McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved Chapter 10 Externalities from Autos

©2009 The McGraw-Hill Companies, All Rights Reserved10-2 Axiom 3: Externalities cause inefficiency Solution: Internalize the externalities with pricing (taxes) Automobile externalities: congestion, environmental damage, collisions Introduction

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©2009 The McGraw-Hill Companies, All Rights Reserved10-6 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

©2009 The McGraw-Hill Companies, All Rights Reserved10-7 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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©2009 The McGraw-Hill Companies, All Rights Reserved10-10 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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©2009 The McGraw-Hill Companies, All Rights Reserved10-12 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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©2009 The McGraw-Hill Companies, All Rights Reserved10-15 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

©2009 The McGraw-Hill Companies, All Rights Reserved 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

©2009 The McGraw-Hill Companies, All Rights Reserved10-17 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

©2009 The McGraw-Hill Companies, All Rights Reserved10-18 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

©2009 The McGraw-Hill Companies, All Rights Reserved10-19 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

©2009 The McGraw-Hill Companies, All Rights Reserved10-20 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

©2009 The McGraw-Hill Companies, All Rights Reserved10-21 Road Capacity Decision How wide a road to build? Widen if Congestion Tax Revenue > Road Cost

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©2009 The McGraw-Hill Companies, All Rights Reserved10-23 Step 1: Two-Lane Road

©2009 The McGraw-Hill Companies, All Rights Reserved10-24 Step 2: Four-Lane Road

©2009 The McGraw-Hill Companies, All Rights Reserved10-25 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

©2009 The McGraw-Hill Companies, All Rights Reserved10-26 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?

©2009 The McGraw-Hill Companies, All Rights Reserved10-27 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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©2009 The McGraw-Hill Companies, All Rights Reserved10-29 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

©2009 The McGraw-Hill Companies, All Rights Reserved10-30 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

©2009 The McGraw-Hill Companies, All Rights Reserved10-31 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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©2009 The McGraw-Hill Companies, All Rights Reserved10-33 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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©2009 The McGraw-Hill Companies, All Rights Reserved10-35 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