Lecture 2 Flashcards
Why can’t we always just place a toll on every road then?
- Traffic conditions on each road vary over time
- There are multiple roads in a network, some of which cannot be tolled
- Other taxes or externalities could also generate distortions
Why is “first-best pricing” only a benchmark and not a reality?
As governments have to account for issues in practice which do not exist in the “first-best pricing” model.
What does “second-best pricing” account for?
Second-best pricing accounts for limitations to the government’s ability to intervene. Limitations include not being able to vary tolls perfectly on all roads and some roads cannot have tolls. There are also uncorrected distortions in the economy, such as labour taxes or externalities.
Why doesn’t it make sense to have a constant toll charge on the same section of road? List 2 demand and 2 supply reasons
- Variation in equilibrium traffic volume
- Variation in external costs and optimal toll
- Accidents may reduce available road space
- Adverse weather may slow drivers down
In first-best pricing, what should happen to a toll in peak hours?
A toll in peak hours should be larger than usual in order to match the increased marginal external cost.
In first-best pricing, what are the three issues in implementing a toll which instantly adapts to traffic conditions (and the MEC of congestion)?
- Calculating MEC in real-time
- Communicating prices to drivers
- Enforcement
Give 2 examples of second-best pricing.
– Coarse road pricing with time-varying traffic
conditions
– Pricing a road with an unpriced alternative (and congestion)
List 3 potential benefits of coarse tolling with time-varying traffic conditions.
- Makes individuals internalise part of the external cost of congestion
- Incentivises individuals to change the timing of their trips (ie not travel at peak hours)
- Doesn’t have the complexity of continuous-time first-best tolling, but still has significant welfare gains.
Why can it be difficult to measure the effectiveness of congestion charges in reducing congestion?
There are confounding factors, including:
- Changes in the supply of public transport services (or other modes of transport e.g. biking)
- Changes in road supply conditions: traffic calming measures, pedestrianisation etc.
What happened in Milan when the congestion charge was ended? What about when it restarted?
- When the charge ended, traffic in the city centre rose by about 14.5% daily.
- When the charge was reinstated, traffic went back to previous levels.`
What should equilibrium represent if both untolled and tolled routes are perfect substitutes? What does this follow?
In equilibrium, the generalised price of a trip on both routes should be the same. This follows the Wardrop Principle. Also, the marginal benefit of a trip is equal to the generalised price.
What equation do we use to maximise social welfare?
Vu+Vt∫0 𝑏(𝑣)𝑑𝑣 − 𝑉𝑈 ⋅ 𝑐𝑈(𝑉𝑈) − 𝑉𝑇 ⋅ 𝑐𝑇(𝑉𝑇)
Will we ever be asked how to solve the problem of pricing a road with an untolled alternative?
No
What is the following expression for the second-best optimal toll on route T?
τ = Vt . c’T - (Vu . c’u - τu) . (-b’/c’u-b’)
What can we interpret from the second-best toll?
Second-best toll = marginal external congestion cost on tolled route – correction term for traffic diverted to untolled rout
