Externalities on highways

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Externalities on highways

• Today We apply externalities to a real-life
  example

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Today

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

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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

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Recall route choice experiment from early in the
quarter

• 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

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Simple case with a toll

• Suppose each car has 1 driver
• If we charge a toll, let the toll be 5 per car

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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

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Why charging a toll is useful

• Without tolls, the bridge and highway have the
  same travel times in equilibrium
• Take away the bridge and nobodys travel time
  changes ? No social value to the bridge
• With tolls, some people can have shorter travel
  times

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Arent 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

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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

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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

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Efficiency Lowest total minutes for all drivers
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What is efficient?5 or 6 on bridge
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Applying our problem to real traffic problems

• Los Angeles metro area
• Some refer many of these freeways to be parking
  lots during rush hours

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What are some potential ways to solve this
problem?

• Some people believe that we can build our way out
  of congestion
• Lets examine this problem in the context of our
  activity

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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

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Increased capacity on bridge

• New technology leads to bridge travel time at 9
  0.733T
• Equilibrium T 15, 20 minute travel times for
  all

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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

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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

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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

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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

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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
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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

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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

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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

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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 lt Social MC

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

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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

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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

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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

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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