Externalities on highways
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Externalities on highways - PowerPoint PPT Presentation

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Externalities on highways. Today: We apply externalities to a real-life example. Today. A real-life example with externalities Automobile congestion We can use some economic tools to analyze the situation Equilibrium Market failure. Congestion.

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Externalities on highways

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Externalities on highways

Today: We apply externalities to a real-life example


  • A real-life example with externalities

    • Automobile congestion

  • We can use some economic tools to analyze the situation

    • Equilibrium

    • Market failure


  • 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

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

Recall route choice experiment from early in the quarter

Simple case with a toll

  • Suppose each car has 1 driver

  • If we charge a toll, let the toll be $5 per car

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

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

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

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

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

Efficiency: Lowest total minutes for all drivers

What is efficient?5 or 6 on bridge

Applying our problem to real traffic problems

  • Los Angeles metro area

  • Some refer many of these freeways to be parking lots during rush hours

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

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

Increased capacity on bridge

  • New technology leads to bridge travel time at 9 + 0.733T

  • Equilibrium: T = 15, 20 minute travel times for all

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

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

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

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

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

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

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

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

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

91 Express Lanes toll schedule

$9.55 toll going eastbound on Thursdays, 4 pm hour

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

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

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

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


  • 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

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