Externalities

A popular example of an externality is road congestion, this is not different in my current textbook. In a paragraph titled Thinking like an economist, the author shares an estimation of the direct and indirect cost of road congestion in the UK. The direct cost of congestion is the increase in journey time, which is an actual cost for hauliers and an opportunity cost for motorists. The indirect cost is more difficult to compute, since this has to do with the cost of choices related to road congestion. The example used is people who want to avoid congestion choose to find a job locally and may thus end up with a lower salary. If they also end up with lower transport costs and lower opportunity cost, it might actually level out, but there is no mention of this in the text.

Also not mentioned is the increase in CO2 emissions as a consequence of longer journey times and the typical stop-and-go driving during congestions. I think you should take this into account when thinking as an economist. There are real, long-term, costs involved here. What you take into account when accessing the costs of road congestion affects the direction you take when trying to address the problem.

When addressing the issue of road congestion you also need to assess which market is causing the externality. The author of my textbook is circumventing the question by putting ‘the market price of a road journey’ on the stage, which is actually a compilation of several costs, one of which the cost of road congestion. That does not really help in gaining the insight necessary to work towards reducing the problem. So, let us think like an economist and ask ourselves which market is causing the externality? Is it an externality of the market for road construction? cargo? public transport? air-traffic? cars? housing? labour? It seems that all these markets, and probably some more, attribute to road congestion.

You could argue that there is too little pavement to accomodate the supply of traffic, so the solution to the problem would be to improve road infrastructure, like building bypasses, and invest in road building. However,  a  government analysis showed that new road schemes can increase traffic 8-10% in a year.1 An increase in traffic counterbalances the extra pavement, and it creates an increase in that other externality: CO2 emissions.

Improving alternative options for road travel, like public transport, cycle ways, and footpaths, might alleviate congestion. But in the UK the occupation of the rail infrastructure, especially around London, is already dense, so this requires building and improvements too. The advantage, however, is that it decreases CO2 emissions. Should someone decide to improve public transport, a thing to consider might be the rail connections around London. The saying is “All roads lead to Rome”, and I could add to that “All railtraffic leads through London”. If I want to travel to Heathrow Airport from Woking it takes me, disregarding delays, 69 minutes, because I first have to travel to London and from there take a train to Heathrow. The bus, actually two connecting buses, take a shorter route, but because of all the stops that takes me 81 minutes. I can get there by car in 36 minutes when road traffic is low. When the traffic is heavy it could take me up to 55 minutes, door-to-airport.

It is not without a reason I mention this, since the vote for a third Heathrow runway will expand the airport’s capacity to handle passengers, and possibly increase traffic towards and from the airport, on an already congested motorway, the M25. From that perspective you could say the railway sector is contributing to road congestion because it is underproducing, and air traffic is contributing because it is overproducing. Could we thus conclude that road congestion is an externality of both the markets for public transport over rail and through the air?

But we are not there yet. The paragraph in my textbook also brings up the possibility of a job change to avoid traffic jams. It did not mention the possibility of moving house. With that possibility we enter a completely different market: the housing market. You could argue that an increase in journey time brings about opportunity cost, but it might very well be that the motorist took this into account when deciding where to live and where to work. London, again, is the obvious example, since housing gets cheaper the further away from London you get, or the further North you go, until you stumble upon another big, but not as big, city. So, in order to live in a nice family house, maybe in an environment where you can leisurely walk the dog on a Sunday afternoon, the (opportunity) cost of the commute are, maybe reluctantly but still, accepted. If work could be where housing is affordable, congestions would be a lot less, but that may be in another lifetime.

It would be nice if employment opportunities would be spread evenly across the country, but instead we often see a concentration of companies in one area, attracting smaller companies servicing the companies and the workforce, thus creating more job opportunities.  These areas have something to offer like proximity to an airport, motorways, rail station and other infrastructure like a river-port or a sea-port. Companies need a reliable electricity network and internet access, and, last but not least, they need access to their labour market. Being in close proximity to other companies could be important when the other companies are business partners, suppliers or customers, although that may not be absolutely necessary in this day and age. An area where more companies are concentrated tend to attract more facilities, which might be a bonus for future employees. Therefore demand of labour tends to be concentrated, and that contributes to the possibility of road congestion.

What this analysis shows, is that road congestion is an externality of many, interconnected, markets. It is easy to imagine how things will start moving – literally – if you start tuning the loops reinforcing and balancing traffic jams. Also is it not unthinkable that this could end in a bigger chaos, and unintended effects elsewhere. To think like an economist is to see all the gears in the machine, gather all the information on how they connect and affect each other, and have the modesty to admit that you might have overlooked something, notwithstanding your thoroughness.


How to use this in your lesson

You may have noticed that I did not include ‘cargo’ and ‘cars’ in my analysis. You could take these on with your students. I think in general the more freight transport by road and cars are produced, the more congestion – you could say road congestion is a by product of freight transport and car sales. It could be interesting to discuss possible solutions, while steering away from the obvious – and very sensible – ones I covered above. Would it be an improvement if people would drive smaller cars? A smaller car takes up less road space. What about self-driven cars or trucks? Or automatically driven cars, driven through transponders in the road? What would the effect on CO2 emissions be of any of the alternatives your students come up with?

I do not claim to have covered everything, I wish I would have the time to spend on an extensive analysis. Therefore I invite you and your students to come up with other possible causes of road congestion and the markets these causes are pointing at.


  1. UK road traffic rises 25% in 15 years, John Viddal, 18 March 2009, The Guardian
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