SUMMARY: Rush-hour drivers in congested U.S. cities are increasingly facing a stark choice: stay stuck in traffic or pay to get in the fast lane.
CLASSROOM APPLICATION: Driving on congested highways creates a negative externality; and pricing highway travel according to the amount of congestion improves economic efficiency. Instructors can create a simple scenario of a two-lane highway in which one lane has a fee and the other does not. Using this simple scenario, instructors can make students begin to consider the following issues about fast-lane pricing: the decision about which lane to travel depends in part on opportunity cost of time; sorting by travel time according to opportunity cost of time improves economic efficiency; and the price that maximizes state revenues from fast-lane pricing may not be the efficient price.
QUESTIONS:
1. (Introductory) Does driving on a congested highway create a negative externality?
2. (Advanced) Suppose that adding a new driver to a fast lane reduces the wellbeing of drivers currently in the lane by $8, while deleting a driver from a substantially congested lane increases the wellbeing of drivers currently in this lane by $10. The greatest utility increase of any of the drivers currently in the congested lane from moving to the fast lane is $3. What is the greatest price a highway administration could charge for fast-lane driving that motivate any driver to shift from the slow lane to the fast lane? If those currently in the fast lane could veto any lane shift, what is the smallest payment they would accept for a shift into their lane? For an efficient lane shift, would those currently in the slow lane need to subsidize a lane shift?
3. (Advanced) Does fast-lane pricing improve economic efficiency? As the slow lane becomes more congested, should the price of the traveling in the fast lane increase?
4. (Introductory) Why are some drivers objecting to fast-lane pricing? Does the introduction of fast-lane pricing harm those who continue to drive in the slow lanes?
1. (Introductory) Does driving on a congested highway create a negative externality?
2. (Advanced) Suppose that adding a new driver to a fast lane reduces the wellbeing of drivers currently in the lane by $8, while deleting a driver from a substantially congested lane increases the wellbeing of drivers currently in this lane by $10. The greatest utility increase of any of the drivers currently in the congested lane from moving to the fast lane is $3. What is the greatest price a highway administration could charge for fast-lane driving that motivate any driver to shift from the slow lane to the fast lane? If those currently in the fast lane could veto any lane shift, what is the smallest payment they would accept for a shift into their lane? For an efficient lane shift, would those currently in the slow lane need to subsidize a lane shift?
3. (Advanced) Does fast-lane pricing improve economic efficiency? As the slow lane becomes more congested, should the price of the traveling in the fast lane increase?
4. (Introductory) Why are some drivers objecting to fast-lane pricing? Does the introduction of fast-lane pricing harm those who continue to drive in the slow lanes?
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