Tuesday, October 12, 2010

The Economics of Parking

The apartment complex where I live comes with limited parking slots. A little over 2 years after the complex was built, it has filled up with close to 100% occupancy. And as usually happens in such cases, the demand for car parking has outstripped the supply. And as usually happens in such cases, the only way to address this problem is to introduce a price mechanism that would bring demand and supply in alignment. Since each apartment comes with a parking lot, the problem is with the 2nd car syndrome, increasingly common in most affluent urban households. This clearly opens up a 'market' for a 2nd parking lot.

1. There is a space constraint (street parking is ruled out in our neighborhood) - in other words, supply is constrained and cannot expand infinitely to meet the demand. This is generally true since parking supply is highly inelastic (it takes a very long time to add new parking spaces and conversely, once added it is practically impossible to re-use the parking spot for some other purpose).
2. Where the price mechanism can be regulated by a voluntary residents' association, it is very difficult to agree to a sensible pricing strategy.
3. Residents and guests end up going after the same supply of parking lots. Resident parking demand is very, very inelastic. Once a resident has chosen to buy a 2nd car, her demand for a parking slot becomes completely inelastic - in other words, she will be forced to pay irrespective of the fare demanded. And this amount, theoretically, could go up to a point where it becomes viable for the resident to park her car at some other location and pay her way back to the complex!
4. On the other hand, guest parking is relatively more elastic - as parking becomes difficult, the residents can even ask guests not to bring their cars. Obviously, the feedback loops are not perfect here, which in turn impedes the elasticity.

While #1 would automatically posit that a variable pricing mechanism where the price is dynamically determined by the demand with the marginal price for each additional parking slot keeps on increasing, the obvious constraint to that would be #2 which makes any price structure that looks remotely exploitative difficult to implement.

So, what is the way out?

1. Obviously, paid parking is the way to go. The challenge is to improve elasticity of both demand and supply to the point where the market mechanism can take care of the problem dynamically.
2. While it is ideal to have a dynamic pricing mechanism, implementation issues will force a fixed pricing mechanism.
3. The price itself should be revised as frequently as possible to align demand and supply. If nothing else, this would control demand for parking from guests.

The topic of the economics of parking has been studied extensively - two interesting articles:
Recent article by Tyler Cowen in NYT and a more scholarly, yet very interesting, paper on the economics of parking in Chicago around the Cubs stadium during the games - where there is high, relatively inelastic demand for short bursts (during the season home-games) in a highly constrained supply environment