Assignment 1

Assignment #1

1) There are various types of experiments. There are scientific experiments that are conducted in a laboratory and there are natural experiments conducted based on historical information and facts. In a natural experiment economists are utilizing natural experiments based on historical data not something that is concocted in a laboratory. In the case of the Spanish tolled motorways, economists were able to collect data from an already existing motorway. The motorway had been in existence for approximately 18 years. Economists had to collect the data from the last 18 years and then test their theory with the data that was collected.

Natural experiments show diverse patterns and this study there were over 70 (eventually whittled down to around 52) sections of motorways that were being analyzed for patterns on how volume on the motorway was effected by GDP, fuel and toll cost. Assumptions were being made that as GDP increased so would the traffic volume on the toll roads and as the toll prices increased the assumption was made that the traffic volume would decrease. These assumptions could be validated or rejected due to the historical information that could be collected from the motorway.

2) In reviewing Table 5 in the article there is approximately a 50% differences between the short-term and long-term elasticities in each group. What makes up the volume of traffic on motorways is monetary costs and time costs of using the motorway, level of economic activity and of course the monetary and time costs of using an alternative route. The short-term elasticity is low as people tend to be creatures of habit. In the short-term people will pay the toll until they can find a better alternative route. The demand in the long-term becomes rather elastic as repairs may be made to parallel roads that will become a substitute for the toll roads. The main reasons for the significant differences are the variables that reflect the quality of an alternative...