Externalities on highways
Today: We apply externalities to
a real-life example
Today
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A real-life example with externalities
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
Automobile congestion
We can use some economic tools to
analyze the situation

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Equilibrium
Market failure
Congestion
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We will look at possible solutions to the
problem
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Tolls on congested routes
Building our way out of congestion
HOV lanes
Private highways and express lanes
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Monopoly power?
Public transit and city design
Traveling from A to B

Choose between a highway and a
bridge in each of the 4 rounds
highway
bridge
Recall information from
previous activity
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Travel time on the highway is 20 minutes, no
matter how many other cars travel on this
route
The bridge is narrow, and so travel time is
dependent on the number of other cars on
the bridge
If 1 car is on the bridge, travel time is 10
minutes; 2 cars, 11 minutes; 3 cars, 12
minutes; etc.
Implementation of tolls
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Each minute of time is worth a dollar
for each person in your carpool
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In other words, for each additional minute
of travel time, you pay a $1 marginal cost
due to your lost time
Each time you travel the bridge, each
person in your carpool must pay a $5
toll
Route choice and externalities
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Earlier this quarter, we used an activity
to show that there is equilibrium on this
route network w/o tolls: 11 carpools on
the bridge
However, there are externalities
involved whenever an additional carpool
travels on the bridge
Why charging a toll is useful
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W/o tolls, the bridge and highway have
the same travel times in equilibrium
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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?
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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
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In this case, an optimal tax can reduce DWL
Equilibrium with tolls
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Each minute is $1 in time costs (per
person)
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Cost to travel on HW  $20
Cost to travel on bridge  time cost + $5
What is equilibrium?
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Each person on the bridge has $15 in time
cost  travel time of 15 minutes  6
carpools on the bridge
In the following analysis…
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…we assume 1 person per car
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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
# on bridge
Travel time on
bridge
Total minutes
for bridge
travelers
Total minutes
for highway
travelers
Total minutes
for all drivers
1
10
10
380
390
2
11
22
360
382
3
12
36
340
376
4
13
52
320
372
5
14
70
300
370
6
15
90
280
370
7
16
112
260
372
8
17
136
240
376
9
18
162
220
382
10
19
190
200
390
11
20
220
180
400
What is efficient?
5 or 6 on bridge
# on bridge
Travel time on
bridge
Total minutes
for bridge
travelers
Total minutes
for highway
travelers
Total minutes
for all drivers
1
10
10
380
390
2
11
22
360
382
3
12
36
340
376
4
13
52
320
372
5
6
14
15
70
90
300
280
370
370
7
16
112
260
372
8
17
136
240
376
9
18
162
220
382
10
19
190
200
390
11
20
220
180
400
Applying our problem to real
traffic problems

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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?
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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 1
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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
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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?
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Increased capacity leads more people
to travel on the bridge
This is known as increasing bridge
capacity creating its own demand
In the real world
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Increasing freeway capacity creates its
own demand
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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
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HOV lanes attempt to increase the
number of people traveling on each
lane (per hour)
These attempts have limited success
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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
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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
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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
Highway 91 Express Lanes:
Part success, part failure
Why could private highways
be successful?
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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
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Monopoly power
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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
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This is what happened on the 91
Express Lanes in Orange County
(eventually)
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Privately built
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Monopoly problems
Public buy-out of the privately-built lanes
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With public control, more carpooling has been
encouraged
Benefits of public control of
priced highways
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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
$10 toll
going
eastbound
on Fridays,
3 pm hour
Public transit and city design
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People often hope that public transit is
the solution
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However, many people hope that
“someone else” takes public transit
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Why? Slow, inconvenient, lack of privacy
Public transit can only be a long-term
solution if it is faster and less costly than
driving
Public transit and city design
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City designs usually make public transit
difficult for many people to use
effectively
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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
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City planners can make public transit
more desirable
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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
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The problem with these potential
solutions
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People in these cities want their single
family homes, low density neighborhoods
People value privacy highly
This leads to the externality problems of
congestion
Summary
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Congestion is a big economic problem
in the US, due to the externalities
involved
There are many possible solutions
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Each has its advantages and disadvantages