"Induced demand": The highway is expanded such that it only takes me 15 minutes to get downtown instead of 45, so I go downtown more.
Jevson paradox: The highway is expanded such that it only takes 15 minutes to get from the suburbs to my office instead of 45, so I move to the suburbs.
So one is movement along the demand curve, while the other is a movement of the demand curve.
Yes, but for subtly different reasons. In the case of induced demand, the supply curve shifts to the right (eg number of highway lanes increases) so we move to the right on demand curve (or quantity increases, eg more people drive). On the Jevon's paradox case, efficiency increases (eg fuel efficiency increases), so the _demand_ curve shifts (eg more people people drive).
Isn't it the same from the point of view of the consumer's calculus? If suddenly my car can do the same trip for half the fuel and in half the time, whether it's because the road is better or because my car is better, it won't affect how I'm going to use my car from then on.
Induced Demand is a poorly conceived mental model.
The concept of "Induced Demand" is easily explained by the default state of the downward sloping demand curve, and upward sloping supply curve.
In basic economic theory, if you reduce the cost of a good, more people will consume it.
e.g. the classic building a highway example; there was always demand for cheap housing with accessibility to downtowns, but the supply of cheap housing with accessibility to downtowns did not exist prior to building the highway there. The "demand curve" doesn't shift at all, you're just moving along it as perception of cost changes.
Has there ever been a case where a highway was run through the middle of nowhere and traffic didn't increase? It's intuitive why
> The concept of "Induced Demand" is easily explained by the default state of the downward sloping demand curve, and upward sloping supply curve. In basic economic theory, if you reduce the cost of a good, more people will consume it.
It is easily explained by that because that is literally the definition of induced demand (see sentence one of wikipedia). The concept has a name because its important to discuss the externalities and long term implications of that additional consumption.
w.r.t your highway example, how you define the market is extremely important and is sensitive to context. The market for "transportation between suburb X and city Y" experiences a durable change in the demand curve as a result of the construction of all that cheap housing. Both market definitions are valid but if your concern is e.g. urban sprawl then contextually one is a lot more relevant than the other. All that said, you can think of the change in the demand curve of market B not as induced demand itself, but as a consequence of realized latent demand (i.e. induced demand) in market A (cheap housing with accessibility to downtown). Alternative solutions to realizing latent demand in Market A (public transit, denser housing, etc.) have different and potentially preferable externalities which is why considering induced demand and its consequences are important.
"Induced Demand" is often, incorrectly, talked about as a shift in the demand curve in response to increase in supply.
There is no shift. I am addressing this common misunderstanding, not debating the wording in the Wikipedia article.
"Induced Demand" is a misnomer, as the demand was always there at the given price. It is not induced, just realized. If I offer you a gold bar for $0, did I induce your demand to accept it?
Most people will always have demand for goods offered below their perceived intrinsic value.
Ultimately it's semantics around definitions, but the thinking of lay people around this concept is typically more of the shifting demand curve, not realization along the existing curve
>"Induced Demand" is a misnomer, as the demand was always there at the given price.
That's not necessarily true. Suppose you're the government and you produce food for free, and every year people eat everything you make, and everyone is well-fed. You decide you want to prepare for a famine, so this year you start more farms such that next year you make 20% more food. The first two months you're able to save, but when people see that there's more food available, they change their habits and start doing even more exercise than before, and so they eat more until they eat all the food every month again.
As an aside, the concept of Induced demand has been criticized. A more precise way to think about “induced demand” is that the demand for a product at a lower price point was preexisting. The transaction didn’t clear until the price actually became lower and this demand manifested itself.
This seems like splitting a hair but it is a more consistent intellectual framework for understanding the dynamics of a particular market.
Induced demand is just the name for realized latent demand, your more precise way to think about it is the concept*. It's only muddled because it is often invoked in complex markets where the costs are often not monetary, there are substantial externalities to consider, or the supply is centrally managed.
Should a city spend $500,000 to install lighting in the park downtown? After all nobody uses it at night because its too dangerous! Induced demand is central to the answer but isn't a first thought for many because the problem space doesn't look like a traditional market.
* there is the additional concept that the long term availability of a good or service at a lower cost changes consumer behavior in a durable way. Building a new train station realizes latent demand but also creates new demand as it causes denser housing to be constructed near it**.
** Whether you want to model that as just more realized latent demand or as a consequence that's technically distinct from induced demand is IMO where a lot of the confusion comes from. If you ask me this should probably have a distinct name as it is a long-term, interrelated process that doesn't map well to sliding around supply and demand curves. Generated demand is what Bloomberg calls it but that has insane overlap with a marketing technique.
Thanks, very interesting. The term ‘induced demand’ has been used a lot in the urban transit & housing discourse. Occasionally you will see the term hijacked by NIMBYs who argue against new housing by claiming construction only serves to create more demand for housing. Or people will argue against widening highways because it will only and always just create ‘induced demand’. A more precise way of thinking about the problem is that a market will pay up to Y amount of time to get from point A to point B. It may be impossible to meet the total demand in this market at time Y with low-efficiency car transit, but a mass transit train system could saturate and address the entire market demand at price point time Y. That is, thinking more precisely about the problem can help inform policy choices.
I don't see how that is more precise. What is the definition of "demand" in that case? Anything that could ever happen at one point, or something that is actually wanted (needed?) by someone who's formulating the thought consciously?
I was just coming here to say, this looks like the fancy way to say 'induced demand'.
Why do you think this is a specific case of induced demand (as opposed to induced demand being a specific case of Jevons paradox, or the two being different words for the same thing?)
