Introduction

Transport in LA

Topic 1
Introduction: Models and Evidence in
Economics

Economic Analysis

Read Perloffs Chapter 1.

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A Case Study: Public Transit in LA

Introduction

Transport in LA
Economic Analysis

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A Case Study: Public Transit in LA

Introduction

Transport in LA
Economic Analysis

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A Case Study: Public Transit in LA

Introduction

Transport in LA
Economic Analysis

Public Transport is heavily subsidized.

What would happen if we doubled ticket prices?

Would the effect be desirable?

Would this be a good policy?

(Michael L. Anderson, Subways, Strikes, and Slowdowns: The

Impacts of Public Transit on Traffic Congestion, American
Economic Review, September 2014, pages 2763-2796.)

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A Case Study: Public Transit in LA

Introduction

Transport in LA

Understanding commuters choices:

Economic Analysis

Commuters have two choices: D (driving) or M (metro).

Commuters maximize utility.
Utility from driving: U(D) = Y C (D) x T (D).
U(D) = utility from driving; Y = income, C (D) = monetary cost
from driving, T (D) = time spent driving, x = a parameter.

Utility from metro: U(M) = Y C (M) x T (M).

U(M) = utility from metro; Y = income, C (M) = monetary cost
of the metro, T (M) = time spent in the metro, x = the same
parameter as above.
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A Case Study: Public Transit in LA

Introduction

Transport in LA

The commuters optimal choice:

Economic Analysis

Drive if:

Y C (D) x T (D) Y C (M) x T (M)

C (D) x T (D) C (M) x T (M)
x T (M) x T (D) C (D) C (M)
x (T (M) T (D)) C (D) C (M)
x

C (D) C (M)
T (M) T (D)

(assuming: T (M) > T (D).)

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A Case Study: Public Transit in LA

Introduction

Transport in LA
Economic Analysis

But: How do commuters know the time it takes to drive?

It will depend on others decisions.

Assume: correct expectations ( Equilibrium).

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A Case Study: Public Transit in LA

Introduction

Transport in LA
Economic Analysis

The Structure of the Theory:

Rationality

and

Equilibrium.

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A Case Study: Public Transit in LA

Suppose we observe for one commuter one choice.
Suppose we observe the values of:

Introduction

Transport in LA
Economic Analysis

C (D), T (D), C (M), T (M) but not x.

If the commuter drives, it must be that:

x

C (D) C (M)
T (M) T (D)

If the commuter takes public transport, it must be that:

x

C (D) C (M)
T (M) T (D)

We obtain bounds on x.

A Case Study: Public Transit in LA

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Introduction

Transport in LA
Economic Analysis

Suppose we observe for one commuter many choices.

These choices may not be consistent with a single value of x.
Random variation.
Estimate (bounds for) x.

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A Case Study: Public Transit in LA

Introduction

Transport in LA
Economic Analysis

Suppose we observe for many commuters many choices.

Estimate (bounds for) the distribution of x.

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A Case Study: Public Transit in LA

Introduction

Transport in LA
Economic Analysis

We interpret the data assuming the theory were correct.

We use:
I

Rationality

Equilibrium

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A Case Study: Public Transit in LA

Introduction

Transport in LA

A policy question:
Should we double ticket prices for public transport?

Economic Analysis

How would peoples choices change?

Use our model to predict choices.
More people drive
(use the model of rational choice to predict this)

Larger traffic delays

(known relation between road use and traffic delays)

Less people drive

Smaller traffic delays ...
Figure out the final equilibrium.
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A Case Study: Public Transit in LA

Introduction

Transport in LA
Economic Analysis

But should we double ticket prices?

Add up the changes in utility.
Calculate anticipated ticket revenue.
Compare change in sum of utilities to change in ticket
revenue.

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A Case Study: Public Transit in LA

Introduction

Transport in LA

What Michael Anderson really did:

I

His policy question: Should we shut down public

transport?

He took estimates mostly from other work.

He then simulated the effects of shutting public

transport down.

He compared the simulation results to the observed

effect of a strike by public transport works.

The simulation results and the observed effects were

similar.

The results imply large benefits of public transit.

Economic Analysis

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The Structure of Economic Analysis

Introduction

Transport in LA

1. Theory
I

Economic Analysis

Rationality
U(D) = Y C (D) x T (D)
U(M) = Y C (M) x T (M)
commuters maximize U.

Equilibrium
Commuters anticipate driving delays correctly.

2. Evidence
3. Policy thought experiment
4. Normative evaluation
5. Policy recommendation

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The Structure of Economic Analysis

Introduction

Transport in LA

1. Theory
I

Economic Analysis

Rationality
U(D) = Y C (D) x T (D)
U(M) = Y C (M) x T (M)
Commuters maximize U.

Equilibrium
Commuters anticipate driving delays correctly.

2. Evidence
3. Policy thought experiment
4. Normative evaluation
5. Policy recommendation

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Introduction

Transport in LA
Economic Analysis

Theory

Data

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Introduction

Transport in LA
Economic Analysis

Theory and Evidence

Thought Experiment
Norma6ve Evalua6on
Policy Recommenda6on

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The Structure of Economic Analysis

Introduction

Transport in LA
Economic Analysis

Econ 401: Intermediate Microeconomic Theory.

Theory: rationality, equilibrium.
Normative judgements in economics.
Sometimes, a glimpse of data.

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