Economists Do Not Understand the Opposition to Congestion Pricing

Michael Giberson

A few recent news articles on congestion has Peter Klein at Organization and Markets asking, “Why the Resistance to Pricing?

When the quantity demanded exceeds the quantity supplied — causing shortages, delays, congestion, misallocation — the solution is to raise the price. Every freshman economics student knows this. Why, then, are regulators, industry groups, and consumer representatives so often opposed to rationing by the price mechanism?

Klein offers two examples, the airport congestion issue (citing a Reason Foundation commentary and my blog post of last week) and a Wall Street Journal story on internet congestion. In the case of pricing proposed to help clear airport congestion, Klein draws upon the quote I used from the Air Transport Association, “We are unalterably, adamantly opposed to it.” From the Wall Street Journal article on internet congestion, Klein notes the extensive interest in technological solutions — bigger, better, faster, more. “All purely technological remedies. No mention of pricing,” he says.

Scott Wallsten riffed on the same topic in a commentary in response to news report that internet service provider Comcast was sometimes limiting capacity usage by customers who use file sharing services:

While this story immediately degenerated into a fight over net neutrality, economists’ ears should have perked up. If network traffic needs to be “managed,” then something is probably wrong with prices. Getting prices right–by charging heavy users for the costs they impose on everyone else, for example–would go a long way towards reducing the need to manage the network.

Wallsten draws on analogies to road use, electric power, and water utilities, to suggest that rates for high-speed internet use could be priced by some mechanism other than a flat access fee. “Consider highways. … Policymakers have generally tried to deal with congestion by building more roads” — the technological solution rather than pricing. Pricing proposals to address congestion, like HOT lanes, often face opposition even from parties would be benefit from faster travel.

Klein asks, “Is [the opposition to pricing] simply Bryan Caplan’s anti-market bias? Is it interest-group politics? Or is there something specific people don’t like, or don’t understand, about prices?”

It is possible that any proposed price will make some people worse off, possibly almost unavoidable, so some part of any opposition may be simple self-interest. But I think there may be a deeper phenomena at work, in Klein’s words, “something specific people … don’t understand about prices.”

People naturally understand the allocative function of prices — the paying you X so I can get Y — but have a harder time understand the coordination function provided by prices — the paying you enough X so that other people don’t take all of the Y first. Particularly when the value of the coordination function varies dramatically over time (rush hours, peak loads, high season at vacation spots), it seems harder to grasp the abstract service of coordination provided by prices.

Maybe there is work in the behavioral economics literature about congestion pricing, or maybe some sophisticated economics experiments have teased out these differences. I don’t know, but if not it seems like a promising research topic: Why the Resistance to Prices?


9 thoughts on “Economists Do Not Understand the Opposition to Congestion Pricing

  1. Well, there is an obvious constituency against many of these charges, such as people with a high time value of money who would rather wait than pay a congestion charge. More generally, there’s a perception of fairness– the rich guy doesn’t mind paying the toll and gets all the benefit of the lower congestion, whereas the poor guy gets screwed. With congestion or blackouts, everyone suffers equally. Build new roads, the rich guy pays more, in line with income.

    I can think of several other possibilities too, however:

    1) The “nickel-and-dime” argument, or the “Thenardiers” argument. The basic belief that we’re going to get charged for “something we used to get for free,” and that the other costs won’t go down. See also opposition to Economy Plus seating, or airlines charging $5 for food rather than bundling it in with the ticket. To some degree impression matters– every business should know that it makes more sense to raise prices quietly and then offer an online discount, rather than have a special “deal with an employee in person” fee. Always phrase it as a discount for doing X, never as an extra fee for doing Y.

    2) A more sophisticated way to put it, the “Econ 101” argument. A freshman economics student might well say, “But wait, this is price discrimination. Price discrimination is performed by monopolies in an attempt to capture consumer surplus, therefore bad. We want perfect competition, which requires no differentiated products and maximizes consumer surplus. Hence we oppose HOT lanes and the like which attempt to discriminate.”

    3) In general, it’s a problem with a “fee right now for benefits later.” It’s not always clear to people that proper pricing leads to more rational supply, that the market is dynamic rather than static.

    Speaking of Net Neutrality and network utilization, Cornell University went to a charge-by-network consumption (to outside the University) model a few years ago for the on-campus network. Seems to have worked pretty well– the charges for average users per month are much lower for higher speeds than most places. In addition, lots of students started putting up local mirrors of things that many would like to download, conserving network bandwidth as a result.

  2. I think it’s that most people believe that prices should be determined by the “intrinsic” cost required to produce something plus “reasonable” profit.

    Thus they tend to see any demand related component to pricing as an attempt to capture “unreasonable” profits.

  3. I think it’s that most people believe that prices should be determined by the “intrinsic” cost required to produce something plus “reasonable” profit.

    Thus they tend to see any demand related component to pricing as an attempt to capture “unreasonable” profits.

  4. I’m amazed by how little discussion of pricing there is with respect to water. I live in the Atlanta area, where the water situation is famously dire. We’re under ever-tightening water restrictions, especially on outdoor uses. But the price for water is essentially the same as it has been for many years, and there is no rate structure to encourage conservation. It’s amazing. Our reservoirs are nearing the “dead pool” level (where they go below the intakes), and our price is ever steady.

    Of course, in electricity pricing the current political trend is away from scarcity pricing, back toward regulated prices that vary perversely to scarcity. Everything out there is indicating that consumption and growth need to be disciplined by market prices now more than ever. Yet we’re treated to regular debates about the “regulated states” versus the “unregulated states” in an effort to blunt proper price signals. Consequently, some politicians will screw up royally, but by the time it is clear that something is wrong, there will be something/one else to blame. This is a problem of the human condition.

  5. Thanks, D.O.U.G., for that hopeful outlook.

    In the water case, people simply feel it is fruitless to blame the weather for the lack of rain, rather than consider how to efficiently ration demand.

    The Cornell bandwidth approach is interesting. Students are probably high-end bandwidth consumers when given an ‘unlimited’ pipe (unlike Grandma, who might swap a few hi-res photos of the grandkids, but unlikely to try to download video in the middle of an eight-hour World of Warcraft binge). Will the university begin to find that local storage needs are up (to handle the leftover files from all the local mirroring)? Storage is probably cheaper than bandwidth.

  6. Thanks, D.O.U.G., for that hopeful outlook.

    In the water case, people simply feel it is fruitless to blame the weather for the lack of rain, rather than consider how to efficiently ration demand.

    The Cornell bandwidth approach is interesting. Students are probably high-end bandwidth consumers when given an ‘unlimited’ pipe (unlike Grandma, who might swap a few hi-res photos of the grandkids, but unlikely to try to download video in the middle of an eight-hour World of Warcraft binge). Will the university begin to find that local storage needs are up (to handle the leftover files from all the local mirroring)? Storage is probably cheaper than bandwidth.

  7. Most onling games (such as World of Warcraft) aren’t high bandwidth applications. They need fast network links not not for the high throughput, but for the low latency (i.e. they don’t transmit much data, but what data they do transmit has to get where it’s going really fast).

Comments are closed.