Externalities on highways

Today: We apply externalities to a real-life example

Today

A real-life example with externalities Automobile congestion

We can use some economic tools to analyze the situation Equilibrium Market failure

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

Traveling from A to B

Choose between a highway and a bridge in each of the 4 rounds

highway

bridge

Recall information from previous activity Travel time on the highway is 20

minutes, no matter how many other cars travel on this route

The bridge is narrow, and so travel time is dependent on the number of other cars on the bridge

If 1 car is on the bridge, travel time is 10 minutes; 2 cars, 11 minutes; 3 cars, 12 minutes; etc.

Implementation of tolls

Each minute of time is worth a dollar for each person in your carpool In other words, for each additional

minute of travel time, you pay a $1 marginal cost due to your lost time

Each time you travel the bridge, each person in your carpool must pay a $5 toll

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 carpools on the bridge

However, there are externalities involved whenever an additional carpool travels on the bridge

Why charging a toll is useful

W/o 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

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

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 carpools on the bridge

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

Efficiency: Lowest total minutes for all drivers# on bridge Travel time

on bridgeTotal

minutes for bridge

travelers

Total minutes for

highway travelers

Total minutes for all drivers

1 10 10 380 390

2 11 22 360 382

3 12 36 340 376

4 13 52 320 372

5 14 70 300 370

6 15 90 280 370

7 16 112 260 372

8 17 136 240 376

9 18 162 220 382

10 19 190 200 390

11 20 220 180 400

What is efficient?5 or 6 on bridge# on bridge Travel time

on bridgeTotal

minutes for bridge

travelers

Total minutes for

highway travelers

Total minutes for all drivers

1 10 10 380 390

2 11 22 360 382

3 12 36 340 376

4 13 52 320 372

55 1414 7070 300300 370370

66 1515 9090 280280 370370

7 16 112 260 372

8 17 136 240 376

9 18 162 220 382

10 19 190 200 390

11 20 220 180 400

Applying our problem to real traffic problems Los

Angeles metro area

Some refer many of these freeways to be parking lots during rush hours

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

Suppose our activity from week 1

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

Increased capacity on bridge

New technology leads to bridge travel time at 9 + 0.733T

Equilibrium: T = 15, 20 minute travel times for all

What happens with increased bridge capacity?

Increased capacity leads more people to travel on the bridge

This is known as increasing bridge capacity creating its own demand

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

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

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

Some references in the video

Highway 405: Often one of the busier freeways in the LA metro area

Highway 91 Express Lanes: Part success, part failure

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

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

Possible solution: Public control over priced highways

This is what happened on the 91 Express Lanes in Orange County (eventually) Privately built

Monopoly problems Public buy-out of the privately-built

lanes With public control, more carpooling has

been encouraged

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

91 Express Lanes toll schedule

$10 toll going eastbound on Fridays, 3 pm hour

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

Public transit can only be a long-term solution if it is faster and less costly than driving

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

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

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

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