Sunday, December 21, 2008

Parking, Driving, Drinking and Printing

On the 1st of December Dublin City Council increased city centre parking rates from €2.70 to €2.90 per hour. The council’s justification for this was to limit the congestion caused by people cruising around looking for a parking space. The increased cost aims to do this by discouraging commuter parking and encouraging short term parking. Looking at it another way they are trying to reduce congestion by allowing the cars that are moving to stop and getting the cars that are stopped to move. In the words of Thomas Schelling they have fallen foul of “the inescapable mathematics of musical chairs” as all they have done is change the categories while the total number of cars remains unchanged. More on congestion later.

On the 1st July the government introduced changes to the Vehicle Registration Tax (VRT) and annual motor tax on new cars that had been announced in the previous December's budget. The new rates are based on the carbon dioxide emissions of the car rather than the size of the engine which was the determining factor under the old system. When announced in Brian Cowen’s last budget the stated aim of this new system was to assist the environment by reducing carbon dioxide emissions. Granted the system may cause some people to alter their car buying decision but once a person has bought a high emissions car they can drive, and pollute, as much as they want and not face any additional cost.

The new system has changed the average cost of a polluting trip but it has not changed the cost of the next polluting trip, the marginal cost. Consider the example of student parties from Tim Harford’s book The Undercover Economist. The clubs and societies in Tim’s university organised large parties with two types of entry tickets; ‘Alcoholic’ tickets allow unlimited drinking and ‘Sober’ tickets made warm orange juice the tipple of choice. ‘Alcoholic’ tickets were sold for €20, while ‘Sober’ tickets were free.

After buying the more expensive ticket it makes little sense to have two or three drinks and leave as quietly as you entered. So people either bought the ‘Alcoholic’ ticket and drank as much as they could, or went for the ‘Sober’ option and left as quietly as they entered. Drinking in moderation was a rarely seen phenomenon. To counter this excessive drunkenness the college decided their only option was to make drinking more expensive so they mandated that the cost of ‘Alcoholic’ tickets be raised to €30. Can you guess what happened?

For some people this increase in price might cause them to go down the ‘Sober’ road. But most of the students would cobble together the €30 and get as drunk as they had got before. The university hadn’t solved its drinking problem at all. Replace ‘Alcoholic’ with gas guzzler and ‘Sober’ with fuel efficient and you will see that the government has made that exact same mistake in trying to curb carbon emissions that the university made in trying to curb excessive drinking.

Both thought correctly that the cure was to raise the price of the harmful activity; unfortunately they both raised the wrong price. By raising the up-front fee you are raising the average price of the activity. The government has raised the up-front fee on high emission cars with the VRT changes. However we don’t base our decision on average prices. Drivers ask what the next trip will cost them. With the emissions based VRT this is an up-front fee so the marginal or extra cost of the next trip is zero. Like the students who kept drinking the SUV drivers might as well keep on driving. The changes in VRT do little to help the environment.

An up-front fee does not change behaviour. Of course, it could be argued that the annual motor tax has also been changed to tie-in with carbon emissions and that this will solve the problem. But once again it is the case that when this is paid drivers are free to drive as much as they wish. And it can be assumed that the person would have considered the annual motor tax when they initially bought the car.

If you want to limit pollution the only effective way is to change the marginal cost of driving, the cost of additional trips. The changes to VRT and motor tax were introduced under the guise of “environmentally friendly” taxes but they are nothing of the sort. They are just taxes. If you want to curb pollution you must tax pollution. Cars don’t create pollution, driving cars does.

The government hasn’t always shown such a poor appreciation of how changing incentives affect behaviour and that people respond to marginal and not average prices. In 2002 the government looked to address the use of plastic bags for shopping. It was decided that a tax or charge was the best instrument to limit the use, and ensuing littering, of plastic bags. The tax resulted in a 94% drop in the use of plastic bags in Ireland.

The levy was initially set at 15c and increased to 22c in July 2007. How did such a small charge have such a large effect? The tax increased the average and the marginal price of plastic bags. Every time a person wanted to use an additional bag they had to pay an additional levy, the cost of the next bag was greater than zero. The tax was designed to change people’s behaviour and it achieved that.

University College, Cork looks like it hasn’t learned from their colleagues in Tim Harford’s university or the success of the plastic bag levy. The problem they face is not that students are drinking too much; it is that they are printing too much. There is unlimited free printing for students on campus. UCC wants to address this issue by introducing a charge for printing. In a recent piece in the University paper (University Express, 18th November) the registrar and Professor of Zoology Paul Giller showed a good grasp of basic economics when he stated that “a free good is be abused”. However, this is the limit of their understanding. The solution proposed by the bursar Diarmuid Collins to the printing problem is that an extra €15 charge to be added to students’ registration fee at the start of the year.

Increasing the pricing of ‘Alcoholic’ tickets at parties did nothing to stem the flow of drink. Charging students €15 at the start of the year will do nothing to stem the flow of ink. UCC may have raised the average price of printing but the marginal cost of the next page will still be zero so students will print as much as they did before. Of course, if the university is looking for a scheme to raise almost a quarter of million euro in revenue from the University’s 16,000 students they have hit on a winner.

So what of congestion? Well it’s actually not that much different from pollution. It is not parked cars that cause congestion; moving cars do that, even if they are moving at a snail’s pace. If you want to limit the number of cars on city streets you must charge for driving on city streets. Otherwise people are free to drive as much as they wish, and city centre traffic will testify that is exactly what they do.

Oh and make city centre parking cheaper not dearer (unless the only aim is to raise revenue that is).

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