Congestion and political economy

Today: An application of externalities using congestion; Direct democracy; Indirect democracy

Today

A real-life example with externalities Automobile congestion Some economic tools to analyze the situation

Equilibrium Market failure

Chapter 6 Political economy

Direct democracy Representative democracy

Congestion externalities

Congestion is a big problem in urban areas 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

A simple example

Choose between a highway and a bridge

highway

bridge

More information on this example 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. Travel time is 9 + T minutes if T represents the number of

cars on the bridge

Route choice and externalities Without tolls, equilibrium occurs with equal

travel times on both routes 11 cars on the bridge

However, there are negative externalities involved whenever an additional car travels on the bridge Imposition of a one-minute negative externality to

cars already on 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 Lower overall travel time improves efficiency

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 negative externalities are present In this case, an optimal tax (which is a toll in this case)

can reduce DWL

Equilibrium with tolls

Suppose each minute has $1 in time costs, and a $5 toll is charged 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 30 cars that must travel from A to B

How many cars should travel on the bridge to minimize total travel time?

For efficiency, see the right column# on bridge Travel time on

bridgeTotal minutes

for bridge travelers

Total minutes for highway

travelers

Total minutes for all drivers

1 10 10 580 590

2 11 22 560 582

3 12 36 540 576

4 13 52 520 572

5 14 70 500 570

6 15 90 480 570

7 16 112 460 572

8 17 136 440 576

9 18 162 420 582

10 19 190 400 590

11 20 220 380 600

What is efficient? 5 or 6 on bridge# on bridge Travel time on

bridgeTotal minutes

for bridge travelers

Total minutes for highway

travelers

Total minutes for all drivers

1 10 10 580 590

2 11 22 560 582

3 12 36 540 576

4 13 52 520 572

55 1414 7070 500500 570570

66 1515 9090 480480 570570

7 16 112 460 572

8 17 136 440 576

9 18 162 420 582

10 19 190 400 590

11 20 220 380 600

The above example with calculus Total travel time for all cars

20 (30 – T) + (9 + T) T 600 – 11T + T2

First order condition to minimize travel time – 11 + 2T = 0 T = 5.5 Is this a minimum or maximum?

Try second order condition

The above example with calculus Second order condition to check that this is a

minimum 2 > 0

Positive second order condition Minimum

Since fractional numbers of cars cannot travel on a route, we see that 5 or 6 cars minimizes total travel time

Real traffic problems

Los Angeles metro area

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

Can we build our way out?

Some people believe that we can build our way out of congestion

Let’s examine this problem in the context of our example

Increased capacity on bridge

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

Equilibrium without tolls: T = 15, 20 minute travel times for all once again

Increasing bridge capacity

Increased capacity leads more people to travel on the bridge

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, almost

like a time subsidy Cost of carpool: Coordination costs Problem: Most big cities on the west coast are

built “horizontally” sprawl limits effective carpooling

Private highways

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

Problems with 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

Public takeover of a private highway This is what happened on the 91 Express

Lanes in Orange County (eventually) Privately built

Monopoly problems Public buy-out of the privately-built lanes

With public control, more carpooling has been encouraged

Pricing public roads

Pricing based on time of day and day of week can improve efficiency by decreasing congestion

Recall that these measures increase efficiency

Why are these “congestion pricing” practices not used more? Feasibility Political resistance

Benefits of congestion pricing Gasoline taxes can be reduced in congested areas

to offset congestion pricing Pricing increases efficiency

Taxes may increase efficiency in this context 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 lower than Social MC

Example: 91 Express Lanes toll schedule

$10 toll going eastbound on Fridays, 3 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

Public transit can only be a long-term solution if it is faster and less costly than driving Public transit will almost always be less convenient 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

Summary: Congestion externalities Congestion is a major problem in urban areas

Especially in cities built “horizontally” Congestion pricing has been implemented on

a limited basis in recent decades in California Feasibility and political resistance has limited

further implementation Many other methods are used to try to limit

congestion Mixed success

Democracy

Political decision making is important for public finance

Two types of democracy in this “mini-lecture” Direct Indirect, or representative

Direct democracy

There are different ways to make decisions in a direct democracy Unanimity, especially of public goods purchases

Lindahl prices Majority voting rules

Possible cycling with three or more choices Median voter theorem

Arrow’s impossibility theorem

Unanimity with public goods

Suppose there are two people trying to find the efficient level of public goods purchases

Each person could decide on a quantity to purchase Free-rider problem

Each person could decide on a quantity to purchase, given what fraction he or she would pay The share paid is known as a Lindahl price

Direct democracy: Unanimity rules

r per year0

0’

Ada

m’s

sha

re (

SA)

Eve

’s s

hare

(S

E)

DrA

The Lindahl Model

DrE

r*

S*

Notice that by construction of graph, shares add up to one at each point

Feasibility of unanimity rules

Reaching equilibrium Time and negotiation costs are usually very high

when many people are involved Strategic behavior

One person could react to how he or she thinks the other will behave

Strategic behavior can prevent efficient results from occurring

Majority voting rules

Majority voting relies on all voters having single-peaked preferences

With single-peaked preferences… The person with median preferences can

essentially make the decision (under certain conditions)

Trading votes may or may not increase welfare Programs that lower overall welfare are known as

“pork”

Jen: Double-peaked preferences

Missiles

Util

ity

A B C

Brad

Jen

Angelina

Single-peaked preferences

Double-peaked preferences

Preferences

When at least one person does not have single-peaked preferences, we can get cycling Cycling occurs when no clear winner can be

established

Single-peaked preferences

Each person has single-peaked preferences here Brad’s peak is at A Jen’s peak is at C Angelina’s peak is at B

A vs. B: B wins A vs. C: C wins B vs. C: B wins B is the clear winner

Voter

Choice Brad Jen Angelina

First A C B

Second B B C

Third C A A

Back to Jen’s two peaks

This example is different from the previous one Jen now has double-peaked

preferences A and C are both peaks

We now get cycling A vs. B: A wins A vs. C: C wins B vs. C: B wins No clear winner This inconsistency is part of

a voting paradox

Voter

Choice Brad Jen Angelina

First A C B

Second B A C

Third C B A

This example is the same as in the graph a few slides ago

Suppose Angelina is in charge Agenda manipulation:

Someone can decide on the order of votes to get her or his first choice Suppose Angelina

decides the order of votes to get her most-desired choice

First, A vs. C: C wins Second, B vs. C: B wins B is implemented

Voter

Choice Brad Jen Angelina

First A C B

Second B A C

Third C B A

The median voter theorem

When preferences of each person are single peaked, we can assign a “median voter”

Relative to the median voter Half of the people want more Half of the people want less

Under certain conditions, the median voter’s preferences will be approved

The median voter theorem

Voter Most desired expenditure on breast cancer

research

Abby $50

Betty $1,000

Christine $1,100

Doris $2,500

Elaine $50,000

Median voter theorem predicts that $1,100 will be voted on

Six reasonable criteria for decision making Kenneth Arrow studied six

criteria that many people would consider “ethically acceptable”

Unfortunately, there is no guarantee that all six criteria can be followed This proof is known as Arrow’s

Impossibility Theorem What are the six criteria?

Kenneth Arrow, 2004

The six criteria that Arrow proposed It can produce a decision whatever the configuration of voters'

preferences No problems due to multipeaked preferences

It must be able to rank all possible outcomes It must be responsive to individuals’ preferences

Example: If everyone prefers A to B, then society does too Preferences must be transitive

If A is at least as good as B, and B is at least as good as C, then A is at least as good as C

Independence of irrelevant alternatives Relative rankings of two goods do not depend on a third good

Dictatorship ruled out Social welfare is a function of more than one person

Representative democracy

In a representative democracy, a subset of the population votes to determine who our elected politicians are Median voter theorem applies here also,

assuming single-dimensional rankings and exactly two candidates

Ideology, personality, and leadership abilities of the politician may matter to voters

If no candidate appeals to a voter he or she may not vote

Median voter theorem in one dimension

Number of Voters

Liberal ConservativeMedian voter S

If a candidate takes position S, the opponent can take the median voter stance and get a majority of votes

Implications of the median voter model Based on the median voter model…

Two-party systems tend to be stable Replacement of direct referenda by representative

system has no effect on outcomes

Logrolling

Logrolling is the act of politicians trading votes in order to pass legislation that is beneficial to their district Some logrolling improves welfare Some logrolling does not improve welfare

An example Suppose that Waldo, Xavier, and Zach each live

in a different congressional district Note that this example uses a different approach

than in the book

Logrolling

In each case, Waldo, Xavier, and Zach’s representatives can get together to try to pass each other’s projects

If all three projects are passed together, Waldo, Xavier, and Zach are each better off

Whether or not the logrolling leads to welfare improvements depends on the cost to others

Welfare-improving logrolling

Project Waldo Xavier Zach others Total net benefits

Park 500 -200 -250 -30 20

Beach restoration

-200 750 -300 -100 150

Tree planting

-200 -300 750 -75 175

Bring on the pork

Project Waldo Xavier Zach others Total net benefits

Park 500 -200 -250 -130 -80

Beach restoration

-200 750 -300 -350 -100

Tree planting

-200 -300 750 -275 -25

Public employees

Public employees fulfill legislated mandates and operate many government operatives Bureaucrats sometimes have interpretive power Red tape criticism

Unresponsive to reasonable requests No market-oriented incentives

Some bureaucrats want to maximize the size of their departments Niskanen’s model of bureaucracy

Niskanen’s model of bureaucracy

Q per year

$

0

VC

Q*

Efficientoutput

Qbc

Bureaucrat’s suggested output

What can the politician do?

A politician can change the quantity to Q* if he or she knows what Q* is Sometimes, only the bureaucrat knows what Q* is

Make bureaucrats’ pay dependent on quality of work Requires costly oversight

Hire bureaucrats that are reliable in determining what Q* is Probably difficult

Special interests

“Special interests” has become a politically-charged term in today’s political arena

What are some special interest groups? Labor groups Groups that favor the rich, poor, young, or old Groups that favor tax breaks for an industry Groups that want to enhance social and religious

goals Rent-seeking behavior

Attempts for a firm to have positive economic profits

Rent-seeking behavior

tons of peanuts per year

$

S=MC

D

MR

RentsCompetitive outcome

Cartel price and quantity

Deadweight loss with a cartel

Other people involved

Other people help to carve the political landscape Judges have control to enforce and interpret laws Media influence

Providing information Political leanings

Experts Former politicians

Example: Al Gore

Summary: Democracy

Democracies can be direct or indirect Both types of democracies have their own

sets of problems Direct democracies

Time consuming to people Cycling Arrow’s Impossibility Theorem

Indirect democracies Bureaucrats Special interests