Traffic Congestion as a Negative Externality

Austin J Dyami Adams

How is traffic congestion created, and by who?

Traffic congestion in the United States is becoming increasingly salient to citizens, private
companies, and government actors. Traffic congestion, particularly on major highways and
interstates, increases with economic development and production. First, as the economy develops,
workers’ income rises. Public transportation is an inferior good in that a person’s demand for it
decreases as their income rises (DeVoe, 2013). Thus, as workers in a growing economy gain income,
they begin to purchase vehicles, which leads to more drivers on the roads (Road Congestion, n.d). A
second way in which economic growth affects traffic congestion is through business and other
urban development. As a city’s borders expand with new businesses and residential areas, the
number of people increases rapidly, while the new infrastructure to sustain them follows slowly
behind in a dragging effect. To worsen the problem, these new businesses have new employees who
travel on the same roads at the same time of day, which further leads to congestion during peak
hours (Winaisathaporn, n.d). While growth contributes to increased congestion, the externality itself
is created by each person who enters the road space. Indeed, as each new person utilizes the road
space, they begin to reduce the travel time of other consumers of the road space. This can be shown
through a simple understanding of how traffic congestion forms. Marginally, the first few people on
the road contribute little to the externality because there is still plenty of road space. However, the
two-hundredth person in a thousand-foot stretch of road may stop the speed of traffic altogether, as
the road space becomes packed with vehicles.

Is traffic congestion an external cost, and do drivers choose to incur them?

Broadly, a negative externality is a cost imposed on a person due to the productivity or
actions of another person, in which the person bearing the cost does not choose to do so. As
established, congestion is indirectly caused by economic development by the government and
private firms, but directly created by other consumers of the road space. But do drivers choose to
incur the cost of traffic congestion? Inherently, we are inclined to answer yes, as each person has the
autonomy and economic privilege to travel in their car on a road. However, in this instinctual
response, we lose the actuality of our own travel habits and needs. In the absence of public
transportation, vehicles are the only option for many who cannot walk to work or school. While we
have the bodily autonomy to not go to work, none of us have the social or economic autonomy to
do so. In this same way, we also lack autonomy to choose the time we drive to work, so congestion
comes in waves that we cannot choose to stay out of – we thus incur cost without choosing to do
so.
But what does traffic congestion cost us? It is important to understand that traffic
congestion is more than an annoyance to the daily commuter, but a large cost on society. For
example, an article summarizing results from the Urban Mobility Report shows that 4.8 billion hours
of productivity and/or leisure were wasted in the United States in 2010. The average commuter in
this study showed to lose about 34 hours. For perspective, 4.8 billion hours of productivity is
equivalent to $144 billion worth of thirty-minute haircuts at around $15 per person. Another way to
understand the vastness of this cost is to think about how those lost hours affect trucking and
freight companies. A freight truck that only moves 5mph on the highway is essentially incurring
storage costs for the product being carried, which may be exceptionally high if the product is in a
temperature-controlled unit (Schwartz, 2013). Traffic congestion also leads to more crashes, which
further leads to casualties and repair costs to members of society (Wang, 2009). Because congestion
imposes these costs on society, and because it is caused by our necessary use of it, we should view
and address it as a negative externality. Because traffic congestion is becoming prevalent as a public
and private cost today, many states have taken actions to reduce overall congestion. To understand
the policies that states use as effective mechanisms, it is important to understand the basic options
for reducing congestion as a negative externality.
The basics of correcting the traffic congestion
externality – Targeting Supply, Targeting
Figure 1
Demand, and Pricing Control

On the left, Figure 1 illustrates how

congestion forms. If the price of road space is
zero, demand will be higher than the road can
carry before congestion begins. Thus, efforts must
be made to bring the quantity demanded to equal
the quantity of road space able to be supplied.
The first way to do this is to increase the supply
of road space. Visually, this would be a rightward
http://www.economicsonline.co.uk/Market
_failures/Road_congestion.html

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shift of the blue supply line in Figure 1, which would allow more demand to be accommodated, and
therefore reducing surplus/road congestion (Road Congestion, n.d). However, this has proven to be
ineffective in recent years, as it has been noticed that increasing the supply of road space will also
increase the demand for it (Handy, 2015). As more lanes are built, people are incentivized to use
them more, as the cost of entering the road space is lessened – and the use of older side roads
declines (Handy, 2015). This tactic seems to lead to an issue of expensive over-building while not
resolving the initial problem at all.
An alternative approach would be to reduce the demand of road space, which would be a
leftward shift of the red demand curve in Figure 1 (Road Congestion, n.d). There are numerous
creative ways in which a government could do this, but some are often easier either economically or
politically. For example, a solution to lower demand for road space would be to raise the legal
driving age. However, one could imagine a significant public backlash to such a policy. Better
options have included increasing parking charges and creating infrastructure for public transit
systems – such as buses and trolleys.
A more modern experimentation has been road pricing, which is the idea of charging for the
use of the road space (Road Congestion, n.d).
Conceptually, this is neither a shift in demand
Figure 2
or supply, but a contraction of demand, which
moves quantity demanded closer to the
quantity supplied. Instead of changing a price in
another market to shift demand, a charge for
road space directly moves quantity demanded
down the demand curve (see Figure 2). It is
clear why this method is gaining stride, as it
generally has easy implementation and the
http://www.economicsonline.co.uk/Market possibility of new government revenue, which
_failures/Road_congestion.html
can be used to maintain the infrastructure and
whatever costs incurred through collecting the tax, such as toll stops.

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 What can the government do? – Manifestations of the basic principles
To fully understand concepts of reducing traffic congestion, it is important to understand
how they have been implemented by the government and the effects these policies have had on the
population.
Shifting Demand – The Iowa Statewide Park and Ride System
The Iowa Statewide Park and Ride System is an example of a program that purely affects traffic
congestion through a shift in demand. Though normally implemented in cities, the park and ride
system’s basic structure is simple: provide parking in one space
Figure 3
for many people, and move them to another place
in one, larger vehicle. The fundamental idea here is
to increase economies of scale so that travelers use
less road space and fuel. The demand curve for
road space shifts leftward because people
substitute single-person traveling with carpooling.
In cities, this model usually involves parking in
residential areas, with public transportation
moving from the lots to a concentrated business
area. However, the Iowa Department of
Transportation has recently created a park and ride
http://www.iowadot.gov/iowainmotion/file
s/StatewideParkandRideSystemPlanFINAL.p
system for the entire state. Through this network,
df
groups of people can go to a central parking lot in rural Iowa and carpool or utilize public
transportation to travel to work. Figure 3 shows the Annual Average Daily Traffic (AADT) in
orange and scales the percent of people leaving their county of residence to work (Iowa Park and
Ride, 2014). It is important to notice that a significant number of people from the more rural
counties leave to work in a county that has large cities (Iowa Park and Ride, 2014). Because of this
behavior, we see large corridors connecting major parts of the state, where the AADT is the
heaviest. The park and ride program incentivizes people to park in a lot that is accessible to a cluster
of ‘bluer’ (more rural) counties, so they can carpool or take public transportation to the ‘greener’
counties (Iowa Park and Ride, 2014). This option is essential for Iowa in reducing congestion and
wear-and-tear on these corridor roads. In fact, 78.7% of Iowan workers in 2010 reported driving
alone to work, while only 10.3% carpool and 1.1% take advantage of public transportation. While

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seemingly effective conceptually, The Iowa Statewide Park and Ride System carries with it a
potentially large problem.
Building parking lots creates sunk costs for the State of Iowa. Once the State builds the
parking lot, it will no longer be able to regain the money spent on it, thus making it a sunk cost by
definition (Staff, n.d). One might argue that parking lots are cheap, but the program involves the
government building many of them, as well as amenities at the lots, such as restrooms. Thus, in
implementing the program, the state risks wasting resources on infrastructure that may go largely
unused. One may also argue the government can easily repurpose a parking lot. While true, the
quantity of lots then poses a serious problem. Repurposing dozens of parking lots, although cheap
and perhaps feasible, means creating dozens of minor local projects, which requires investing even
more labor and materials.
Shifting Demand – Public Transit
A 2005 study examines effects of public transit supply on the commute mode choices of
drivers and annual vehicle miles traveled (VMTs) of nearly 10,000 households living in 114 urban
areas in 1990. The researchers in this study tested their model’s validity by testing for known existing
information in the literature, and they found that income, race, and education all have statistically
significant effects on the probability the a commuter takes transit or walks to work, which is in
accord with leading literature (Bento, 2005). Across the study, it was found that 86% of households
own at least one car, while 53% own two or more cars (Bento, 2005). These numbers highlight how
reliant people are on vehicles, which the study concludes may not be reduced by implementing
public transit.
The study results suggest that individual measures of public transit supply have a small but
statistically significant effect on travel demand. For Example, the effects of a positive change of 10%
in rail and bus miles supplied is approximately a 0.5% reduction in the probability that commuters
will drive to work (Bento, 2005). The quantitative effects of these variables on an annual average
VMT is less than a 2% reduction, meaning commuters still prefer to drive themselves. Most
importantly, the study finds no effect of public transit on vehicle ownership (Bento, 2005). Although
providing public transit seems to be effective from principle, the aggregate effects of supplying them
is minimal. However, one may argue that simply supplying the transit is not enough to shift to
Demand. Rather, commuters may need to be further incentivized by also making transit a better
option than driving, whether that be through taxes on driving on improving the quality of the transit
system.

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Shifting Supply – Building or expanding lanes
As mentioned, expanding existing roads as a way to reduce traffic congestion is
counterintuitive. As briefly summarized in a 2002 analysis, the basic theory behind this effect is
simple: creating more road space encourages more use of the road space, which inevitably shifts
Demand to equal Supply, creating the same amount of congestion, but with more participants stuck
in traffic (Cervero, 2002). This new demand is commonly referred to as induced demand (Cervero,
2002). This analysis presents two models that predict induced travel demand and induced road
investment using an array of instrument variables reflecting political, environmental, and
demographic influences. Induced road investment, as defined by this analysis, is a further reaction to
induced demand, where the government increases supply further to meet this new, higher demand
(Cervero, 2002).
The time period chosen for the analysis was 1976 to 1997 because it is a period of rapid
growth and change. The population of California increased by 50% over this 22-year period. In total,
22 years of 34 cross-sectional observations, or 748 data points, were used for the analysis (Cervero,
2002). Variables considered where Demand, Supply, gas prices, population demographics, and the
fuel economy. The research found a strong relationship between road supply and demand that
works in both directions. That is, the effects of induced demand and induced supply are cyclical
(Cervero, 2002). Past state highway investments were based on levels of travel demand that were
anticipated, suggesting that road supply not only stimulates road demand, but responds to it as well
(Cervero, 2002).
Contracting Demand - Road Pricing
The following article examines the effects of road pricing and other congestion reduction
efforts in Great Britain. It does so by examining the cost-benefit analyses of road improvement and
pricing of public transit and road use. The article concludes that road pricing is the best method of
dealing with congestion because it would have massive implications “for the viability and quality of
public transport, for the finance of urban infrastructure, and ultimately for the quality of life”
(Newbery, 1990). This article shows that road pricing can be an effective strategy for reducing
congestion while also creating government revenue. As a reaction to road pricing, the analysis also
examined other outcomes of these programs.
In the medium-run, the quality of urban public transport would improve, and the average
cost might drop below current levels. Energy consumption would be expected to increase, as there
would not be a reason to have heavy fuel taxes for revenue (Newbery, 1990). The impact on the

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distribution of income is expected to be low, as urban private travel costs would rise, and urban
public transportation costs may decline. Rural transport costs would also be expected to fall.
Because urban car owners are richer than the average person, and those who use of public
transportation are poorer, the redistribution should be favorable for the poor (Newbery, 1990).
A Hybrid System – The State of Minnesota’s MnPASS
It is important to note that many programs or policies may have more than one of the
effects mentioned above, and the MnPASS shows to be a quintessential example of this. It utilizes
High Occupancy Toll (HOT) lanes to offer congestion-free travel during peak times for those
willing to pay the tolls associated with that section of the corridor. This payment to use the road is
not a traditional payment to gain access to the roadway like most road pricing structures, but a
payment specifically for an express lane. This method reduces congestion on the road overall while
allowing those willing and able to pay to move at a faster speed during peak hours. As the price for
road space increases, we move along the demand curve in Figure 2, getting closer to the intersection
of supply and demand, and therefore reducing surplus/congestion (MnPASS, n.d).
Because the HOT lanes are pricier, and because they are offered for free to carpools and
buses, many people are moving away from single-occupant traveling to save money. Although this is
an indirect effect from road pricing, it is nonetheless a leftward shift in demand for road space. This
can be seen in Figure 4. Thirty percent of people moved through I-394 and I-35W combined are
done so through
buses, which only
Figure 4
accounts for 3% of
total vehicles moved.
Plus, fifty-six percent
of people moved are
http://www.dot.state.mn.us/mnpass/usean
carpooling, which dperformance.html

follows that, in total, only about 14% of people traveling are doing so alone, which constitutes 34%
of the vehicles moved (MnPASS, n.d). When the cost of using the road space increases, people
become less inclined to use it, which shifts demand leftward. This shift happens with the movement
along the curve mentioned above, which creates two pushing factors to drive down congestion.
While somewhat innovative and relatively effective, the MnPASS program carries its own setbacks.
As mentioned above, those willing and able to pay to move at a faster speed during peak
hours experience the fastest travel, while also removing them from the main flow of traffic.

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However, it is important to recognize that not all people who are willing to pay are also able to pay.
Those with lower incomes are heavily disadvantaged in this system due to its regressive structure.
Bobbie Dahlke, a spokesperson for the Minnesota Department of Transportation, spoke in a news
story about MnPASS about the price range of using the HOT lanes (Good Question, 2014). Dahlke
noted that the ceiling price is $8 at the highest levels of congestion. To someone who makes close to
the minimum wage, say $8 per hour, a trip to work and back in an $8 express lane costs them
roughly two hours of pay out of the eight they work. When calculated, this shows to be 25% of their
daily income, which equates to about $64 per day for a person who makes $8 per hour. An average
college graduate makes $1270 per week and would not face nearly as large of a burden (Doyle,
2017). Over a five-day work week, the college graduate would earn $254 per day, as 1270/5 is equal
to 254. Sixteen dollars, or two hours of travel at peak time, is just 6.3% of the college graduate’s
income, and about half of their calculated hourly income ($31.75). From a social or political
standpoint, this is unequal to those in poverty, and may make travel for the poor an even larger
burden.

Conclusion
Traffic congestion can be considered a negative externality because it is a cost burden on
drivers that is created by the use of road space by over drivers. Drivers do not choose to incur these
costs because they are required to travel in a modern society. The government can engage in tactics
to shift demand, shift supply, or contract demand through road pricing models. Of these options,
analyses seem to show that road pricing is an optimal choice in most circumstances, as it involves
little prior investment into infrastructure, effectively reduces congestion, and generates government
revenue.

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