ECONOMICS OF THE
METROPOLITAN AREA
212G, SPRING 2013
Professor: Keren Mertens Horn
Office: Wheatley 5-78B
Office Hours: TR 2:30-4:00 pm
E-mail: [email protected]
RECAP: COSTS OF CARS
 Gas
 Time
 Wear and tear on road
 Pollution
 Accidents
 AND CONGESTION
RECAP: ECONOMIC CONCEPTS
 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
CONGESTION HAS COSTS
 According to Texas Transportation Institute (2012)*:
 Average US commuter lost 52 hours due to traffic congestion
 In some metropolitan areas costs were higher:




In
In
In
In
Washington DC 67 hours (MSA with highest congestion)
Los Angeles and San Francisco 61 hours (Second highest)
New York 59 hours (Fourth highest)
Boston 53 hours (Fifth highest)
 Up from 47 hours in 2011
 Texas Transportation Institute measures the costs of
congestion at $121 billion a year, which is about $818 for
each commuter
 Costs associated with congestion appear to be growing
 Average peak period driver lost three times as much to congestion in 2002
as in 1982
*http://mobility.tamu.edu/ums/national-congestion-tables/
POLICY RESPONSES TO
CONGESTION
 Do nothing  call this “come as you please” system
 People will bear two types of costs:
 Waiting costs – costs you bear when you wait, are proportional to amount
of time you wait
 Schedule delay costs – costs you bear when using a facility at a time that
isn’t optimal for you in order to avoid waiting
COME AS YOU PLEASE SYSTEM
Assume:
All drivers are the same (need
to be at work at 9).
Cost
They have been striving to
reduce commute time for a
while so no time can be any
better than any other time.
$32
And costs of congestion are
$32.
5:50 am
8:30 am
9:50 am
Time of Arrival
COME AS YOU PLEASE SYSTEM
Cost
$32
Waiting Time Cost
5:50 am
8:30 am
9:50 am
Time of Arrival
COME AS YOU PLEASE SYSTEM
Equilibrium: situation in which everyone is doing as
well as they can, given correct beliefs about how
everyone else will behave
Cost
$32
Schedule Delay Cost
Schedule Delay Cost
Waiting Time Cost
5:50 am
8:30 am
9:50 am
Time of Arrival
NUMERICAL EXAMPLE
 Problem Parameters:
 Lincoln tunnel can handle 1,000 cars an hour
 4,000 cars want to enter the tunnel at 8:30 am to get to work at
9:00am
 Going in early costs each household $0.20 per minute
 Going in late costs each household $0.40 per minute
 Waiting in line costs them $0.30 per minute
 Question 1: How long does it take everyone to get through the
tunnel?
 4,000 cars / 1,000 cars per hour = 4 hours
NUMERICAL EXAMPLE
 Problem Parameters:
 Lincoln tunnel can handle 1,000 cars an hour
 4,000 cars want to enter the tunnel at 8:30 am to get to work at
9:00am
 Going in early costs each household $0.20 per minute
 Going in late costs each household $0.40 per minute
 Waiting in line costs them $0.30 per minute
 Question 2: When will the latest and earliest cars arrive?
 Twice as bad to be late by 1 minute as to be early by 1 minute, so
earliest car will arrive twice as early as the latest arrival is late.
 First car will arrive at 5:50 am (160 minutes early)
 Last car will arrive at 9:50 am (80 minutes early)
NUMERICAL EXAMPLE
 Problem Parameters:
 Lincoln tunnel can handle 1,000 cars an hour
 4,000 cars want to enter the tunnel at 8:30 am to get to work at
9:00am
 Going in early costs each household $0.20 per minute
 Going in late costs each household $0.40 per minute
 Waiting in line costs them $0.30 per minute
 Question 3: How much total cost does each driver bear?
 Earliest driver bears: ($0.20 x 160) = $32
 Latest driver bears: ($0.40 x 80) = $32
 Everyone in between must bear this same cost, which is partially a
waiting cost and a schedule delay cost
NUMERICAL EXAMPLE
 Problem Parameters:
 Lincoln tunnel can handle 1,000 cars an hour
 4,000 cars want to enter the tunnel at 8:30 am to get to work at
9:00am
 Going in early costs each household $0.20 per minute
 Going in late costs each household $0.40 per minute
 Waiting in line costs them $0.30 per minute
 Question 4: What is the total cost? What is the waiting cost?
What is the schedule delay cost?
 Total Cost : (4,000 cars x $32) = $128,000
 Waiting Cost: ½ Base x Height or (1/2 x 4,000 cars x $32) = $64,000
 Schedule Delay Cost: Remainder or $64,000
POLICY RESPONSES TO
CONGESTION
 Do nothing  call this “come as you please” system
 People will bear two types of costs:
 Waiting costs – costs you bear when you wait, are proportional to amount
of time you wait
 Schedule delay costs – costs you bear when using a facility at a time that
isn’t optimal for you in order to avoid waiting
 Reservations?
 People would show up exactly at their scheduled time, so there
would be no waiting costs
 From numerical example will still take 4 hours to get everyone
through, so will still have schedule delay costs
 Will have no waiting costs, so will cut costs in half
RESERVATION SYSTEM
Cost
$32
Schedule Delay Cost
Schedule Delay Cost
Waiting Time Cost = 0
5:50 am
8:30 am
9:50 am
Time of Arrival
POLICY RESPONSES TO
CONGESTION
 Do nothing  call this “come as you please” system
 People will bear two types of costs:
 Waiting costs – costs you bear when you wait, are proportional to amount
of time you wait
 Schedule delay costs – costs you bear when using a facility at a time that
isn’t optimal for you in order to avoid waiting
 Reservations?
 People would show up exactly at their scheduled time, so there
would be no waiting costs
 From numerical example will still take 4 hours to get everyone
through, so will still have schedule delay costs
 Will have no waiting costs, so will cut costs in half
 Not everyone is equally well off
 Person with $32 schedule delay cost would be willing to pay $32 to get
the 0 waiting time slot
 Feasible?
POLICY RESPONSES TO
CONGESTION
 Congestion Pricing:
 Impose a toll that varies by arrival times and that is equal to the cost
a driver imposes on others
 From our numerical example this toll would be $0 at 5:50, go up to
$32 at 8:30 and back to $0 at 9:50.
 This toll would make people bear all the costs that they impose on
others (internalize the externality)
 Tax that makes people bear all the costs of their decisions is
called a Pigouvian Tax
DESIGNING AN OPTIMAL
TOLL SYSTEM
Cost
$32
Schedule Delay Cost
Schedule Delay Cost
Cost Imposed on Others
5:50 am
8:30 am
9:50 am
Time of Arrival
DESIGNING AN OPTIMAL
TOLL SYSTEM
Cost
$32
Schedule Delay Cost
Schedule Delay Cost
Toll
5:50 am
8:30 am
9:50 am
Time of Arrival
POLICY RESPONSES TO
CONGESTION
 Congestion Pricing:
 Impose a toll that varies by arrival times and that is equal to the cost
a driver imposes on others
 From our numerical example this toll would be $0 at 5:50, go up to
$32 at 8:30 and back to $0 at 9:50.
 This toll would make people bear all the costs that they impose on
others (internalize the externality)
 Why are people better of f?
 Everyone still pays $32, either in toll or in schedule delay costs
 BUT waiting costs are pure waste and tolls are a transfer
 Tolls can be used to rebate everyone who uses the tunnel or it could
be used to improve transportation in other ways which benefit
citizens
DISCUSSION
 Do you believe that congestion pricing can reduce congestion?
 Why do you think congestion pricing ultimately failed in NYC?
 What changes could have been made to NYC’s plan to make it more
appealing?
 Do you agree with the author’s conclusion that gaining broad public
acceptance of congestion pricing requires changing how motorists
see pricing as affecting their own best interests?
 Would you support a system of congestion pricing in Boston?
 Where would you implement this system?
 What price would you be willing to pay for congestion pricing to not
have to sit in traffic?
 What services would you require in return for congestion pricing?
 Would a system like the one we are suggesting here be politically
feasible?