1. Professor: Keren Mertens Horn Office: Wheatley 5-78B Office Hours: TR 2:30-4:00 pm E-mail: Keren.horn@umb.edu ECONOMICS OF THE METROPOLITAN AREA 212G, SPRING 2013

2.  EQUILIBRIUM  Situation in which everyone is doing as well as they can, given correct beliefs about how everyone else will behave  PIGOUVIAN TAX  Tax that makes people bear all the costs of their decisions  ELASTICITY  % ∆ Qd/ % ∆ P  Demand is elastic if a small percent change in price causes a big percentage change in the quantity demanded  Demand is inelastic if a big percentage change in price causes a small percentage change in the quantity demanded  PROGRESSIVE vs. REGRESSIVE TAXES  Progressive tax – tax for which high-income taxpayers pay a larger fraction of their income than do low-income taxpayers  Regressive tax – tax for which high-income taxpayers pay a smaller fraction of their income than do low-income taxpayers RECAP: ECONOMIC CONCEPTS

3.  Gas  Time  Wear and tear on road  Pollution  Accidents  Congestion  Alternatives to cars? Mass Transit! RECAP: COSTS OF CARS

4.  Overall about 5% of Americans take a bus, train or subway to work.  Some cities more people commute to work with mass transit* (vs. driving, walking, biking or other means)  New York City, NY – 55.7%  Jersey City, NJ – 45.8%  Washington, D.C. – 38.3%  San Francisco, CA – 34.1%  Boston, MA – 32.8%  Why don’t more households commute using mass transit? MASS TRANSIT USAGE *Source – 2010 American Community Survey

5.  Unless you are making a trip that a lot of other people are making at the same time, mass transit is unlikely to be useful  Need density to make mass transit worthwhile  How much density? WHEN IS MASS TRANSIT APPROPRIATE?

6.  It depends….  On value of people’s time (ie opportunity costs)  On alternative modes of transportation (ie amount of car traffic)  On technology of mass transit (ie how expensive is it to build and run)  Berkeley Study in early 1970s (comparing cars, buses and rail)  Trips that fewer than 1,100 people an hour make, cars are cheapest  Trips that more than 1,100 people an hour make, buses are cheaper  Trips that at least 22,000 people an hour make, rail is cheaper than cars  Trips that at least 50,000 people an hour make, rail is cheapest  Few urban corridors with this type of density  Manhattan – 40,000 trips an hour  Boston, Chicago, Philadelphia – some corridors that see 10,000-30,000 trips per hour HOW MUCH DENSITY?

7.  Is Mass Transit a Public Good?  Definition: Goods that are neither excludable or rival in their consumption  EXCLUDABLE  Property of a good whereby a person can be excluded from consuming it  RIVAL  The property of a good whereby one person’s use diminishes another person’s use  Is Mass Transit a Natural Monopoly?  Definition: A monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms. PROPERTIES OF MASS TRANSIT

8. SCALE ECONOMIES AND TRANSIT PROVISION Cost per passenger Ridership Demand P1P1 Marginal Cost Average Cost Q1Q1 P*P* Q*Q*

9.  Transit systems have adopted a wide variety of fare systems:  Boston T charges a flat fee for riding to any destination  Washington Metro has peak and off-peak fares that vary by distance  According to economic principles:  Cost of the fare should be exactly the costs imposed on the rest of the world, leading people to only make trips where MB > MC  Ex/Uncongested train  Riding -- costs are very little, so in principle should pay little or nothing  Boarding -- takes time and can delay people behind you, so should charge something  Overall should charge little, and shouldn’t vary with distance traveled  Ex/Congested train  Riding – costs are high because each additional person degrades the experience of others, so should pay higher fee, and it should vary with distance  Boarding – costs again are higher because you delay even more people  Overall should charge more for travel on a congested train  Should we expect mass transit systems to make money? THE RIGHT FARES

10. SCALE ECONOMIES AND TRANSIT PROVISION Cost per passenger Ridership Demand P1P1 Marginal Cost Average Cost Q1Q1 P*P* Q*Q*

11.  Mass transit systems around the world are governed in many different ways, so unlikely that there is one single best way to govern.  Boston Massachusetts Bay Transportation Authority (MBTA) is a quasi-governmental organization (as are many urban public transit systems)  Brazil bus system completely privately owned and operated WHO SHOULD RUN THE SYSTEM?

12.  HOV Lanes:  Some drivers switch to car pools, so fewer cars on the road  BUT also use up an entire lane  Ex/Santa Monica Freeway in LA  Switched only few riders to car pools, so 25% of freeways was used by 6% of drivers.  After public outcry lane was returned to general use  Ex/Houston HOV System  Caused large increase in carpooling, diverting large volumes of traffic from general-purpose lanes  Resulted in reducing congestion by 4% (Richmond, 1998) ALTERNATIVE FORMS OF MASS TRANSIT

13.  Shared-ride taxis (3 to 4 passengers)  Cab drivers display destination signs, allowing people along the route to hail cabs going their way.  Thrived in Washington DC after WWII  Jitneys (6 to 15 passengers)  Benefit of lower cost per passenger, and can have the flexibility to change routes, pickup points, and schedules.  Atlantic City offers this type of bus service. Market value of a license was $160,000 in 1995.  Subscription commuter vans and buses (10 to 60 passengers)  Riders pay in advance for commuter bus service.  San Francisco, Golden Gate Transit established 22 commuter routes between suburban communities and downtown financial district. ALTERNATIVE FORMS OF MASS TRANSIT

14.  PUBLIC GOODS  Goods that are neither excludable or rival in their consumption  EXCLUDABLE  Property of a good whereby a person can be excluded from consuming it  RIVAL  The property of a good whereby one person’s use diminishes another person’s use  NATURAL MONOPOLY  A monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms. REVIEW OF ECONOMIC CONCEPTS