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
Tuesday, October 12, 2010
Tuesday, August 31, 2010
Fare Dodgers!
This one is pretty creative. A group of people in Paris are trying to institutionalize the age-old practice of fare dodging (once the exclusive preserve of students ...).
http://www.timesonline.co.uk/tol/news/world/europe/article7115236.ece
Under the guise of a very specious argument that public transport ought to be a pure public good (i.e. the state should provide this for free), they are promoting the idea of dodging fares on the Paris metro. They even have an 'insurance fund' in place as a risk pooling mechanism. I wonder if the ever-enterprising Mumbai local train commuters figured this model out ...
To begin with, public transport is clearly not a public good - given the simple fact that there is always a shortage of availability of good public transport in any city (and certainly a city of the size of Paris), there needs to exist a price mechanism to ensure that the demand is controlled to align with the supply. Which itself may sound paradoxical, given that one of the goals of public transport is to offer a low-cost alternative to people. So long as the cost of public transport is lower than any other means of private transport at the margin, it will always remain the more effective mode of transport. And once you add up all the other negative externalities that transportation creates (pollution, global warming, oil dependency et al), public transport wins hands down as a public utility.
Giving it away for free will create an administrative headache of managing the demand, which will almost certainly outstrip supply -hence the need for a price mechanism. And so, if there is a city where the supply of transport far exceeds the demand, there may be a case for the state to subsidize a large part (if not the complete) cost of public transport.
http://www.timesonline.co.uk/tol/news/world/europe/article7115236.ece
Under the guise of a very specious argument that public transport ought to be a pure public good (i.e. the state should provide this for free), they are promoting the idea of dodging fares on the Paris metro. They even have an 'insurance fund' in place as a risk pooling mechanism. I wonder if the ever-enterprising Mumbai local train commuters figured this model out ...
To begin with, public transport is clearly not a public good - given the simple fact that there is always a shortage of availability of good public transport in any city (and certainly a city of the size of Paris), there needs to exist a price mechanism to ensure that the demand is controlled to align with the supply. Which itself may sound paradoxical, given that one of the goals of public transport is to offer a low-cost alternative to people. So long as the cost of public transport is lower than any other means of private transport at the margin, it will always remain the more effective mode of transport. And once you add up all the other negative externalities that transportation creates (pollution, global warming, oil dependency et al), public transport wins hands down as a public utility.
Giving it away for free will create an administrative headache of managing the demand, which will almost certainly outstrip supply -hence the need for a price mechanism. And so, if there is a city where the supply of transport far exceeds the demand, there may be a case for the state to subsidize a large part (if not the complete) cost of public transport.
Wednesday, August 4, 2010
How much is a tiger worth?
Went to Kabini (Nagarhole National Park in South Karnataka) last week. This National Park is one of the largest tiger sanctuaries in India. And given the ongoing "Save the Tiger" campaign, there was naturally a lot of talk about this among the visitors to the Park. Everyone felt that we must do 'everything that it takes' to ensure that we don't wipe out the species.
Which got me wondering - how much should we (as a country) be spending on this exercise? In other words, how much is a tiger worth? The rational economist would first try to put a number on a tiger's worth and then multiply it by the desired increase in the tiger population - and if the cost of doing this is less than this value, then it is a worthwhile investment.
Makes sense - but leads to an obvious question: how do you go about measuring a tiger's worth? Now extending this argument - how do you measure anything that cannot have a market (say, a beautiful scenery, a sunset etc)? This is, by the way, not merely an academic question: it has practical implications. For instance - if a mining company wanted to dig up a hillside, how much should they be made to compensate for the loss in quality of life for everyone who would otherwise enjoy the view? Similarly, in a developing country like ours which is resource constrained, any expenditure on 'Save the Tiger' campaign is money taken away from some other deserving social programs.
After some trawling on the internet, it emerged that there is an obscure area in economics which deals with these exact situations and it goes by the name of "Contingent Valuation". Some interesting leads:
http://www.ecosystemvaluation.org/contingent_valuation.htm
http://www.ecosystemvaluation.org/contingent_valuation.htm
One thing that is obvious as you read through this is that this can be highly subjective - perhaps naturally (!) since there is a huge sphere of human activity that is beyond the confines of the domain of revealed preferences (i.e. where a need or want is expressed through the price mechanism) and in the domain of stated preferences - which is why we take pleasure in watching a beautiful sunset or the lush green countryside but abhor the idea of putting a price to these experiences. Talking of such experiences - try the train ride on the Bangalore-Mangalore route. This has recently been upgraded to a broad gauge and the stretch between Sakleshpur and Subrahmanya Road through the Western Ghats is breathtaking (esp. in the monsoons). I am pretty sure that in pure economic terms, this is an investment that the Railways will never recover - but then the ride itself is, well, worth it!
Which got me wondering - how much should we (as a country) be spending on this exercise? In other words, how much is a tiger worth? The rational economist would first try to put a number on a tiger's worth and then multiply it by the desired increase in the tiger population - and if the cost of doing this is less than this value, then it is a worthwhile investment.
Makes sense - but leads to an obvious question: how do you go about measuring a tiger's worth? Now extending this argument - how do you measure anything that cannot have a market (say, a beautiful scenery, a sunset etc)? This is, by the way, not merely an academic question: it has practical implications. For instance - if a mining company wanted to dig up a hillside, how much should they be made to compensate for the loss in quality of life for everyone who would otherwise enjoy the view? Similarly, in a developing country like ours which is resource constrained, any expenditure on 'Save the Tiger' campaign is money taken away from some other deserving social programs.
After some trawling on the internet, it emerged that there is an obscure area in economics which deals with these exact situations and it goes by the name of "Contingent Valuation". Some interesting leads:
http://www.ecosystemvaluation.org/contingent_valuation.htm
http://www.ecosystemvaluation.org/contingent_valuation.htm
One thing that is obvious as you read through this is that this can be highly subjective - perhaps naturally (!) since there is a huge sphere of human activity that is beyond the confines of the domain of revealed preferences (i.e. where a need or want is expressed through the price mechanism) and in the domain of stated preferences - which is why we take pleasure in watching a beautiful sunset or the lush green countryside but abhor the idea of putting a price to these experiences. Talking of such experiences - try the train ride on the Bangalore-Mangalore route. This has recently been upgraded to a broad gauge and the stretch between Sakleshpur and Subrahmanya Road through the Western Ghats is breathtaking (esp. in the monsoons). I am pretty sure that in pure economic terms, this is an investment that the Railways will never recover - but then the ride itself is, well, worth it!
Thursday, July 22, 2010
The economics of taxi/auto markets
Slightly dated post - but goes to show that this is an interesting topic.
http://www.marginalrevolution.com/marginalrevolution/2010/04/are-taxicabs-allocated-optimally.html
The next big question that is intriguing is that of pre-paid autos. Are they efficient - both from the demand and supply point of view? If that be so, then why not create multiple such hubs around the city? I suspect that they may not be an efficient as it sounds. Food for thought ...
http://www.marginalrevolution.com/marginalrevolution/2010/04/are-taxicabs-allocated-optimally.html
The next big question that is intriguing is that of pre-paid autos. Are they efficient - both from the demand and supply point of view? If that be so, then why not create multiple such hubs around the city? I suspect that they may not be an efficient as it sounds. Food for thought ...
Thursday, July 15, 2010
Monday, July 12, 2010
Gods in the stock markets?
We are now bent upon taking the concept of divine intervention to a new level.
http://timesofindia.indiatimes.com/Biz/India-Business/Trust-moves-HC-seeking-demat-accounts-for-Hindu-deities/articleshow/6159083.cms
http://timesofindia.indiatimes.com/Biz/India-Business/Trust-moves-HC-seeking-demat-accounts-for-Hindu-deities/articleshow/6159083.cms
Friday, July 9, 2010
Breaking the auto cartels?!
Another update on the market for autorickshaws. The other day, we had to take an auto – and we walked up to the ‘auto-stand ‘ (essentially, an informal gathering of auto-rickshaws, ostensibly to provide a way for people to reduce the costs of seeking out an auto – which makes sense, on the face of it). When we asked for a ride, there was a quick, impromptu huddle among the auto drivers and they came back with an atrociously high quote and needless to say, refused to go by the fare meter. Clearly, cartelization was at work here. Note that this is independent of a competitive equilibrium for the demand-supply of autos that may exist at the city level (which I had mentioned earlier). This is what may be called a positional monopoly which would come into play where active collusion drives up the prices.
Under classical micro-economic theory, as the number of suppliers of a good or service increases, there comes a point where it is no longer possible to form cartels as the cost of cartelization becomes prohibitively high. As with most things about classical micro-economics, rarely ever happens in real life.
Which then brings us to a policy question – is there any way to solve this problem or are we as consumers of this service, doomed to suffer? One way to enable this would be to disallow ‘auto-stands’, which would make it difficult to create the situation for cartels to form in the first place. Taking this one step further, it would be even better to force the auto/taxi drivers to keep driving around (rather than waiting at a place). In addition to preventing them from forming pools of cartels, it would also create a very strong incentive for the drivers to pick up fares as and when they are available – following the simple logic that it is better to drive around on a fare rather than incurring the marginal costs of driving around without any revenues. Clearly a desirable solution as far as the consumers are concerned – and to make it equitable, the drivers have to be compensated, the only way for that to happen is to allow a higher fare/unit distance, which will also create a further incentive not to drive around empty, while compensating for the incremental marginal cost that they have to incur for not being allowed to wait at a place.
Meanwhile, now you have the answer why the taxi and auto drivers prefer to create these ‘stands’ , which by the way, tend to be more common in places where general enforcement is poor (hence you would see a higher number of stands in places where the metering systems do not exist. In Delhi for instance, the ‘taxi stand’ is an integral part of most neighbourhoods).
And finally, what did we do that day to get a better deal? Just walked down a short-distance around the block and waited (out of sight of our predatory monopolists) – a short wait later, one auto-driver came by and offered to take us on the meter fare.
Under classical micro-economic theory, as the number of suppliers of a good or service increases, there comes a point where it is no longer possible to form cartels as the cost of cartelization becomes prohibitively high. As with most things about classical micro-economics, rarely ever happens in real life.
Which then brings us to a policy question – is there any way to solve this problem or are we as consumers of this service, doomed to suffer? One way to enable this would be to disallow ‘auto-stands’, which would make it difficult to create the situation for cartels to form in the first place. Taking this one step further, it would be even better to force the auto/taxi drivers to keep driving around (rather than waiting at a place). In addition to preventing them from forming pools of cartels, it would also create a very strong incentive for the drivers to pick up fares as and when they are available – following the simple logic that it is better to drive around on a fare rather than incurring the marginal costs of driving around without any revenues. Clearly a desirable solution as far as the consumers are concerned – and to make it equitable, the drivers have to be compensated, the only way for that to happen is to allow a higher fare/unit distance, which will also create a further incentive not to drive around empty, while compensating for the incremental marginal cost that they have to incur for not being allowed to wait at a place.
Meanwhile, now you have the answer why the taxi and auto drivers prefer to create these ‘stands’ , which by the way, tend to be more common in places where general enforcement is poor (hence you would see a higher number of stands in places where the metering systems do not exist. In Delhi for instance, the ‘taxi stand’ is an integral part of most neighbourhoods).
And finally, what did we do that day to get a better deal? Just walked down a short-distance around the block and waited (out of sight of our predatory monopolists) – a short wait later, one auto-driver came by and offered to take us on the meter fare.
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