Art Carden  

Heuristics and Public Policy: Being Faithful With Little to be Trusted With Much?

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I got off the parking lots roads leading to Samford at around 7:55 after leaving my house three miles away 20 minutes earlier. My time stuck in traffic gave me ample opportunity to think about what my beloved dismal science can tell us about the world--particularly with regard to heuristics and public policy. As co-blogger Bryan Caplan pointed out in an EconTalk episode a few years ago (I forget which, but here's his archive), heavy traffic is a problem every economist in the world knows how to solve: price road access, and charge high prices during rush hour. With technologies like E-ZPass and mobile apps, it's easier than ever (and, as The Onion points out, it might have saved Sonny Corleone's life).

That we don't pick this low-hanging fruit is a pretty serious indictment of public policy.* If we can't address what is literally a principles-level textbook example of a negative spillover with a fairly easy fix, what hope do we have for effective public policy on other margins? As with many policy debates, the problem isn't that those who would balk at road pricing have careful, nuanced arguments for why we shouldn't. They often reject out of hand the idea that people should have to pay to use the roads.

Jesus said, "One who is faithful in a very little is also faithful in much, and one who is dishonest in a very little is also dishonest in much." The KJV and a few other translations say "unjust" instead of "dishonest," and that probably gets at the idea regarding public policy just a little bit better. You don't need bad intentions in order to produce bad outcomes. Translated to public policy, if governments can't get road pricing right, why should we expect them to get other things right?

Here, though, is a more charitable interpretation. In his book with Charley Hooper Making Great Decisions in Business and Life, I recall co-blogger David Henderson talking about being counseled to focus on the part of the budget with the most zeroes when he worked for the government. Perhaps that's what's going on here: officials are working on problems of such great importance that they don't have time to fry small fish like road pricing.

That's possible, but I really doubt it.

*-I've been thinking about the themes in Bryan's "Why Do Government Enterprises Work So Well?" post for some time and will offer some of my own answers at my earliest convenience.

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COMMENTS (13 to date)
David R. Henderson writes:

If we can't address what is literally a principles-level textbook example of a negative spillover with a fairly easy fix, what hope do we have for effective public policy on other margins? As with many policy debates, the problem isn't that those who would balk at road pricing have careful, nuanced arguments for why we shouldn't. They often reject out of hand the idea that people should have to pay to use the roads.
Beautifully stated, Art. A very important thought.
BTW, my boss who told me to focus on the part of the budget with the most zeroes was Harvard’s Marty Feldstein. He and I were both at the Council of Economic Advisers at the time.

Tom West writes:

We often talk about price-based rationing allowing something to be rationed based on need. The more you need it, the more you are willing to pay, so it goes to those who most need it.

Of course, this equates lack of ability to pay with lack of need.

For goods and services provided by the government, many think of it as providing goods and services based on the need of the citizen, regardless of the citizen's wealth.

For private enterprise, where those without ability to pay *are* value-less, rationing by price makes sense. For a government, where presumably all citizens are equally valuable and their needs equally prized, there are philosophical difficulties with such a practice.

[Of course, I think you're right in the main. Citizens get more upset (or think they'll get more upset) when they're charged for things they think they're paying for with their taxes than they do when stuck in traffic, so politicians respond rationally.]

Dan W. writes:

Perhaps the fruit of congested roadways isn't as low-hanging and easy to pick as economists suppose. Consider: What if the demand for a lane of travel is inelastic? In such a case a relatively high toll may not change the crowding condition. In this case who receives this windfall of toll money?

In the perfect world more roads would be built to increase the supply of lanes. But we do not live in a perfect world. Thus the scheme of on-demand pricing may simply result in a taking of money from one group to be spent to the benefit of another group. The politicians walk away the clear victors but are there any other winners? Not if the winners of the "car-lane" lottery each paid the most they wanted to pay.

Nathan Ashby writes:

Here's the thing with with congestion taxes. To eliminate the externality problem you should ideally have the tax equal to the level of social cost caused, and redistributed to those who bear this external cost. Obviously doing this is hard in practice but let's focus on the theoretically perfect case.

So who is hurt by the choice of Person X to drive? Other drivers, who also want to use the road at the same time. So let's say 100 people want to drive at the same time and at that level of congestion each is imposing a marginal delay worth $1 on each other driver. So we should tax person X $99 for using the road and slowing everyone else down.

Of course there are 99 other people also slowing down person X so he should in turn collect a dollar from each of them. So in the ideal situation nothing changes. In a real world situation of course we have issues with tax rates set at the wrong levels and tax revenues not being distributed properly to victims of these externalities.

Think about it this way: you ALREADY paid an extra cost for using the road during a congested time: your three hour delay! And given that everyone else similarly decided that whatever they needed to do was more important than avoiding a long traffic jam it's hard to see how there could be a whole lot of socially wasteful driving going on.

The real puzzle is not why governments don't impose congestion taxes but why otherwise intelligent economists think they are a good idea.

Maniel writes:

Congestion pricing requires some initial investment and, of course, good marketing, but it does work - and some people in government know about it as shown here.

vikingvista writes:

Nathan Ashby,

Not everyone paying the cost of congestion would equally substitute that particular cost for the same monetary cost. If travel were, e.g., priced to prevent congestion, some of those people would alter their travel habits to avoid that monetary cost, and some would gladly pay the extra fee and feel like they've won a lottery. Indeed some people who DID alter their travelling habits to avoid the congestion would then choose to pay and travel during rush hour. The uniformity of redistribution in your argument ignores this variation in subjective valuations.

And so trying to compare the cumulative amount of individually-perceived waste in one scenario with that in another scenario is not worthwhile even if possible. But what you can do, is look at how one scenario directs resources compared to the other. In the case of pricing to prevent congestion, people are effectively, through price signals and profits, choosing to pay for the construction of more roads, while those avoiding the extra fees, are choosing not to do so. But the former group are clearly benefiting the latter group in the future, by making it easier to travel without fees, as more or more effective roads or lanes are built.

David R. Henderson writes:

@Nathan Ashby,
Good point, but there’s a simple solution: combine a congestion toll with a drop in the gasoline tax.

Nathan Ashby writes:

David: ok let's model this.

3 drivers. A and B get utility of 6 from driving in rush hour. Driver C gets 5 utility. Gasoline tax reduces utility of driving by 2. Marginal disutility of sharing the road is constant at 1 per other driver. So gas tax + congestion gives us a stable equilibrium of + 1 net utility for C and + 2 for A and B. Social benefit is 5 utility.

If we eliminate the gas tax and put a revenue neutral congestion tax in its place at 3 utility we get the following changes. C will avoid the tax by not driving, making him 1 utility worse off. A and B will pay extra tax but face less congestion. They both net out at + 2 utility as before. So it's a Pareto loss - making one person worse off without making anyone better off.

Nathan Ashby writes:

Actually I'm wrong. Since C can drive at another non congested time while still not being subject to the gas tax his utility is actually 1higher than before. So I'm wrong you're right and it's a Pareto improvement.

Cameron Harwick writes:

To call toll-roads a low-hanging fruit for economists is to ignore the current institutional context. The argument against toll roads is the apparatus cost. Given current institutions in the US, there is a 100% chance that an EZ-pass-like system would be used not for congestion management, but for surveillance.

Lest you think that's an overstatement, tolls exist hardly anywhere at the moment and they're already being used this way.

Peter writes:

Congestion pricing works as advertised, and it would be easy to set up a system that adjusts prices to manage demand. What you are talking about is a new round of the Enclosure Acts.

Tom DeMeo writes:

The time spent in traffic is a kind of tax, so you have to ask why congestion pricing works, but congestion time doesn't. The answer is that this substitution only works for some but not others, and I think we know who is who.

We are clearing people off the roads that are not able to exchange a chunk of their time for a few dollars a day. Congratulations! Problem solved!

Dan W. writes:

Consider a highway that is always congested for two or three solid hours every morning and afternoon. Clearly there is great demand for this road. So what would be the necessary clearing price to relieve the congestion? $20 a car? Higher? Given the cost of time and the willingness of drivers to endure delays it seems unlikely the clearing price would be a modest amount.

So lets say the clearing price is $20. Who gets this money and who decides?

Another challenge (illustrating this problem is NOT low-hanging fruit) is this: As the monetary cost of using a certain road increases drivers will avail themselves of other roads, especially surface streets. Thus, in the process of relieving congestion on one road new congestion has been created on other roads? Who pays for this cost?

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