Arnold Kling  

Demand Too Elastic?

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London's congestion charge, which seemed like such a good idea from an economic perspective, may have run afoul of elastic demand, according to an article by Iain Murray.


economists...estimated that a reduction in traffic of 15 percent would require that £5 fee. Unfortunately, they got their sums wrong. The reduction in traffic has been far greater than anticipated. This has several consequences. First, it has meant a shortfall in Capita's revenues...Far from the congestion fee benefiting London's public transport network, it has harmed it.

For Discussion. Can we tell whether the problem is that the demand for driving into central London is too low or too elastic? Is it possible that there is no price that would generate the required revenue?


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COMMENTS (3 to date)
Brad Hutchings writes:

Funny that nobody has commented here yet. I think it would be interesting to come up with examples of "free to free" conversions that worked and didn't work. Then look at whether they are supposed to work or not. Sometimes, a price is put on some activity to discourage it -- e.g. fines for traffic infractions. Sure they produce revenue (and the cops often end up acting more like salespeople), but the idea is to discourage bad behavior and we should be happy if there is a low rate of bad behavior and negligable revenue from enforcement.

The message that congestion pricing in London probably sent to the consumers was that driving in London was something the authorities wanted to discourage at certain times. I bet they would get the same result in the short to medium term at any congestion price that exceeds their collection costs. People could go to London for free before and now have to pay at peak times. That triggers a reaction between "I'll go when I don't have to pay" to "How dare they make me pay for that". No surprise that the curves break down around zero.

-Brad

Tom Dougherty writes:

"Can we tell whether the problem is that the demand for driving into central London is too low or too elastic?"

Yes, we can. The city could lower the tax by half a pound and see what happens to total revenue. If total revenue goes up then they are on an elastic part of the demand curve, but if total revenue goes down then they are on an inelastic part of the demand curve. Again, they could lower the tax another half pound and see what happens to total revenue. By experimenting with different tax rates they will get a feel for what the demand curve looks like.

"Is it possible that there is no price that would generate the required revenue?"

Yes, after experimenting they might find that there is no tax that will generate the required revenue that will cover their costs.

Eric Krieg writes:

Isn't congestion a cost in and of itself?

I don't drive to Chicago. It is too costly in time and aggrivation to do so. Mayor Daley, tax collector for the welfare state that he is, does not need to implement a congestion charge to change my behavior. The insane traffic does it for him, although I bet he would rather have the revenue!

I really don't see the point of the congestion charge. What is it solving? Are there people downtown who shouldn't be there? Is it a pollution issue? What's the problem being solved?

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