Lecture 7Lecture 7Tuesday, September 25Tuesday, September 25

TransportationTransportation

Film about the destruction of the L.A. trolley system:

Taken for a Ride

http://www.youtube.com/watch?v=ehoVnykvMKY

% of Urban Trips by type of transportation (1995)

Trends in Annual public transit ridership, 1900-2000

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200

400

600

800

1000

1200

1400

1600

1800

UnitedStates

Canada UnitedKingdom

Germany Europe France CentralAmerica

Middle East& N. Africa

SouthAmerica

Asia

Annual liters per person

Annual Per Capital Gas Consumption, 2003

Annual hours of delay per traveler due to traffic congestion

The LA Transportation Story The LA Transportation Story as told in as told in

Who Framed Roger RabbitWho Framed Roger Rabbit??

http://www.youtube.com/watch?v=8DO5HzEWSkM&feature=related (first 2 minutes)

http://www.youtube.com/watch?v=OUnWPcipi1w&feature=relmfu

(first 4 minutes)

YOUR CHOICE

BUS PRIVATE CAR

EVERYONE ELSE’SCHOICE

BUS A25 minutes

B10 minutes

PRIVATE CAR

C1.5 hours

D45 minutes

The Public Transportation Free Riding Problem:

Busses vs. Cars

Free-riding preferences: B > A > D > C

Free riding gain: 15 Minutes (A minus B)

“Sucker penalty”: 45 minutes (C minus D)

YOUR CHOICE

RAIL PRIVATE CAR

EVERYONE ELSE’SCHOICE

RAIL A15 minutes

B10 minutes

PRIVATE CAR

C25 minutes

D45 minutes

The Public Transportation Free Riding Problem:

Light Rail vs. Cars

Free riding gain: 5 Minutes (A minus B)

“Sucker penalty”: There is no sucker penalty!

What are the positive externalities of good public transportation?

1. Quicker commuting times, less congestion

2. Saving on private car infrastructure (parking ramps, street repairs, etc.)

3. Less pollution: less frequent house painting

4. Health benefits (asthma especially)

5. More efficient labor market, especially for poor (easier to get to jobs), therefore less need for welfare

6. Less need for multiple cars in a family

7. Energy savings

Key Question: What is the true economic value of the positive externalities of good public transportation?

Solutions Solutions

1.1.No free parkingNo free parking

2.2.Build infrastructure for transportation Build infrastructure for transportation alternatives: bike paths, rapid transit, etc.alternatives: bike paths, rapid transit, etc.

3.3.Increase residential density within citiesIncrease residential density within cities

4.4.The full cost of driving should be reflected in gas The full cost of driving should be reflected in gas taxestaxes

5.Fully recognize the value of positive externalities in the price of public transit tickets. (Implication: perhaps tickets should be free).

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USA

Canada

Australia

New Zealand

Japan

Switzerland

Spain

Ireland

Austria

Korea

France

Sweden

Germany

UK

Belgium

Italy

Netherlands

Norway

U.S. $ per gallon

Price/gallon

Tax/gallon

Solutions Solutions

1.1.No free parkingNo free parking

2.2.Build infrastructure for transportation Build infrastructure for transportation alternatives: bike paths, rapid transit, etc.alternatives: bike paths, rapid transit, etc.

3.3.Increase residential density within citiesIncrease residential density within cities

4.4.The full cost of driving should be reflected in gas The full cost of driving should be reflected in gas taxestaxes

5.5.Fully recognize the value of Fully recognize the value of positivepositive externalities externalities in the price of public transit tickets. (Implication: in the price of public transit tickets. (Implication: perhaps tickets should be free).perhaps tickets should be free).

Positive externalities & ticket pricesPositive externalities & ticket prices1.1. Suppose: (a) the direct costs of a ride = $3, and (b) there is Suppose: (a) the direct costs of a ride = $3, and (b) there is

some kind of some kind of negativenegative externality = $1/rideexternality = $1/ride

2.2. Then the true cost per ride = $4Then the true cost per ride = $4

3.3. To cover these costs, the ticket price should be $4, not $3.To cover these costs, the ticket price should be $4, not $3.

4.4. Now suppose: (a) the direct costs of a ride = $3, and Now suppose: (a) the direct costs of a ride = $3, and (b) there is some kind of (b) there is some kind of positivepositive externality = $1/ride externality = $1/ride

5.5. Then the true cost per ride = $2Then the true cost per ride = $2

6.6. So, the ticket price should be only $2So, the ticket price should be only $2

7.7. But the transit company has spent $3 in direct costs to pay But the transit company has spent $3 in direct costs to pay for the ride.for the ride.

8.8. Therefore the society has to somehow pay for the $1 of Therefore the society has to somehow pay for the $1 of value everyone receives to reimburse the transit company value everyone receives to reimburse the transit company for providing the ridefor providing the ride..

Big Take-Home Message Big Take-Home Message from lecture on Transportationfrom lecture on Transportation

For the free market to enable people to make efficient choices For the free market to enable people to make efficient choices two things must be truetwo things must be true::

1.1. There are no significant externalities – positive or negative – There are no significant externalities – positive or negative – to your individual choice: what you chose does not affect to your individual choice: what you chose does not affect other people.other people.

2.2. The full range of feasible alternatives from which to make The full range of feasible alternatives from which to make your choices can itself be provided by the market.your choices can itself be provided by the market.

Transportation violates both of these principlesTransportation violates both of these principles: :

People will make very different private choices depending People will make very different private choices depending upon whether or not there exists a good, efficient, cheap upon whether or not there exists a good, efficient, cheap public transportation option, public transportation option, but the market itself can but the market itself can never provide this even if it would be economically never provide this even if it would be economically efficient to do soefficient to do so..