Question

Beating the traffic

All big cities have traffic problems, and many local authorities try to discourage driving in the crowded city center. If we think of an auto trip to the city center as a good that people consume, we can use the economics of demand to analyze anti-traffic policies.

One common strategy is to reduce the demand for auto trips by lowering the prices of substitutes. Many metropolitan areas subsidize bus and rail service, hoping to lure commuters out of their cars. An alternative is to raise the price of complements: several major U.S. cities impose high taxes on commercial parking garages and impose short time limits on parking meters, both to raise revenue and to discourage people from driving into the city.

A few major cities—including Singapore, London, Oslo, Stockholm, and Milan—have been willing to adopt a direct and politically controversial approach: reducing congestion by raising the price of driving. Under “congestion pricing” (or “congestion charging” in the United Kingdom), a charge is imposed on cars entering the city center during business hours. Drivers buy passes, which are then debited electronically as they drive by monitoring stations. Compliance is monitored with automatic cameras that photograph license plates. Moscow is currently contemplating a congestion charge scheme to tackle the worst traffic jams of all major cities, with 40% of drivers reporting traffic jams exceeding three hours.

The current daily cost of driving in London ranges from £9 to £12 (about $13 to $19). And drivers who don’t pay and are caught pay a fine of £120 (about $192) for each transgression.

Not surprisingly, studies have shown that after the implementation of congestion pricing, traffic does indeed decrease. In the 1990s, London had some of the worst traffic in Europe. The introduction of its congestion charge in 2003 immediately reduced traffic in the London city center by about 15%, with overall traffic falling by 21% between 2002 and 2006. And there was increased use of substitutes, such as public transportation, bicycles, motorbikes, and ride-sharing.

In the United States, the U.S. Department of Transportation has implemented pilot programs in five locations to study congestion pricing. Some transportation experts have even suggested using variable congestion prices, raising prices during peak commuting hours. So although congestion pricing may be controversial, it appears to be slowly gaining acceptance.

Submit a small paper answering the following questions:

Explain whether each of the following events represents (i) a shift of the demand curve or (ii) a movement along the demand curve.

• A store owner finds that customers are willing to pay more for umbrellas on rainy days.
• When XYZ Telecom, a long-distance telephone service provider, offered reduced rates on weekends, its volume of weekend calling increased sharply.
• People buy more long-stem roses the week of Valentine’s Day, even though the prices are higher than at other times during the year.
• A sharp rise in the price of gasoline leads many commuters to join carpools in order to reduce their gasoline purchases.

Explain whether each of the following events represents (i) a shift of the supply curve or (ii) a movement along the supply curve.

• More homeowners put their houses up for sale during a real estate boom that causes house prices to rise.
• Many strawberry farmers open temporary roadside stands during harvest season, even though prices are usually low at that time.
• Immediately after the school year begins, fast-food chains must raise wages, which represent the price of labor, to attract workers.
• Many construction workers temporarily move to areas that have suffered hurricane damage, lured by higher wages.
• Since new technologies have made it possible to build larger cruise ships (which are cheaper to run per passenger), Caribbean cruise lines offer more cabins, at lower prices, than before.

In each of the following examples, determine (i) the market in question; (ii) whether a shift in demand or supply occurred, the direction of the shift, and what induced the shift; and (iii) the effect of the shift on the equilibrium price and the equilibrium quantity.

• As the price of gasoline fell in the United States during the 1990s, more people bought large cars.
• As technological innovation has lowered the cost of recycling used paper, fresh paper made from recycled stock is used more frequently.
• When a local cable company offers cheaper on-demand films, local movie theaters have more unfilled seats.
• When a new, faster computer chip is introduced, demand for computers using the older, slower chips decreases. Simultaneously, computer makers increase their production of computers containing the old chips in order to clear out their stocks of old chips.

Answer 1

Answer 1:

a. This represents a shift of the demand curve where the demand curve has shifted rightwards during the time of rainy days.

b. This represents a movement along the demand curve where the decline in the prices during the time of weekends has led to increase in demand of the product. Thus, it is a movement along the demand curve.

c. This represents a shift of the demand curve where quantity demanded increases at each price during a particular time of the year.

d. This represents a shift of the demand curve where carpools has reduced the demand for gasoline.