Welfare Costs of Urban Traffic through Retail Prices
One sentence summary: Reducing the time spent in urban traffic by 1 minute would result in a welfare gain of about 1.3% for the average city.
The corresponding paper by Hakan Yilmazkuday is available as a working paper here.
Abstract
This paper investigates the welfare costs of urban traffic by considering its implications on good-level prices. Using price data for 40 products from 70 cities (covering 47 countries) for multiple years, the estimation results suggest that the elasticity of good-level prices with respect to the time spent in urban traffic is about 0.5. This elasticity is further connected to the welfare of individuals by using the implications of a simple model. The corresponding investigation shows that reducing the time spent in urban traffic by one minute results in a welfare gain of about 1.3% for the average city, with a range between 0.8% and 2.3% across cities.
The amount of time spent in urban traffic changes significantly across cities. While one-way transportation takes only about 23 minutes in Thessaloniki, Greece, it takes about 64 minutes in Mumbai, India. These differences are important to have an economic comparison across cities, because besides the well-known opportunity costs of time and energy costs that can be considered as direct costs, there are also indirect (off-the-road) costs of urban traffic. For example, based on interviews with managers at distribution centers in the United Kingdom, it has been shown that urban traffic can increase warehousing costs by about 20%. On top of this, it has been shown that unreliability of delivery due to urban traffic has added about another 8% to 11% to the costs of traffic congestion in Netherlands. Similarly, the majority of the companies in Ireland has experienced traffic problems (and thus cost increases) according to the literature.
Against this background, this paper attempts to measure the welfare costs of urban traffic through its effects on good-level retail prices. The main idea is that retail costs can be affected by traffic congestion as in the studies introduced above, and these effects are further reflected in the welfare of individuals through their purchasing power. Accordingly, using the implications of a simple economic model, first, we investigate the effects of urban traffic (measured in minutes for one-way transportation) on good-level prices. The results based on price data from 40 products coming from 70 cities (from 47 countries) show that good-level prices are affected positively and significantly by urban traffic. Regarding the magnitude of this effect, the elasticity of good-level prices with respect to the time spent in urban traffic is estimated about 0.5.
The effects of urban traffic on good-level prices are further connected to the welfare of individuals by using the implications of the economic model introduced. In particular, it is shown that changes in individual welfare depend on changes in urban traffic, subject to the elasticity (of good-level prices with respect to the time spent in urban traffic) estimated. Within this picture, we consider two hypothetical changes in urban traffic. To measure the overall welfare costs of urban traffic, the first hypothetical change corresponds to the removal of the overall effects of urban traffic from good-level prices. Although this exercise may not be convenient to have a policy investigation that could only partially reduce the effects of urban traffic, it provides useful information on the overall welfare costs of urban traffic. To have a more convenient policy investigation, a second hypothetical change is defined as reducing the time spent in urban traffic by one minute.
The results for the first hypothetical change (based on the price data introduced above) suggest that removing the overall effects of urban traffic on prices would increase welfare by about 1.8 times the current welfare in the average city, with a range between 1.6 times (for Thessaloniki, Greece) and 2.1 times (for Mumbai, India). Hence, there are significant overall effects of urban traffic on consumer welfare through retail prices.
The results for the second hypothetical change show that reducing the time spent in urban traffic by one minute would result in a welfare gain of about 1.3% for the average city, with range between 0.8% (for Mumbai, India) and 2.3% (for Thessaloniki, Greece) across cities.