Research

October, 2011

“The Effect of the Price of Gasoline on the Urban Economy: From Route Choice to General Equilibrium” (with Alex Anas)

RELU-TRAN2, a spatial CGE model of the Chicago MSA is used to understand how gasoline use, car-VMT, on-the-road fuel intensity, trips and location patterns, housing, labor and product markets respond to a gas price increase. We find a long-run elasticity (with congestion endogenous) of -0.081, keeping constant car prices and the technological fuel intensity of car types but allowing consumers to choose from available car types. 43.2% of this long run elasticity is from switches to public transit; 14.8% from trip, car-type and location switches; 38.3% from price, wage and rent equilibration, and 4% from building stock changes. 79.3% of the long run elasticity is from changes in car-VMT (the extensive margin) and 20.7% from savings in gasoline per mile (the intensive margin); with 83% of this intensive margin from changes in congestion and 17% from the substitution of less fuel intensive cars. An exogenous trend-line improvement of the technological fuel intensities of the car-types available for choice raises the long-run response to a percent increase in the gas price from -0.081 to -0.251. Thus, only 1/3 of the long-run response to the gas price stems from consumer choices and 2/3 from progress in fuel intensity. In the period 2000-2007, real gasoline prices rose 53.7%, the average car fuel intensity improved 2.7% while car prices fell about 20%. The model predicts that from these changes alone, gasoline consumption in this period would have fallen by 5.2%.

“The Economics of Cordon Tolling: General Equilibrium and Welfare Analysis” (with Alex Anas)

We study cordon tolling to price road congestion in a general equilibrium model of the Chicago MSA. Adjustments in the travel, housing and labor markets by consumers and firms blunt the toll’s impact. Toll-avoiding changes in residence locations drive changes in job location and vice versa. Faced with a downtown cordon, some jobs and residents leave but the outflow is kept in check by switches from car to public transit. Downtown wages increase and rents rise too as producers substitute floor space for labor. Some richer consumers avoid the toll by taking up downtown residence than by switching to transit or to a job outside the downtown. Structural density inside the cordon rises by the demolition of low density houses and the construction of higher density apartment and commercial structures. Higher production outside the downtown exceeds downtown output losses and the total real and nominal gross product rises. A $14 toll per crossing maximizes welfare, achieving 65% of the gains from Pigouvian pricing on all major roads. About 16% of the downtown cordon’s welfare gains are from toll revenue, 34% from annualized real estate value gains and 50% from consumer utility. Bigger cordons around the City of Chicago and around the City and its inner suburbs are also studied. In the case of the last cordon, toll-avoidance causes jobs, residences and real output to increase within the cordon.

“Anti-Congestion Policies in Cities with Public Transportation”(with Akin C. Buyukeren)

We study how anti-congestion policies should be designed optimally in a city with both car and public transit commuting from the suburbs to the central city. The policy instruments we examine are congestion tolls, subsidies to transit commuters and an urban growth boundary (UGB). We show that under first-best road pricing, the suburban population increases, but the number of suburban commuters using cars decreases. An urban growth boundary (UGB) always reduces welfare whether it is used to restrict or expand aggregate urban land use. But a restrictive UGB together with subsidies to transit riders is a second-best policy. In such a case, the UGB can either reduce or expand suburban sprawl. Subsidies to transit users yield a third-best optimum even with no economies of scale in public transit, but increase suburban sprawl. All our findings are derived analytically and illustrated by simulations.