Category: Economics

Congestion Pricing III

…Alex is asking the American public to give our trustworthy government monopoly pricing power over our ability to get around…We also would have to give that same government knowledge of our daily movements….

Ouch, that really hurts! (The debate so far, Tyler I, Alex 1, Tyler II). Tyler seems to forget, however, that government already taxes gasoline (and automobiles, motorcycles, airplanes – even bicycles). Perhaps we should eliminate these taxes but no one thinks much of the argument that we shouldn’t put a price on bicycles because this lets the government (and bicycle manufacturers) control “our ability to get around.” Road pricing is no different on this score.

The privacy argument is a complete non-starter. Singapore, for example, is rarely considered a bastion of privacy yet its system allows drivers to be fully anonymous. The Singapore system is simple. Drivers buy a cash card, much like a copy-card, and every car has a reader. As the cars move under a gantry the system deducts the toll from the card. No identification is ever necessary. (Only scofflaws who drive under the gantry without enough money on their card have their license plate photographed – a bill is then sent to the owner of the car. Exactly the same system we have here in Virginia at many traffic lights.)

All this is not to say that we shouldn’t be wary of government inefficiently using road prices as a revenue source, but this problem is hardly unique to roads and for those who really worry about government note that road pricing is a necessary first step toward road privatization.

Bickering with Alex, again

I agree with much of Alex’s post on road pricing, immediately below. And I favor road pricing in a wide variety of instances. But I don’t think it is so easy either.

Alex notes that people are willing to pay for parking, and that no one finds the idea to be strange. True, but how would they feel if you made them pay for “parking within a half mile of their homes”? Most people would rebel against this idea. They understand the difference between a monopolist (someone who controls a major road), and a parking lot owner, who has little monopoly power. If parking rights were subject to monopoly issues, people wouldn’t want to be charged for that either. So I don’t see the two cases as the same, as Alex suggests.

Here are some cases where toll roads have worked, illustrating Alex’s point. But almost always they are imbedded in a context where free (albeit congested) alternatives are also available. A true solution to the congestion problem would involve a much more widespread use of pricing, thus exacerbating the monopoly issue.

We should not forget previous history. It was originally promised that various bridge and highway tolls would be removed, once the infrastructure was paid for, but of course this never happened. In similar fashion, we can expect more widespread road pricing to become an important means of local and state government finance.

In effect, Alex is asking the American public to give our trustworthy government monopoly pricing power over our ability to get around, and in a time of state and local fiscal crises. We also would have to give that same government knowledge of our daily movements, and thus give up our privacy. Yes, people are irrational (I know that I am!), but I am not surprised that this a difficult political sell.

Congestion Pricing II

Tyler asks, Why doesn’t the public doesn’t accept road pricing? But in fact the public does accept road pricing – at least so long as their vehicles are stationary. I am speaking, of course, about pay-parking. Strangely, no one thinks it odd that they should have to pay for road space at point A and at point B but ask them to rent the space in between and you are thought a kook (or, much the same thing, an economist).

The radical disconnect between two things that are the same, suggests that the public’s lack of acceptance for road pricing is due to poor information, an inability to understand the theory, and the terrible weight of the status quo and is not a rational calculation (contra Tyler and Will Baude). I think, however, that we are on the cusp of major breakthroughs. Singapore has long led the way but London’s plan has been a great success. HOT lanes and toll roads are working in CA, Virginia and elsewhere. It won’t be easy but road pricing is the only solution to congestion in major metropolitan areas like Washington, the San Francisco Bay Area and Atlanta. Once a major city adopts the idea others will follow very quickly.

Addendum: We should pay for parking more often too.

The new chief economist at the World Bank

It is Francois Bourguignon. His work on inequality is highly regarded, but how is his policy sense? He recently noted the following:

It’s true that the Bank has focused on poverty and did not insist so much and as explicitly on inequality. I believe we must give more space to the problem of inequality and income distribution in general.

When it comes to growth he gives a “yes but” answer:

Of course, growth is critical to poverty reduction, but we need to analyze more closely who actually benefits from growth, and from the policies, programs and projects undertaken to reduce poverty. Will one or another group, or class, benefit more than others? Are our strategies reducing or increasing inequality? Are they pro-poor, benefiting everybody in the same proportion or benefiting relatively more those who are already better off?

Here is an interview with Bourguignon, including a brief biography, courtesy of www.politicaltheory.info.

My take: Go for growth, and worry about short-term inequalities only insofar as they pose political constraints. Getting growth is hard enough, and concern about inequality often gets twisted to favor special interests and block reforms. We should never care if a policy is “benefiting everybody in the same proportion”, and of course it never will do so, no matter how good an idea.

Why don’t we have congestion pricing for roads?

Congestion pricing would limit traffic jams and increase efficiency, by virtually all standard economic accounts. So why is it such a political non-starter? After all, drivers would be the main beneficiaries.

I think Will Baude nails a good part of the answer. People don’t want to give government another revenue source, and they don’t trust government to give them the money back in the form of either a tax rebate or better services. I feel the same way. Sad, isn’t it?

Here is how Will puts it:

This [congestion pricing] is, in essence, like saying to all commuters “hey, why don’t you guys all subsidize the budget problem? Oh, but as a consolation for your lost money, we’ll solve your congestion problem.” Now, congestion is problematic, but so is losing money, as a group. Commuters are probably right to oppose congestion taxes, so long as there’s any serious risk of the money being used to “fix the state’s budget problems.”

Of course, mistrust of government is not the only problem. People seem to think that traveling on the road is a God-given right, and that a toll is a greater infringement of that right than is a traffic jam. But I can’t imagine this mental attitude lasting forever, just try a trip around the Capital Beltway at 5 p.m. on a rainy day.

The economic behavior of children

Yes, there is a whole web site about the economic behavior of children.

Here is one of the listed abstracts:

We study the development of bargaining behavior in children age 7 through 18, using ultimatum and dictator games. We find bargaining behavior changes substantially with age and that most of this change appears to be related to changes in preferences for fairness, rather than bargaining ability. Younger children make smaller dictator proposals than older children, and they also make and accept smaller ultimatum proposals. Even young children seem to be quite strategic in their behavior. Boys claim to be more aggressive bargainers than girls do, but they are not. We also find a relative height effect: within each experimental group, taller children make much smaller dictator offers. Since gender and height are correlated, height alone explains part of the gender effects. We argue that the existence of systematic differences in bargaining behavior across age supports the argument that culture is a determinant of economic behavior, and suggests that people acquire this culture during childhood. We argue that the height differences indicate that forces other than culture are also important.

In other words, we learn our sense of fairness, and unfairness, over time. And boys aren’t so tough after all, although they pretend to be. Here is the original paper. And thanks to Ben Muse for the pointer.

Another piece listed on the web site has the rather sinister title: “Economic Experiments You Can Perform at Home On Your Children”. Scary, no? They could have at least referred to experiments “with” your children.

And while we are on the topic, a hearty congratulations to Eugene Volokh, legal scholar and blogger extraordinaire, new father of a splendid baby boy, yes the link is a lovely photo.

Who are the big nationalizers?

From 1960 to 1992, which countries nationalized the most industries? (N.B.: Data are not available for every country, the source is a new book about multinationals, called GlobalInc.)

The winners are Chile, Algeria, and Tanzania, which all lie in the “31-50” range. Chile, of course, has undone most of its earlier mischief, and has grown rapidly and moved to democracy. Algeria is wracked by a disastrous civil war and economic collapse. Tanzania has privatized more than 380 of 400 state-owned companies, read here, which is one reason why their growth rates have been exceeding five percent, despite miserable infrastructure.

Industrial Organization Puzzle

In IO theory we teach our students that price discrimination requires monopoly power and monopoly power allows the firm to make above-normal profits. So why don’t the industries that practice a lot of price discrimination seem especially profitable? Airlines, movie theatres, universities – all classic examples of users of price discrimination yet none seem especially profitable. There are examples of profitable industries that use price discrimination, pharmaceuticals for example, but there are also profitable firms that don’t use a lot of price discrimination. If we graphed use of price discrimination against profits would we find a positive slope across the economy as a whole? I doubt it, yet this is what the theory would seem to predict. Send me your thoughts.

Gasoline and market power

Having just visited New Jersey, I am reminded once again that service stations in New Jersey are full service only. That’s right, self-serve is against the law. My wife wonders what a public choice explanation could possibly be, I postulated a kind of “full employment act” for the undereducated, the public rhetoric once claimed that without full-service stations the supply of auto repairman would dry up, although that hardly seems plausible. Here is a summary of a recent New Jersey debate, the piece notes that NJ gas prices are not especially high.

The real puzzle, for me, is precisely that full-service gasoline in New Jersey is typically no more expensive than the typical self-service prices in Virginia. (I am writing from a Kinko’s in Manhattan and don’t have the exact numbers handy.) Yet full-service gas in Virginia is much more expensive than self-service in Virginia, often thirty, forty, or fifty cents a gallon more, at least.

You might that the marginal cost of providing service explains this differential, but then why is full-service gas in New Jersey so cheap? More likely, you have gas stations in Virginia, and elsewhere, practicing a common price discrimination, here is some empirical support for such a model. In other words, the stations believe that those who purchase full-service gas are simply willing to pay much more. Such price discrimination, of course, is impossible in a perfectly competitive market. You would think, surely, that the retail gasoline market is very competitive. The product is relatively homogeneous and there are many different service stations in developed regions. Yet it does not appear to behave like a competitive market, and that is the source of my puzzle. Here is a good piece on the use of priceline.com, and how it serves price discrimination, including in the gasoline market.

Here are Capitalistchicks complaining about full-service requirements in Portland, where they claim that gas prices are especially high, they consider public choice arguments as well.

The final lesson?: You have to look really hard to find a truly competitive market, in the sense defined by the economist’s notion of perfect competition.

Addendum: Gary Leff relates how priceline.com pulled out of the gas market several years ago. And here are gas taxes by state, though they do not explain the observed price gaps in this case, thanks to David Hartley for the tip.

Don’t forget to say thanks

Paul Schervish and John Havens at the Boston College Social Welfare Research Institute have projected that between 1998 and 2052, between $31 trillion and $41 trillion of [American] wealth (in 1998 dollars) will move from one generation to another. They estimate that during this fifty-four-year period, our economy will produce 10.1 million new millionaires.

The stock market crash did not require much of a revision in this estimate, according to an article on Schervish’s home page. Here is the home page itself, you will see that Schervish studies donor behavior. Here is the home page of John Havens.

Of course their numbers are, in some ways, gross underestimates. Let’s not forget the even more important bequests of decent institutions, the American Constitution, science, and technology. The next generation will enjoy something better than Stone Age conditions, not because they are so especially smart, but because of the shoulders they will be standing on.

All of a sudden, I don’t feel so bad about making these people pay for my retirement and the retirement of my baby boom generation.

The above quotation is from The Greater Good, by Claire Gaudiani, a keen treatment of the importance of philanthropy in American life. The author notes that many more people donate to charity than vote. It is also more people than eat fast food or would read a book.

Is there a cost-disease?, or Mozart by computer

There is, of course, William Baumol’s “cost disease” thesis, which is that productivity tends to stagnate in the service sector in general and in the government sector in particular.

That is from Arnold Kling.

Consider this, from The New York Times.

Dr. Baumol, director of the C.V. Starr Center for Applied Economics at New York University, likes to explain the disease by using Mozart as an example. In the centuries since the composer’s death in 1791, playing one of his quartets for string still requires four instruments and four players and the same number of minutes. No way has ever been found to make this process more efficient, even though huge gains in industrial productivity have occurred during the same time.

Now here is from the 7 November Wall Street Journal, lead article:

For more than 200 years, “The Marriage of Figaro” has been performed with a full orchestra. But when the Opera Company of Brookly stages the Mozart opera in January, the pit will be occupied by only 12 musicians – and one technician overseeing a computer program that plays all the other parts….

…Once confined to the computer sector and a few technologically savvy companies, productivity gains have spread into the nation’s vast service sector, from airports to pet stores and package deliveries.

The title of the article is “Behind Surging Productivity: The Service Sector Delivers.” Need I say more?

Capitalist Eggs

Our new colleague, Russ Roberts, author of the economic romance (really!), An Invisible Heart, gave a talk on economic growth where he briefly mentioned the staggering improvements in egg production over the past century. Here are some facts.

Last year the United States produced 86.7 billion eggs.

An early 20th century hen – or a third world hen today – laid perhaps an egg or two a week. Today’s hens lay approximately 5 eggs a week.

Prior to World War II a hen-house might hold 400 hens. Today, a typical hen-house, contains 150,000 hens.

Today’s “hen-houses” are really high-tech factories. The eggs are collected automatically on conveyor belts, graded by robots according to external factors like shape, color, size and also internal factors like consistency and yolk size. See here for a pictorial power-point presentation of the process.

Most amazingly, did you know that from the time it leaves the hen to the time it reaches your table an egg is unlikely to have been touched by human hands!

Addendum: I do not claim that capitalism is good for the chickens.

The future of energy

…the power generation capacity found under the hoods of cars in Germany or America is ten times that of all of the nuclear, coal, and gas power plants combined in those countries.

A compelling and clever fact. The author, Vijay Vaitheeswaran, argues that our energy future is one of decentralization, relative plenty, and lower levels of pollution. His new book is titled Power to the People: How the Coming Energy Revolution Will Transform an Industry, Change Our Lives, and Maybe Even Save the Planet.

We are told that the future will bring hydrogen fuel cells, micropower in lieu of a centralized power grid, and paeans to the visionary genius of Amory Lovins. I am all ready to sign up, except the evidence is missing, at least within the book. The author offers a compelling picture, and it may well be true. But if he is right, why isn’t the price of oil falling over the last few years? Will fuel cells really limit pollution, once we take into account the energy needed to construct the cells? What unknown contingencies could stop his predictions from coming true?

I recommend this book for its enthusiasm and sweeping vision. I also very much liked his treatment of the California power crisis, which is more sophisticated than Paul Krugman’s, among other interesting bits. But I am not yet ready to go short on the shares of either the power companies or the price of oil.