The Economics of Traffic Congestion

October 2009

Moderator: Welcome to Research Insights, an occasional podcast from the Federal Reserve Bank of Atlanta. Our topic today is traffic congestion. We're talking with Ken Small, professor emeritus at the University of California at Irvine. Ken's here for an internal conference at the Bank, and I'll be asking him for his views on traffic congestion. Ken, thanks for your time—good to see you.

Ken SmallKen Small: Happy to be here.

Moderator: Your research on traffic is certainly relevant to those of us who live here in Atlanta. We have to deal with it every day, and my first question for you is, what conclusions have you drawn concerning traffic congestion and land use in general?

Small: Well, you know, one of the things that makes traffic congestion is a happy situation for an area that is growing and has a healthy economy, no recession. The recession is reducing traffic congestion more than anything that I've seen, in at least Los Angeles, which is near where I live. The land-use pattern in Atlanta is famous for being spread out, and that certainly does create traffic. It has a pretty high level of vehicle miles traveled per person. But traffic congestion is different from the amount of traffic because it also has lots of area, so that traffic is spread around. And you have other areas which have a much higher density that still have lots of traffic congestion if they have a lot of vehicle miles that people are traveling. So there's not really that tight a relationship with land use. Spread-out land use makes it harder to operate public transit, and so you'll tend to have low transit ridership as you do here; that's one factor. The rest of the factors are not that closely related to land use.

Moderator: In particular with Atlanta, is there any other factor, in addition to the land use, that contributes to traffic here, or what are the dynamics that cause so much congestion?

Small: I think mostly a growing economy, one that grew fairly rapidly during the automotive age. So lots of highways were built, cars were the preferred means of getting around, and basically the way the U.S. transport system is set up, there's no real restraint on people using it once you build highways like that, and they're going to become congested if there's plenty of demand.

Moderator: So what's the solution? Do you have any suggestions for cities like Atlanta that are coping with this problem?

Small: As an economist I'm always full of suggestions that people won't like. So the first one is you really have to make driving more expensive. That can be done through parking, it can be done through direct charges, it could be done through a fuel tax, although I wouldn't expect a metropolitan area alone [to levy one]. You can tinker with the transit system, but the trouble is the transit system carries too small a share of people to begin with, so even if you're wildly successful at increasing transit ridership, you'll hardly make a dent in the amount of cars, and some of the ones you take off will be filled back in with other people who've just been waiting for congestion to get a little bit better before they take their favorite rush hour trip. So it's pretty much a situation that's not going to get me on the slate to be nominated for mayor of Atlanta.

Moderator: So, there's a limit to what public transportation can do to solve this problem?

Small: A very severe limit. In fact, I would say, if anything, it's not so much to look to transit to solve the problem of congestion, but the other way around. If you were to make driving more expensive and if you could make a serious dent in congestion, public transportation would become quite a bit more attractive. Financially, because of the cost comparison, and in terms of bus transit, if you reduce congestion on the streets, you not only reduce the travel times by bus, you reduce the labor costs, you make it more reliable so it's easier to run the system, and people are more sure of when the vehicles are going to come so you can make big improvements in the level of service that they see.

Moderator: It would seem that politically it's not popular to raise costs for transportation. Are there some examples of places where this is working?

Small: Yes, it's not popular, but it's become a lot more than it use to be, and it's now actually on the table for policy analyses at the federal government and many state governments. We do have some limited examples in the U.S. The so-called HOT lanesâ??the high occupancy toll lanesâ??do involve people paying extra in order to get a higher level of service. There are some of those in Texas, California, Minnesota, and a couple of new ones coming online. New York came quite close to adopting a serious congestion-pricing program, a really dramatic one. It didn't make it for a lot of political reasons, but it made it through all the hurdles except the state legislature, so that's going somewhere. There are places abroad that do have a "ring toll." Stockholm is the most recent, London is the most famous, and Singapore is the oldest one; it's been there since 1975.

Moderator: Good, well, that's interesting background. The Fed, as you know, is concerned with economic developments, so can you identify an economic impact to congestion?

Small: There's been some research on that; there's been a lot of speculation that it should have [an impact]. Logically it should, because what makes a city economy healthy is its being able to bring large numbers of people together. For example, to have a strong labor market, so if your company is looking for specialized workers you'll find lots of them, and so as the company grows or shrinks, there's a market for those people. The size of that labor market pool is really determined by commuting distances, not by the physical size so congestion is reducing that. I wouldn't say that the research has been able to prove that, but there's only been a little research so far. So I think it's likely that the economies of cities like Atlanta are suffering a bit.

Moderator: Well, I know that your research doesn't just concern traffic. What can you tell us about the role of some of the other research issues you've looked at: climate change and energy security?

Small: Yes, that's something I've been looking at just recently. It seems that people are pretty insensitive to the price signals in terms of the amount that they drive. That might seem to contradict what I said earlier, but remember, traffic congestion has to do not with just how much you drive, but driving in a very specific place. If you want to influence energy and climate change you really have to tackle the total amount of driving or do something about the fuel efficiency of vehicles. And the research seems to suggest that people are much more responsive to changing the fuel efficiency of their vehicles in response to signals than they are the amount of driving. So I think it's most likely that whatever solutions we're successful in coming up with will involve technological improvements, and maybe some changes in size and type of vehicle, maybe fewer light trucks, more cars, fewer very large vehicles, more small ones. But probably a lot of technical improvements that become cost effective if manufacturers are given enough incentive to do so.

Moderator: So are we moving in the right direction to solve these problems?

Small: Oh, I guess so. This is at a national level, of course. I think the cap-and-trade billâ?¦well, first of all, the so-called CAFE [corporate average fuel economy] standards, the fuel efficiency standards that were tightened in 2007, and then they've just announced they're going to be tightened some more for the next 10 years or so under a new program. That's definitely, I think, in the right direction. The cap-and-trade bill for carbon emissions that's been going through Congressâ??some version of that will definitely make a big difference and I think is a promising way to go. I'm not particularly endorsing any one version; there are lots of problems with each one. But it looks like we're getting serious about it. And, once again, it has to do withâ??at least in the terms of the cap-and-tradeâ??making carbon emissions, in this case, more expensive. People don't like to think about raising the cost of doing anything, but that is what motivates them, and it allows them to do it in a more efficient way than if the government just goes through and says, "Well, you reduce your emissions, and the transportation sector's got to reduce their emissions so much, and the power sector by so much," and so on. That doesn't usually work so well.

Moderator: Thank you, Ken, for your insight. I appreciate your time.

Small: Thanks for having me.

Moderator: Again, we've been speaking with University of California at Irvine professor Ken Small. This concludes our Research Insights podcast on traffic congestion. Thanks for listening, and please return for more podcasts.