On “Induced Demand”


JW Writes:

I strongly agree with David King’s recent post that we so often forget accumulated knowledge and that we seem to re-discover this knowledge in endless cycles. Nowhere does this seem more true than in the field of economics, which brings me to the reason I reacted so strongly to David’s post.

I hate the term “Induced Demand”. I hate the idea that induced demand is something bad; something to be avoided.

In economics 101 we learn that demand is a function – not an amount. It is presented to us as a two-dimensional function. To make the math easy, it is then reduced to a one dimensional (linear) function so we can calculate elasticity and solve problems. In fact, demand is a three dimensional function, with time parameters, and is not a zero dimensionless point.

We only arrive at an amount (of travel) when we intersect the supply function with the demand function. Transportation improvements, whether the construction of a new runway at an airport or the signal coordination along an urban arterial, change the supply function, and therefore the amount of travel consumed, and the price.

When we consume travel, we are actually consuming something else. It is instructive to think in terms of David Levinson’s formulation of “access” instead of travel. Access is a Merit Good. Merit goods are what most people think of when they talk about Public Goods, without the messiness of concerning ourselves with rivalry and excludability. Merit goods are normally associated with positive externalities; and as such are considered to be something that individuals or societies should have on the basis of need; and something that will be under-supplied by the market, making public provision desirable.

From the individual’s point of view, access provides opportunities to more jobs, more entertainment and social options, and more alternatives for consumption of goods and services. From a business’ point of view, access provides a larger pool of labor and more raw materials. From a retailer’s point of view, access provides a larger pool of consumers. From a municipal government’s point of view, access allows more efficient provision of police protection, fire protection and ambulance service by reducing the number of facilities necessary for a given response time.

Transportation improvements that provide greater access per unit of time lower transaction costs. Lower transaction cost lead to great efficiency in the economy and a higher standard of living.

In telecommunications networks we have witnessed several orders of magnitude improvement in capacity during our lifetimes, yet we have always filled the new capacity. We stream video now when we used send text files. Yet no one wrings their hands about the induced demand in our telecommunications network.

One thought on “On “Induced Demand”

  1. “Yet no one wrings their hands about the induced demand in our telecommunications network.”

    Increased bandwidth in telecommunications has not been accompanied increases infrastructure. Wavelength Division Multiplex, for example, meant a single fiber strand could now carry 5 or 10 *times* the traffic by changing out the optics at the ends of the cable. Do that with a highway or a railway and you’d have to knock down a sizable portion of the city you claim to be serving. Even in the wireless world, where the bandwidth to my phone was unthinkable 20 years ago, was not accompanied by much new infrastructure, since the tower sites were simply retrofitted with new electronics (granted, there are a LOT more cell towers than there were even 10 years ago, but they don’t have the same effect as new lanes or new lines would – even 5 years ago, you could get 3G bandwidth in very rural western Kansas).

    Bad analogy.


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