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. 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

5. Simple case with a toll Suppose each car has 1 driver If we charge a toll, let the toll be $5 per car

6. 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

7. Why charging a toll is useful Without 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

8. 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

9. 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

10. 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

11. 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

12. 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

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

14. 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

15. 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

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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 91 Express Lanes toll schedule $9.55 toll going eastbound on Thursdays, 4 pm hour

27. 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

28. 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

29. 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

30. 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

31. 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