congestion and political economy today: an application of externalities using congestion; direct...
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Congestion and political economy
Today: An application of externalities using congestion; Direct democracy; Indirect democracy
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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
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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
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A simple example
Choose between a highway and a bridge
highway
bridge
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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
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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
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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
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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
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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
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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?
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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
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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
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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
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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
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Real traffic problems
Los Angeles metro area
Some refer many of these freeways to be parking lots during rush hours
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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
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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
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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
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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
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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
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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
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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
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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
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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
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Example: 91 Express Lanes toll schedule
$10 toll going eastbound on Fridays, 3 pm hour
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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
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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
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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
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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
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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
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Democracy
Political decision making is important for public finance
Two types of democracy in this “mini-lecture” Direct Indirect, or representative
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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
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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
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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
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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
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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”
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Jen: Double-peaked preferences
Missiles
Util
ity
A B C
Brad
Jen
Angelina
Single-peaked preferences
Double-peaked preferences
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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Niskanen’s model of bureaucracy
Q per year
$
0
VC
Q*
Efficientoutput
Qbc
Bureaucrat’s suggested output
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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
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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
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Rent-seeking behavior
tons of peanuts per year
$
S=MC
D
MR
RentsCompetitive outcome
Cartel price and quantity
Deadweight loss with a cartel
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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
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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