Driving time, productivity, and the Fundamental Law of Road Congestion

Road congestion is a negative externality associated to automobile use and can negatively affects drivers’ utility in several directions, such as delay time and wasted fuel, but also can have a negative impact on aggregate productivity. This paper develops a Dynamic Stochastic General Equilibrium model to study the interactions between roads, traffic, congestion and productivity over the business cycle. In our model households receive services from vehicles, depending on the flow kilometers driving and on the stock of cars, and they do not take into account their own impact on congestion, which also depends on the stock of roads. Following a positive aggregate productivity shock, traffic density and congestion tend to rise, so dampening its positive effects on aggregate activity. The model is then used to study the process behind the so-called ”Fundamental Law of Highways Congestion”, which states that an increase in the stock of roads produces a traffic density rise of same proportion, thus leaving congestion unaffected in the long run. Our model economy reproduce a rise in output in response to a road capacity expansion and predicts a traffic flow elasticity of 0.172, as a direct consequence of the positive impact of the higher stock of roads on economic activity. Finally, we derive a Pigouvian tax schedule that internalizes the social costs of congestion.