Economics of the metropolitan area 212G, Spring 2013

1. Economics of the metropolitan area212G, Spring 2013 Professor: Keren Mertens Horn Office: Wheatley 5-78B Office Hours: TR 2:30-4:00 pm E-mail: Keren.horn@umb.edu

2. Recap: 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

3. Recap: 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 9:50 am 5:50 am 8:30 am Time of Arrival

4. Recap: 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?

5. Recap: Reservation system Cost $32 Schedule Delay Cost Schedule Delay Cost Waiting Time Cost = 0 9:50 am 5:50 am 8:30 am Time of Arrival

6. Recap: 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

7. recap: Designing an optimal toll system Cost $32 Schedule Delay Cost Schedule Delay Cost Cost Imposed on Others 9:50 am 5:50 am 8:30 am Time of Arrival

8. Recap: Designing an optimal toll system Cost $32 Schedule Delay Cost Schedule Delay Cost Toll 9:50 am 5:50 am 8:30 am Time of Arrival

9. Recap: 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 off? • 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

10. 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?

11. OBJECTIONS TO CONGESTION PRICING • EQUITY: Concern that congestion pricing will unfairly burden the poor and benefit the rich • In many cases this will be true (details of plan and elasticity of demand for both rich and poor people will shape the exact outcomes) • Are congestion taxes progressive or regressive? • Summary of existing research today finds these taxes are slightly regressive • BUT In many ways depends on what is done with the tolls • If tolls are used to benefit the poor (increase quality of bus services or create car vouchers) then this could balance out the benefits lost

12. OTHER OBJECTIONS TO CONGESTION PRICING • Not practical • As technology improves it becomes easier to implement a smoothly varying toll • Also need to inform people of the changing toll costs, which could be posted on flashing road signs or programmed into one’s GPS • It invades privacy • Most drivers already own EZPass, so for many wouldn’t require any change • Alternatively could buy a pre-paid card to pay tolls • Will make alternative routes worse off • Some cities have only a few approaches (as in NYC example) • In places with local roads that cannot be tolled Braid (1996) and Bernstein and El Sanhouri (1994) suggest system that breaks even and pays people in off peak hours and charges them during peak hours • Roads should be free! • When there are no externalities that is a good argument, but when externalities of congestion amount to over $100 billion, most agree something needs to be done • Not politically feasible • Need to try and see if that’s the case

13. Alternatives to congestion pricing • Build More Roads: • To reduce congestion relies on the assumption that there are a fixed number of drivers • BUT this is not true, if it costs less (in terms of delays) to drive into the city, more people will choose to drive into the city • Demand is not completely inelastic • Elasticity: % ∆ Qd/ % ∆P • Demand is elastic if a small percent change in price causes a big percentage change in the quantity demanded • Demand is inelastic if a big percentage change in price causes a small percentage change in the quantity demanded • “Law of peak-hour expressway congestion” Downs (1962) term for the tendency of additional drivers to overwhelm the effect of any physical attempt to relieve congestion.

14. Alternatives to congestion pricing • Uniform tolls during rush hour (static congestion pricing) • Most existing congestion pricing schemes are of this nature • Reduces number of cars on the road during rush hour, does not re-arrange same number of cars better • Still better than nothing!

15. Demand for tunnel Cost Supply no Toll $32 Demand 4,000 Cars using tunnel

16. Demand for tunnel Supply with Toll Cost Supply no Toll L T Demand Cars using tunnel

17. Alternatives to congestion pricing • Uniform tolls during rush hour (static congestion pricing) • Most existing congestion pricing schemes are of this nature • Reduces number of cars on the road during rush hour, does not re-arrange same number of cars better • Still better than nothing! • Gasoline Taxes • Blunt instrument to try and deal with congestion • Again may reduce number of cars on road • Parking policies • Charging parking fees during peak hours • Would be very similar to uniform tolls during rush hour • BUT could replace some high value trips by commuters with some low value trips like people coming through who do not need to park • Currently US tax treatment subsidizes parking in many ways • Employers provide free parking, get tax deductions on maintenance of lots, and employees don’t pay taxes on benefit • Ex/1992 California required some employers to offer a choice between free parking and cash, number of solo drivers fell by 13% and number taking mass transit rose 50%

18. Review of economic concepts • EQUILIBRIUM • Situation in which everyone is doing as well as they can, given correct beliefs about how everyone else will behave • PIGOUVIAN TAX • Tax that makes people bear all the costs of their decisions • ELASTICITY • % ∆ Qd/ % ∆P • Demand is elastic if a small percent change in price causes a big percentage change in the quantity demanded • Demand is inelastic if a big percentage change in price causes a small percentage change in the quantity demanded • PROGRESSIVE vs. REGRESSIVE TAXES • Progressive tax – tax for which high-income taxpayers pay a larger fraction of their income than do low-income taxpayers • Regressive tax – tax for which high-income taxpayers pay a smaller fraction of their income than do low-income taxpayers