/u/penguin_rider222 (PR2): What is induced demand (with apologies for putting words into your mouth).

Hou_Civil_Econ (HCE): Induced demand is a term of art used by some to describe the fact that when Supply is increased, prices will fall, and "induce" new consumption, Fig 1..

PR2: But isn't that just the standard increase in quantity demanded in response to an increase in supply we learned in Principles of Micro?

HCE: Yes.

PR2: But why come up with a whole new term?

HCE: I am not really sure. But I do want to note that maybe we should actually use it in place of "an increase in quantity demanded in response to an increase in Supply", it does roll of the tonque a little better, and would have a more intuitive meaning than forcing Principles students to remember that there is a distinction between change in demand and change in quantity demanded.

PR2: Where did it come from?

HCE: Again I am not really sure, but most people who rhythmically chant "induced demand" as if it will protect them from "the forces of evil"/highways tend to cite Duranton, Gilles and Matthew A. Turner. 2011. "The Fundamental Law of Road Congestion: Evidence from US Cities." American Economic Review, 101 (6): 2616-52 as proof that it exists.

PR2: What does that say?

HCE: It says that in the long run in a system where the full cost of travel is not priced, long run demand is almost perfectly inelastic, Fig 2, and congestion will remain constant even with the expansion of capacity. As an aside I believe this is supported by the widely noted fact that average commute times between metros are pretty consistent, generally falling between 25 and 35 minutes, but on average increasing with metro size.

PR2: Didn't you say that is just a increase in quantity demanded?

HCE: Yes.

PR2: So why do they make such a big deal about it?

HCE: Again, unfortunately, I am not sure. But, I have a theory. It used to be, and to some extent still is, that traffic engineers/planners either implicitly or explicitly assumed that travel demand was completely exogenous and fixed, Fig 3. So highway engineers were always promising that paying them to build more highways would solve all congestion now and forever. But, with "induced demand", and the fact that cities that had increasing congestion were typically growing anyways, the promised reductions in congestion from highway expansion never come anywhere close to be met. To some extent I really believe the induced demand brouhaha is an over-reaction to highway engineers over-promising the congestion relief of new highways.

PR2: Let's go back. Didn't you say that the Duranton and Turner paper found that congestion was going to stay constant no matter how much you expand travel infrastructure?

HCE: Yes.

PR2: Doesn't that mean expanding infrastructure is worthless, if it never improves congestion?

HCE: No, it means if you build more infrastructure more people can use it at the same marginal cost.

PR2: Well then why don't we just build all the highways?

HCE: Because they have costs.

I believe that a significant part of our present difficulties is caused by the fact that highway travel is innappropriately priced, and everyone accepts that as the normal state of the world. Fig 4., shows a standard analysis of the cost of congestion on a given highway, but for our purposes here it can also represent the costs of consructing highways. As it stands currently highways and travel on highways are actually subsidized, so that users are not paying the full cost the infrastructure that they are using while paying the private costs of their vehicle. Highways and travel on highways, furthermore, have external costs that are also not being paid by anyone. If the beneficiaries of highways actually had to pay the full social costs we would probably have less highways than currently. If we could appropriately price highways and travel on highways we would be able to easily tell when the value of additional capacity exceeded its costs. But, it is difficult and govt isn't even attempting to be the benevolent social planner we learn about in the second half of Mankiw's Principles of Micro.

PR2: I had tried to do a little research. On the thread where we met /u/p0m linked to this paper's appendix where they try to make a distinction between induced demand and induced traffic. What do you think about that?

HCE: I saw that link too and it really helped clarify my understanding of what the confusion is. In that paper all they do is change terminology from your typical economics framework to their own.

For them

Things that can be changed in the short run are "induced traffic".

Things that can only be changed in the long run are "induced demand".

So, still the problem is just terminology and standard economic analysis still applies.

PR2: I also found this post in r/urbanplanning discussing induced demand. In this thread a lot of the respondents are claiming that the efficiency of transit relative to highways makes it so that induced demand doesn't apply to transit. Is that true?

HCE: No. Making transit less crowded, faster, have less waiting time, or extend farther lowers the costs of travel just like doing all the same on highways, and should be expected to increase the quantity demanded. The real difference is transit's marginal external costs are much, much lower at any given level of capacity relative to highways. Not that induced demand doesn't apply. Also see these post comments for how obvious it is to r/urbanplanning that making transit better will increase usage of transit.

PR2: Thanks for the discussion but i have to run now. I hope you didn't mind me taking your time.

HCE: Not a problem at all. I hope we can continue this, as we both learn more.