Professor: Keren Mertens Horn Office: Wheatley 5-78B Office Hours: TuTh 2:30-4:00 pm ECONOMICS OF THE METROPOLITAN AREA 212G, SPRING 2013

 Enable specialization  Smooth demand for services  Provide plenty of intermediate inputs  Knowledge spillovers  Lower search costs  Innovation  Making these advantages possible requires TRANSPORTATION  Computers required for work in most offices are made elsewhere  They need to be transported from where they are made to where they are used  People do not live in the same place they work  They too need to get from where they live to where they work (for most of the population) RECAP: ADVANTAGES OF CITY

 One primary reason for density is that there are costs associated with transporting people and goods  If there were no costs associated with travel, then we would all live in large/cheap houses (maybe in warm weather climates)  no one would pay a fortune for a studio apartment in Wall Street  If costs of transportation were prohibitively expensive we would all become self-sufficient  no one would realize economies of scale  Costs of transportation is one main factor limiting how much cities can grow and how much increasing returns to scale can be realized  Many different modes of transportation  Most trips in US  CAR  86% of all trips are done by car, 67% of all short trips (<1 mile) done by car TRANSPORTATION HAS COSTS

TRAVELING IN CITIES  Primary mode of transportation in Urban America  Cars  Benefit to Individual:  Efficient way to get where you want to go  Cost to Individual:  Gasoline, wear and tear on the car  For 20 minute trip at 50 miles per hour, cost of gas about $0.50 to $1.50  Lost time  Based on average hourly wage of $14, this trip would cost almost $5  In a world of only private costs, what makes a good transportation public policy?  Good public policies would ensure that all trips with positive net benefits (where Benefit>Cost) would take place  Change where some people are better off and no one is worse off is called a Pareto Improvement

 Definition:  A change that makes some people better off and no one worse off  Economists often use this criterion in crafting policy recommendations  Term will be used often in class to evaluate a given policy response to an urban issue PARETO IMPROVEMENT

OPTIMAL NUMBER OF TRIPS Net Benefits ($) Number of Trips $0

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 Definition of Externality:  Cost (benefit) that is not borne directly by the person who decides about incurring it.  External Costs of Driving:  Wear and tear on road  Pollution  Accidents  Congestion EXTERNAL COSTS

OPTIMAL NUMBER OF TRIPS Net Benefits ($) Number of Trips V $0

OPTIMAL NUMBER OF TRIPS Net Benefits ($) Number of Trips TV $0

OPTIMAL NUMBER OF TRIPS Net Benefits ($) Number of Trips T W V $0

 Road transportation a major source of air pollution  Beijing article estimates 40% of pollutants causing hazy air come from automobiles  Figuring out the cost of pollution associated with each trip is very challenging:  Varies by type of car, location, time and speed of driving.  Small and Kazimi (1995) estimate pollution-damage costs per mile around 3 cents for 1992 cars and 6 cents for 1977 cars.  How does our government respond?  Regulations  Eliminating lead from gasoline  Requiring manufacturers to produce fuel efficient/cleaner cars  Unintended consequence – people held on to cars longer because more expensive  Only applied to passenger cars NOT SUVs  Each mile driven was cheaper  Regulations do NOT change the marginal cost of an additional trip POLLUTION

 After HIV/AIDS, traffic accidents are the major cause of death worldwide in the fifteen- to forty-four-year-old age group  Response is to require all people to have car-insurance  Does this increase safety?  Cohen and Dehejia (2004) show that mandatory car insurance increases accidents because it reduces the number of uninsured motorists  Need to think of the incentives created by our policies  Car insurance creates a situation of moral hazard  The tendency of a person who is imperfectly monitored to engage in undesirable behavior.  How do insurance companies respond to this moral hazard?  Increase premiums for people who have accidents  Rebates for taking a driver safety course  Charge more for teenage driver ACCIDENTS

 Problem with insurance:  Fixed cost (rather than marginal cost)  Pay premium then drive as much as you want  How could we change the marginal cost of driving?  “Pay at Pump” – surcharge for gasoline that would pay for car insurance  To be accurately priced should vary with:  Congestion in which car will be driven  Driver’s skill  Vehicle’s weight and fuel efficiency  Use of Global Positioning System?  Privacy concerns?  What algorithm should be used to determine price? Speed? ALTERNATIVE RESPONSES TO PREVENT ACCIDENTS

 PARETO IMPROVEMENT  A change that makes some people better off and no one worse off.  EXTERNALITY  Cost (benefit) that is not borne directly by the person who decides about incurring it.  MORAL HAZARD  The tendency of a person who is imperfectly monitored to engage in undesirable behavior.  FIXED COST vs. MARGINAL COST  FIXED COST – costs that do not vary with the quantity of output produced  MARGINAL COST – increase in total cost that arises from an additional unit of input REVIEW OF ECONOMIC CONCEPTS

 Major cost of driving in cities – CONGESTION  Class discussion on how cities should respond to the costs associated with automobile use, with a focus on NYC’s congestion pricing plan NEXT CLASS