Autos and Highways

Chapter 11- Autos and Highways

* Congestion: Equilibrium versus Optimum traffic Volume

o The total cost of a commuting trip is the sum of the monetary and time cost

o The demand curve is a marginal benefit curve ~ shows how much the marginal traveler is willing to pay for the highway trip

o Congestion Externality: the marginal driver slows traffic and increases travel time, forcing other drivers to spend more time on the road ~ it increases with traffic volume

o The external trip cost equals the monetary value of the congestion externality

o External trip cost increases with traffic

o Private trip cost (average travel cost)- is the travel cost incurred by the individual commuter, defined by the sum of the monetary cost and the private cost (trip time * opportunity cost of travel time)

o Social Trip Cost ( marginal travel cost): is the sum of the private cost and the external trip cost

o On graph: the social-cost curve lies above the private-cost curve with the gap between the 2 curves equal to the external trip cost

* Equilibrium?

o Driver uses the highway if the marginal benefit of a trip (demand curve) exceeds the private trip cost

* Optimum number of drives?

o Efficiency rule: is that an activity should be increased as long as the marginal social benefit exceeds the marginal social cost ~ at the optimum level, the marginal benefit equals the marginal cost

* The equilibrium exceeds the optimum volume b/c drivers do not consider the costs they impose on other drivers~ an additional driver slows traffic forcing other drivers to spend more time on the road

* Government can impose a congestion tax to generate the optimum traffic volume~ a tax that is equal to the external trip cost would internalize the congestion externality, generating the optimum number of drivers

* b/c of the tax which closes the gap b/w private and social costs, the individual driver bases his travel decision on the social cost of travel thus the highway is used efficiently

* people who continue to use the highway after the tax is imposed pay the tax but also have a lower time cost, the tax decreases traffic volume which then decreases travel times

* people who stop using the highway avoid the tax but then forgo the benefits associated with using the highway, thus there are costs ad benefits for both types of people

* the govt uses the tax revenue to finance public services or to decrease other local taxes

* the total revenue from the congestion tax is just enough to pay for the optimum highway thus they can use it to substitute for gasoline tax which