Section-14-Congestion-Externalities-slides

Section-14-Congestion-Externalities-slides - Congestion...

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Unformatted text preview: Congestion Externalities Todd Sarver Northwestern University Econ 310-2 Fall 2011 Todd Sarver (Northwestern University) Congestion Externalities Econ 310-2 Fall 2011 1 / 20 Congestion Externalities Congestion externalities are, as the name suggests, externalities that depend on the number of individuals participating in an activity. For example, as more drivers use a particular road, the increased traffic makes the commute longer for all drivers (not just the marginal driver). Congestion externalities therefore necessarily involve many consumers (or producers). Todd Sarver (Northwestern University) Congestion Externalities Econ 310-2 Fall 2011 2 / 20 Swimming versus Running We will illustrate the concept of a congestion externality in the context of a simple example: Todd Sarver (Northwestern University) Congestion Externalities Econ 310-2 Fall 2011 3 / 20 Swimming versus Running We will illustrate the concept of a congestion externality in the context of a simple example: Suppose there are two ways to exercise, running and swimming, and there are N individuals who must decide whether to swim or run. Todd Sarver (Northwestern University) Congestion Externalities Econ 310-2 Fall 2011 3 / 20 Swimming versus Running We will illustrate the concept of a congestion externality in the context of a simple example: Suppose there are two ways to exercise, running and swimming, and there are N individuals who must decide whether to swim or run. We make the following assumptions about the individuals utility: Individuals prefer swimming in an empty pool to running. If more people swim, then the pool becomes more crowded and swimming becomes less enjoyable. Todd Sarver (Northwestern University) Congestion Externalities Econ 310-2 Fall 2011 3 / 20 Swimming versus Running We will illustrate the concept of a congestion externality in the context of a simple example: Suppose there are two ways to exercise, running and swimming, and there are N individuals who must decide whether to swim or run. We make the following assumptions about the individuals utility: Individuals prefer swimming in an empty pool to running. If more people swim, then the pool becomes more crowded and swimming becomes less enjoyable. Also, to make finding the PE allocations more tractable, suppose: It is possible to make (unlimited) monetary transfers between individuals. Individuals utility functions are quasilinear in money. Todd Sarver (Northwestern University) Congestion Externalities Econ 310-2 Fall 2011 3 / 20 Transforming the qualitative description into a formal model: Todd Sarver (Northwestern University) Congestion Externalities Econ 310-2 Fall 2011 4 / 20 Transforming the qualitative description into a formal model: Let n S denote the number of people who swim, so the number of people who run is n R = N- n S ....
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This note was uploaded on 01/03/2012 for the course ECON 310-2 taught by Professor Sarver during the Spring '08 term at Northwestern.

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Section-14-Congestion-Externalities-slides - Congestion...

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