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. Traveling from A to B Choose between a highway and a bridge in each of the 4 rounds

5. 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.

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. Efficiency: Lowest total minutes for all drivers # on bridgeTravel time on bridge Total minutes for bridge travelers Total minutes for highway travelers Total minutes for all drivers 110 380390 21122360382 31236340376 41352320372 51470300370 61590280370 716112260372 817136240376 918162220382 1019190200390 1120220180400

13. What is efficient? 5 or 6 on bridge # on bridgeTravel time on bridge Total minutes for bridge travelers Total minutes for highway travelers Total minutes for all drivers 110 380390 21122360382 31236340376 41352320372 51470300370 61590280370 716112260372 817136240376 918162220382 1019190200390 1120220180400

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

15. 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

16. 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

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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 91 Express Lanes toll schedule $10 toll going eastbound on Fridays, 3 pm hour

28. 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

29. 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

30. 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

31. 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

32. 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