induced supply

Fielding Dreams – Hypotheses about Induced Demand and Induced Supply,

| David Levinson

In the Kevin Costner film  Field of Dreams, a ghost whispers “Build it and they will come”  ‘it‘ refers to a baseball field; ‘they‘ are the ghosts of past baseball players.  This has been adopted by planners to describe the idea of induced demand, which applied in transport is that if you build a new facility (road, tracks, etc.) demand will respond and use it, making trips that previously would have been unmade.

The Field of Dreams

This has been illustrated using economic supply and demand curves, and to an economist this “induced” or “latent” demand was always there, just unrealized until the cost of travel was lowered by the new capacity. The road (or train) fills up, congestion returns (or at least the expected congestion reduction benefits do not last long, as travelers adapt to the new environment. The consumers’ surplus increases, as people can now do things they want to do at lower cost. In the planner’s telling, only the hapless traffic engineer (or traffic modeler who is as often a planner as engineer), who made the partial equilibrium assumption that demand does not respond to supply, is surprised by this growth.

A Political Economy of Access: Infrastructure, Networks, Cities, and Institutions by David M. Levinson and David A. King
A Political Economy of Access: Infrastructure, Networks, Cities, and Institutions by David M. Levinson and David A. King

Of course induced demand is not surprising to anyone who has thought about this, and the idea of induced demand has long been well understood, even if the magnitude of induced demand associated with any given project are hard to estimate, and the models are not used appropriately, and internal consistency between model inputs and outputs is still not standard practice [I did my MS Thesis on this more than 25 years ago, and it wasn’t a new idea then.] A related notion is Say’s Law, from 1803: Supply creates its own demand, or more pedantically as per Wikipedia “that aggregate production necessarily creates an equal quantity of aggregate demand.” Induced demand has been dealt with previously on the blog, here we lay out the hypotheses a bit more formally.

But there are 4 specific hypotheses (and 4 null alternatives) that can be generated here, varying three dimensions: construction (supply), demand response, and sequence:

  • If you build it, will they come? [Induced Demand Question]
    • H1: Build it and [then] they will come. [Because demand responds to supply, or because it was coming regardless] [Compare H2]
    • H1null: Build it and [then] they won’t come [Because demand is independent of supply]. [See H4]
  • If they come, will you build it? [Induced Supply Question]
    • H2: They come and [then] you will build it. [Because supply responds to demand, or because you were building it regardless] [Compare H1]
    • H2null: They come and [then]  you didn’t build it. [Because supply is independent of demand] [See H3]
  • If you don’t build it, will they come? [Exogenous Demand Question]
    • H3: Don’t build it and [then] they will come [anyway]. [Because demand is independent of supply] [See H2null]
    • H3null: Don’t build it and [then] they won’t come [Either because demand is independent of supply, or because you didn’t build it]. [See H4null]
  • If they don’t come, will you build it? [Exogenous Supply Question]
    • H4: They don’t come and [then] you build it. [Because supply is independent of demand] [See H1null]
    • H4null: They don’t come and [then] you didn’t build it. [Either because supply is independent of demand or because they didn’t come.] [See H3null]

Each of these tells us something a bit different. There is both the dependence of the supply-demand question (are they dependent or independent), and there is the sequencing (which comes first, transport or land use).

Of course these are binaries, and we could consider how many of “them” need to come for us to say “they came”. So you built a stadium to seat 10,000 and 5,000 came, is that evidence of induced demand? In short, yes, but not as much as you planned for.

Karl Popper developed the idea of  falsifiability, which a website says: “is the assertion that for any hypothesis to have credence, it must be inherently disprovable before it can become accepted as a scientific hypothesis or theory.”

Sequencing, matters here, and it’s hard to prove a negative. A single sequence of events cannot provide proof for induced demand, maybe everyone was going to show up in Kinsella’s Field anyway, and the field just accommodated them. Just because they never showed up before he built the stadium is not the evidence we require. Instead, we need to compare multiple cases to justify our case, and build the evidence for it.

A sequence of events can however disprove induced demand (or supply), as the list above illustrates, there are several cases where construction does not result in demand (we can conclusively disallow induced demand in that case) or where demand does not create supply (we can conclusively refute induced supply).

There are some other issues, what if they come and you didn’t build it (or you didn’t build and they come)? It is sort of hard to get the sequence correct in the absence of an event, when did the event of non-construction happen (or when did construction not happen)? Always. The related question is when did the absence of demand occur?

In either case, negative externalities ensue, this is the NIMBY fear of growth without supporting infrastructure. NIMBYs may not want the growth with the supporting infrastructure either, but their main complaint, on face value, is growth without it, which realistically may negatively affect their personal quality of life and property value. Whether or not you believe they should prevail, you at least understand their point-of-view.

Policy responses to ensure consistency between supply and demand  include concurrency or adequate public facilities ordinances. Having worked on these before, these are rightly treated skeptically by the public.

On “Induced Demand”

| David Levinson

 

JW Writes:

A Political Economy of Access: Infrastructure, Networks, Cities, and Institutions by David M. Levinson and David A. King
A Political Economy of Access: Infrastructure, Networks, Cities, and Institutions by David M. Levinson and David A. King

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.

The Co-Evolution of London’s Land Use and Transport

| David Levinson

updated August 25, 2009:
For those of you who doubt I am doing work over in London, I have completed two other papers (in addition to “Too Expensive to Meter” based on my research over here):

  • Levinson, David (2008) The Orderliness Hypothesis: Does Population Density Explain the Sequence of Rail Station Opening in London? Journal of Transport History 29(1) March 2008 pp.98-114.[download]

    • Network growth is a complex phenomenon. Some have suggested that it occurs in an orderly or rational way, based on the size of the places that are connected. David Levinson examines the order in which stations were added to the London surface rail and Underground rail networks in the nineteenth and twentieth centuries, testing the extent to which order correlates with population density. While population density is an important factor in explaining order, he shows that other factors were at work. The network itself helps to reshape land uses, and a network that may have been well ordered at one time may drift away from order as activities relocate.

  • Levinson, David (2008) Density and Dispersion: The Co-Development of Land use and Rail in London. Journal of Economic Geography 8(1) 55-57.
    JEG: [doi]

    • This article examines the changes that occurred in the rail network and density of population in London during the 19th and 20th centuries. It aims to disentangle the ‘chicken and egg’ problem of which came first, network or land development, through a set of statistical analyses clearly distinguishing events by order. Using panel data representing the 33 boroughs of London over each decade from 1871 to 2001, the research finds that there is a positive feedback effect between population density and network density. Additional rail stations (either Underground or surface) are positive factors leading to subsequent increases in population in the suburbs of London, while additional population density is a factor in subsequently deploying more rail. These effects differ in central London, where the additional accessibility produced by rail led to commercial development and concomitant depopulation. There are also differences in the effects associated with surface rail stations and Underground stations, as the Underground was able to get into central London in a way that surface rail could not. However, the two networks were weak (and statistically insignificant) substitutes for each other in the suburbs, while the density of surface rail stations was a complement to the Underground in the center, though not vice versa.

Perhaps more interesting for the non-academic, we (Ahmed El-Geneidy, Feng Xie, and myself of the Nexus group) have put together three quicktime movies

  • 1.The co-evolution of London population density and surface (National) rail
  • 2.The co-evolution of London population density and the Underground
  • 3.The co-evolution of London population density and surface (National) rail and the Underground

These can be accessed from here.