[sustran] Re: Driving Forces-further thoughts

[Todd Litman]

At 04:15 PM 6/25/99 -0400, Walter Hook wrote:
>a. the external costs of driving in the WRI study and some others are
>exaggerated in the cases mentioned.  I agree that parking lots in
>private shopping centers do not constitute a subsidy to drivers, (except
>for tax breaks they might get for providing the parking) as these costs
>are reflected in the costs of rent and products at the shopping center.
>'External costs that are actually paid by other motorists is also
>analytically not very neat.

This has been a common issue of debate. Some economists (Tony Gomez-Ibanez,
Mark Delucchi) define free parking provided by businesses as "bundled
goods" rather than externalities. Gomez-Ibanez argues that this must be
economically efficient (to avoid transaction costs associated with charging
for parking), while Delucchi emphasizes that it results, at least in part,
from other market distortions such as zoning laws and and tax policies that
encourage this practice. In any case, I argue that this is functionally an
externality.

Externalities (or "subsidies") can be defined in three ways:

1. Marginal
This requires that the prices (what consumers pay directly for a good)
reflect full marginal costs. This is the only definition to use when
analyzing economic efficiency. By this definition free parking is an
externality and represents underpricing which encourages excessive
automobile use. Such underpricing may be worthwhile to avoid transaction
costs, but since the inefficiency of underpricing are additive (i.e.,
underpricing parking doesn't just result in excessive parking costs, it
also causes excessive traffic congestion, accidents, pollution and consumer
costs by encouraging increased driving) most free parking is probably
inefficient.

2. Individual 
This concerns whether each individual pay for the costs they impose.
Horizontal equity requires that, in general, consumers "get what they pay
for and pay for what they get". As some others have pointed out, free
parking supplied by businesses violates this principle because some people
don't drive. A customer who arrives at a store by walking, bicycling or
transit pays for parking they don't use, therefore subsidizing those who
arrive by car (who tend to be wealthier, so this also violates vertical
equity). The same occurs for workers, since employee parking subsidies are
part of employee benefits, so money spent on parking for those who drive
means less money for employee wages and other benefits.

3. Sector (group) Level
This concerns whether each group pay the costs it imposes. It ignores the
inequity of cross-subsidies that occur within a group (some motorists are
subsidized by other motorists), and is arbitrary since it depends on how
groups are defined. For example, if your neighbor's dog barks, is this an
external cost if your household has no dogs but an internal cost if you are
dog owners? Is traffic noise an internal cost if you own a car, but an
external cost if you are car free? What about motorcycle noise? 

Group level analysis is common because it represents political analysis
(which is concerned with decisions are made by groups), but it has little
meaning in economics (which is concerned with decisions made by individual
consumers and firms). It is common for political debates about
externalities and subsidies to focus on things such as whether truckers as
a group are subsidized by motorists as a group, but effective economic
analysis (concerning both economic efficiency and equity) must ask whether
individual consumers pay the costs they impose.

To put this another way, externalities represent a subsidy of one good or
activity over another good or activity. Free local roads subsidize
underprice driving while overpricing housing. As a result, people consume
more driving and less housing than they would choose in a more neutral
market. Whether it is the same consumers or different consumers who
eventually bear the costs is irrelevant from an efficiency perspective, and
the equity impacts depend on how much individual consumers value the
various goods. Somebody who loves to drive and has minimal housing needs
benefits from this market distortion, while somebody who loves housing but
does not enjoy driving is worse off, regardless of whether a simple
financial accounting would show that they individually pay for the parking
they consume.

Whether you define free parking provided by businesses as an externality or
bundled good, the practice represents a market distortion that underprices
automobile travel, exacerbates problems (or to use a more economic term,
"increases social costs") such as congestion, accidents, pollution and
consumer costs, and is inequitable to individuals.


>b. he may also be right that the benefits of motor vehicle trips and
>road enhancements are also not entirely quantified.  There probably are
>some economic development benefits in some cases, not in others.
>reducing travel times and costs can increase the market area of some
>firms making possible greater returns to scale and can also minimize
>warehousing costs in some cases.  Old Keynesian arguments about broader
>social benefits of social overhead capital have been well criticized
>recently but may retain some validity.

The question is not whether motor vehicle use provides benefits. Obviously
it does or people would not be shelling out a major portion of their income
to drive. However, the real question is whether marginal benefits exceed
marginal costs which would justify existing high levels of automobile use
(probably not), and whether external marginal benefits exceed external
marginal costs which would justify underpricing automobile use (almost
certainly not). There is no reason to assume that there are significant
external marginal benefits from driving (i.e., you benefit if all of your
neighbors drive MORE than they do now) for the simple reason that rational
consumers tend to internalize benefits and externalize costs. Researchers
that have looked for external benefits have found few, and virtually no
marginal external benefits.


For more discussion of these issues see our newest report "Transportation
Cost Analysis Summary." It includes a description of various costs
associated with motor vehicle use a summary of previous transportation cost
studies. In a few days I will be posting a revised version of our report
"Reply to Criticism of Transportation Costing" which will also discuss
which costs are really "external." These reports are available at
http://www.islandnet.com/~litman.

Sincerely,

Todd Litman, Director
Victoria Transport Policy Institute
"Efficiency - Equity - Clarity"
1250 Rudlin Street
Victoria, BC, V8V 3R7, Canada
Phone & Fax: 250-360-1560
E-mail:  litman at islandnet.com
Website: http://www.islandnet.com/~litman