urban economy essay
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LectureSlidesChapter101.pptxChapter 10 Autos and Externalities
Based on Urban Economics by O’Sullivan 8th edition textbook
This Chapter
3 sources of externalities generated by automobiles: congestion, pollution and collisions
Policy responses to each
Travel to Work
Cars are the most popular form of transportation in the US
Average commute to work in 2000 was 25.5 minutes. In 2014 it is closer to 27 minutes for largest 50 metro areas
Longest commutes are in NY, Washington DC, Newark, NJ, Chicago, Boston, Oakland, Riverside, CA, Baltimore, Atlanta
Congestion Externalities
Axiom 3: Externalities cause inefficiency!
Quick Review:
What is an externality?
Types/examples of externalities?
Market outcomes?
How do we deal with externalities?
Primary Externalities from Driving
Road congestion
Common to most cities around the world; especially big ones.
Pollution
Greenhouse gas emissions
Particulate pollution asthma, etc.
Noise pollution
Collisions/Injuries to others
Internalize Externalities (pricing, taxes)
Cost of Congestion
Average US citizen wasted 47 hours/year from congestion (Texas Transportation Institute)
$5 billion wasted gas from slow driving and delays
Total time and wasted gas cost annually was approx. $63 billion
This is 5x the cost compared
to 1982
A model of congestion externality
Each individual travels a route 10 miles long
$ cost of travel: 20 cents/mile
Time Cost: opportunity cost of time is 10cents/minute. (Depends on how long the trip takes).
Private Trip Cost ($)=2+0.1*m
(m is minutes)
A model of congestion externalities
The Demand for Urban Travel:
Negative slope: higher cost (price) means lower amount of travel
Each vehicle makes one trip and one passenger per car
Drivers vary with regards to benefit received from trip
Demand (marginal benefit) curve
The Private and Social Costs of Travel
Trip time increases with traffic volume
Private trip cost = $2 + $0.10m
Social cost= private cost + external cost
Equilibrium vs Optimum Traffic Volume
Private trip cost is cost per driver so also call it the average trip cost
Social trip cost is total cost (private+ ext cost) for marginal vehicle so also call it marginal cost.
Why aren’t two lines parallel?
y
x
Equilibrium vs Optimum Traffic Volume
Drivers ignore congestion cost imposed on others
Lois (#1,500) mb = $5.21, private cost = $4.16, social cost = $6.71
He uses road because mb > private trip cost
But it’s inefficient because mb < social trip cost
Imposing a burden on society of $1.50 (point S to U)
Equilibrium vs Optimum Traffic Volume
Equilibrium: Demand (MB) = Marginal private trip cost at 1,600
Efficient: Demand (MB) = social trip cost at V=1,400
Equilibrium outcome inefficient. Deadweight loss
e
i
Congestion Tax
e
i
Tax = external trip cost at efficient volume = $2.10
Tax shifts private trip cost curve up $2.10
Does the congestion tax make society better off?
e
i
Welfare is maximized when MB=MC for society for last vehicle on road
Point e
Tax improves society welfare because eliminates the DWL
Who Is Better Off Under the Congestion Tax?
Government divides tax revenue equally among all 1600 vehicles. Who benefits?
Hiram(still uses road): Net Benefit = $0.33 + $1.84 - $2.10 = $0.07
Lois (no longer uses road): Net Benefit = $1.84 - $0.88 = $0.96
Congestion Taxes and Urban Growth
Recall the utility curves graph we used for city size
What do you think will happen to a city that implements a congestions tax?
Congestion Taxes and Urban Growth
Point i: two identical cities
Congestion tax in one city reduces congestion diseconomies of scale, shifting utility curve upward
Immediate effect is utility gap: points j and i
Migration to congestion-tax city
Result: congestion tax city grows, other city shrinks, both benefit from congestion tax with higher utility than before
Application: Variations in Congestion
Demand for highway use varies over the course of the day (and week)
This implies a demand curve that is shifting in and out over time
As demand curve shifts, so does socially optimal level of traffic
Efficient congestion tax needs to vary according to where the demand curve is
Congestion tax will be higher when demand is higher because greater MEC
Practicalities of the Congestion Tax
Peak versus Off-Peak Travel:
Peak demand generates larger volume, larger gap between private and social trip cost, and requires larger congestion tax to correct
Peak period lasts many hours in modern cities
Estimates of Congestion Taxes
Implementing the Congestion Tax
Vehicle identification system (VIS) allows tracking and billing
Electronic pricing uses debit card to impose variable charges
FastTrak: Fees on vary on time of day
Pricing HOT Lanes
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
Consumer Responses to Congestion Tax
Modal substitution: switch to carpool, public transit, bike, walking, etc.
Time of travel: switch to off-peak travel
Travel route: switch to less congested route
Travel occurrence: combine number of trips needed, more efficient scheduling/planning
Location choice: in the long-run people alter location to drive less; change residence or workplace to cut travel distance
Other Ways to Reduce Congestion
Gas taxes, parking taxes, public transit subsidy
Gas tax
Reduces driving and reduces pollution, but doesn’t affect when/where people choose to drive; only indirectly addresses congestion problem
Parking taxes (or eliminating free parking)
Also discourages driving, but does not penalize distance driven; can only affect peak hour congestion if parking tax is different at different times of day
Public transit subsidy
Positive externality problem is underuse
However, people like their cars and we’d essentially have to pay people to get them into buses more than a 100% subsidy
How to reduce congestion?
| Congestion Tax | Gas Tax | Subsidize mass transit | Eliminate parking subsidies | |
| Modal substitution | Yes | Yes | Yes | Yes |
| Time of travel | Yes | No | No | No |
| Travel route | Yes | No | No | No |
| Location choices | Yes | Yes | No | No |
The Road Capacity Decision
One efficient way to reduce congestion is a congestion tax
Is it optimal to expand road size as well?
Depends on whether revenue from congestion tax can cover cost of expanding the road
Capacity rule says to widen to the point congestion tax rev. = cost of road
Different short and long run effects
The cost of travel
Table shows private trip cost at different volumes of traffic for a two lane road. Road costs $800 to construct. Calculate the average trip cost .
| Vehicles | Private trip cost | Road cost per vehicle | Average total cost of travel |
| 200 | 3.2 | ||
| 400 | 3.2 | ||
| 600 | 3.248 | ||
| 1200 | 3.728 | ||
| 1400 | 4 | ||
| 1600 | 4.328 | ||
| 1800 | 4.712 |
The cost of travel
Table shows private trip cost at different volumes of traffic for a two lane road. Road costs $800 to construct. Calculate the average trip cost .
| Vehicles | Private trip cost | Road cost per vehicle | Average total cost of travel |
| 200 | 3.2 | ||
| 400 | 3.2 | ||
| 600 | 3.248 | ||
| 1200 | 3.728 | ||
| 1400 | 4 | ||
| 1600 | 4.328 | ||
| 1800 | 4.712 |
| 4 | 7.2 |
| 2 | 5.2 |
| 1.33 | 4.578 |
| 0.66 | 4.388 |
| 0.57 | 4.57 |
| 0.5 | 4.828 |
| 0.44 | 5.152 |
What a Mess! Spaghetti Noodles?!
Cost with 2-Lane Road
Orange curve shows ATC of travel
Green shows private trip cost
Vertical distance between them is road cost per vehicle (AFC)
As volume (V) increases
ATC initially declines as the fixed costs are spread
ATC then increases as the private trip cost rises due to congestion
Private cost
ATC 2 lane
.k
J.
The cost of travel
Two average cost curves: 2 lane road, 4 lane road
It takes a larger volume of vehicles to reach same minimum ATC point since 4 lane road is more expensive
The cost of travel
What happens to travel costs?
As we move to a 4 lane road both private and social costs decline due to reduced congestion
Tradeoff: higher road cost but lower travel costs
Private cost
(4 lanes)
Social Trip Cost
(2 lanes)
Social Trip Cost
(4 lanes)
Private cost
(2 lanes)
Traffic Volume
Trip Cost
Should society build a 4 lane road?
Equilibrium with 2-Lane Road
Equilibrium with a 2 lane road and a congestion tax: point i, where demand intersects social trip cost
Congestion tax: gap between point i and point k
Average road cost: gap between point j and point k
Tax > average road cost: Total tax revenue > Road cost
Rule tells us to build the road
Private cost
ATC 2 lane
i
.k
J.
Equilibrium with 4-Lane Road
With the 4 lane road and the congestion tax, new equilibrium is point e
Congestion tax: gap between point e and point f
Average road cost: gap between point e and point f
Tax= average road cost: Total tax revenue = Road cost
Rule says what?
For wider roads, marginal benefit < $4 (LR MC is $4) so as we move down the demand curve to volumes greater than V** becomes inefficient to expand road
Private cost
.f
e
Growth and Road Expansion
As the suburbs extend out, people living in the suburbs tend to demand road expansion
Does road expansion ease congestion?
Empirical evidence suggests it does, but only in the short run
Demand for peak-period travel is highly elastic
Latent demand issue
Congestion is an important limiter of suburban sprawl
If roads get too congested, people stop settling far out from town
Road expansion lowers commuting costs, and increases willingness to pay to live far out from town; this leads to growth in the suburbs and adds to traffic until congestion gets bad again
If road gets widened, we expect more development will happen from reduced commute costs and road will end up just as congested (or worse) as it is now.
Autos and Air Pollution
Types of pollutants: VOC, CO, NOx, SO2 generate smog and particulates
Transport activities are responsible for 2/3 of CO, 1/2 of VOC, 2/5 of Nox
Greenhouse gases emitted as well
Poor air quality exacerbates respiratory problems and can cause premature death
Good news: over last 20 years air quality has improved. Lower emissions per mile has more than offset the increase in mileage driven each year. Yay technology!
Ideas to Reduce Car Pollution
Monitoring device on vehicles that charges a tax based on usage
Pay a one-time pollution tax for the life of the vehicle upon purchase
Gas tax
Subsidize public transit
Internalizing the Externality
Economic approach is tax = marginal external cost
Emissions depend on miles driven and fuel economy of vehicle
Gasoline Tax
Increase cost per mile, decreasing mileage and emissions
Does not provide incentives for cleaner cars since the tax is based on gasoline consumption not directly on emissions
Gasoline Tax
Tax = $0.40 per gallon: Shifts supply curve (marginal-cost curve) upward by $0.40
Price increases by half the tax (from $2.00 to $2.20) as tax is partially shifted to supply side of market (owners of inputs whose prices fall as quantity falls--crude oil)
Motor Vehicle Accidents
Annual cost in U.S.: 3.1million injuries; 40k deaths; costs $300 billion per year
External cost of driving from collisions = 4.4 cents per mile (vs. 10 cents per mile for fuel)
External cost from collisions depends on:
Miles driven
Care when driving (e.g., speed)
Type of vehicle
Road conditions
Motor Vehicle Accidents
Vehicle Safety Act of 1966: Mandated several safety features
Head restraints, padded dashboards, seatbelts, shatterproof windshields, duel brake systems, airbags
Seat-belt laws didn’t have expected effect
Only a small reduction in passenger death rates
Increased death rates for
pedestrians and bicyclists
Why??
Why Do Drivers Speed?
Marginal benefit of speed: More time for other activities
Marginal cost of speed
Increased likelihood of collision and injuries
Increased severity of injuries
MC (40 mph) = $12; expected injury cost increases by $12 by driving at 40 mph versus 39 mph
Marginal cost increases with speed: expected injury cost increases at increasing rate
Initial equilibrium: Marginal principle satisfied at point i (46 mph)
Theory of Risk Compensation
Mandated safety equipment (air bags) decreases expected injury cost
Decrease in injury cost shifts marginal-cost curve downward
Rational response is to drive faster: 49 mph instead of 46 mph
Evidence for Risk Compensation
Lower cost from injury increases the likelihood of injury
Following safety regulations, higher collision rates and more pedestrian deaths
Death rates for pedestrians and bicyclists increase with vehicle safety features
