Tax

•Vehicle identification system (VIS) allows tracking and billing

•Singapore: $2 for central zone; Electronic pricing for variable charges

•Toronto: Fees on Express Toll Road depend on time of day

Practicalities of Congestion Taxes

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•1. Modal substitution: switch to carpool, transit

•2. Time of travel: switch to off-peak travel

•3. Travel route: switch to less congested route

•4. Location choices: change residence or workplace, cutting travel distance

A Congestion Tax Reduces Traffic Volume by

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•HOV: high-occupancy vehicle lane for carpools and buses

•HOT: high occupancy or toll; pay to use HOV lanes

•California HOT lanes: Toll varies with traffic volume

•Responses

• Modal substitution: switch to transit, carpool

• Time of travel: Switch to off-peak travel

• Change routes

• Combine trips

HOV and HOT Lanes

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•Encourages modal substitution (1) and location choices (4)

•Does not affect time of travel (2) or route (3)

•Gasoline tax applies to driving on uncongested road

Alternative to a Congestion Tax: Gasoline Tax

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•Idea is to match underpricing of car travel with underpricing of mass transit

•Encourages modal substitution (1)

•Does not affect time of travel (2), route (3), location choice (4)

•Problems

• Inelastic demand for mass transit; zero price increases ridership by 1/3

•Only a fraction of new riders are diverted auto drivers

Alternative to Congestion Tax: Transit Subsidy

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•Subsidies cut drive-alone cost and increase number of cars by 19% (Shoup)

•Eliminate subsidies shifts auto demand to left, decreasing volume

•Evidence of responsiveness

•Ottawa pricing decreased drivers by 23%

• LA pricing decreased solo drivers by 44%

Alternative to a Congestion Tax: Eliminate Parking Subsidy

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Road Capacity Decision

•How wide a road to build?

•Widen if Congestion Tax Revenue > Road Cost

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Step 1: Two-Lane Road

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Step 2: Four-Lane Road

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•Wider road has lower time cost and larger quantity demanded

•Figure 10-6: Double width decreases trip cost from $3.60 (k) to $3.00 (f)

•When capacity doubles, why not go from point k to point m?

•Law of demand: Increase in volume partly offsets cost savings from wider road

Capacity Expansion and Latent Demand

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•Use fees for autos and trucks: gas, oil, auto parts

•Revenue from fees no longer cover cost of roads and highways

•Urban road users come closer to covering costs

Who Pays for Roads?

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•Pollution and Greenhouse Gases

• Pollutants: VOC, CO, NOx, SO2 generate smog and particulates

• Transport responsible for 2/3 of CO, 1/2 of VOC, 2/5 of NOx

• Poor air quality exacerbates respiratory problems & causes premature death

• Greenhouse gases from automobiles

•Internalizing pollution externalities

• Economic approach: Tax = marginal external cost

• Monitoring device allows direct charge for emissions

• One-time pollution tax depends on expected emissions, but not mileage

Autos and Air Pollution

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•Carbon tax: External cost per ton of carbon = $25 to $100

•Carbon tax of $50 means gasoline tax = $0.13 per gallon

•Extend Figure 10-7: Shift supply curve upward by $0.13

Greenhouse Gases and a Carbon Tax

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•Cost of MV Accidents

• Annual cost in US: 3.1 million injuries, 40,000 deaths, $300 billion

• External cost of collisions = 4.4 cents per mile (vs. 10 cents per mile for fuel)

•Accidents and Congestion

• Parry: $5 billion per year lost from accident delays

• Quick response policies: cruising tow trucks, loop detectors, helicopters

Motor Vehicle Accidents

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•Vehicle Safety Act of 1966: Mandated safety features

•Seat-belt and other safety laws didn’t have expected effect

•Small reduction in death rates

•Higher collision rates

• Increased injury and death rates for pedestrians and bicyclists

Vehicle Safety Policies: Bikers Beware

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•Impose per-mile tax = Marginal external cost from accidents

•Figure 9-5: Efficiency Gains from VMT Tax

•Perfectly Differentiated: Gain = 0.38 cents per mile driven = $9.4 billion per yea

Accident Costs and VMT Tax

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•Recall spatial mismatch discussion from neighborhood chapter

•Access to a car

•Urban low-income families: 27% don’t own a car

•Blacks in central cities: 45% don’t have access to a car

•Importance of a car

•Switch from mass transit saves 19 minutes each day and expands search area

•Car owners are more likely to complete job training program and get a job

Automobiles and Poverty