Thursday, July 9, 2009

Capturing the consumer surplus for transit

I remember when the MTA raised fares from $1.25 to $1.50 in 1995. That was a big deal for me, just out of college with student loans to repay. Still, I was middle class and I made it through; there were a lot of people who were hit harder.

Now I'm doing better; the price goes up the same amount (although not the same percentage) and I hardly notice it. Streetsblog commenter Niccolo Machiavelli (not his real name) has pointed out that between the unlimited-ride Metrocard, the pay-per-ride discount and the free transfers, the real average price of a NYC Transit trip has actually gone down considerably since 1995. Ben over at Second Avenue Sagas has observed many times that the subway is a pretty good deal for a lot of New Yorkers. When he speculated about doubling fares, and now raising them by 36%, many commented that they would be happy to pay that if it meant the MTA would go for several years without having to beg from the general fund.

Of course, people are still graduating from college with massive student loans - in many cases much bigger than what I had. And there are still lots of poor people who live or work in the city and have been seriously hurt by these increases. Under Ben's proposed fare increases, many people would have to pay for these increases with money from their budgets for food or health care. Some of them would not be able to afford to commute by subway, and would take jobs closer to home or ride bikes.

This situation brought me back to my undergraduate economics class. A number of concepts stuck with me, and one of the major ones was price discrimination. My professor used the example of golf balls, where he claimed that identical balls from the same factory were labeled as "budget" and "premium" balls, and given different prices. People who wanted the best price bought the budget balls, and people who wanted the best quality bought the premium balls (they were misled by the word, even though there was no difference in quality).

I was of course upset by the golf ball company's dishonesty in implying a difference in quality, but let's put that aside for now. The company would have gotten more money per ball if they had charged only the "premium" price, but they would have sold less balls. They would have sold more balls if they had charged only the "budget" price, but they would have gotten less money per ball. By charging both prices, they get more money from the people who are willing to pay it, and they still sell balls to the people who won't pay the premium price. A while ago I realized that haggling takes an even finer-grained approach: people who are unwilling or unable to pay a high price can usually get it for cheaper, but people who can afford the good, but just want to get the thing and take it home will pay more.

Clearly we have a similar situation in the subway, with one group of people who can afford to pay more and would, and another group who can't afford to pay. People who have a goal similar to transportation for all are unwilling to price people away from transit - and that of course includes me.

But with a funding crisis in transit, the consumer surplus - the aggregate difference between the fare and the amount that some people are willing to pay - is a source of funding that we should not ignore. Now if the MTA decided to simply label every other train as a "premium train" and price it higher, even though it was just as crowded (yes, I know) as the "budget trains," that would be dishonest and unethical. But there are honest, ethical ways of exercising price discrimination. For example, the MTA currently charges a reduced fare to the elderly and disabled, on the theory that they're less able to afford the full fare.

Economists reading this may scoff at the simplicity of my ideas, and they will be gratified to know I got a C in that class. If you're one of them, please answer me this: lots of transit advocates throw around terms like "elasticity," but we hardly ever hear about consumer surplus or price discrimination, even though they're very common in markets?


BruceMcF said...

In New South Wales, Australia, its common that retirees, youth, and students pay a "Concession" fare, and that round trip tickets that start in the off-peak are sold for 20% more than a one-way peak hour ticket.

The state government funds the concession fare, while the off-peak fare is just a normal profit-pursuing fare which pulls more cost-sensitive riders out of the way of peak commuters, increasing total effective capacity.

Of course, in a system where there are operating subsidies in any event, there ought to be a combination of higher full far and 50% concession fare that is less state funding overall than a single flat fare presently requires, while offering a lower cost of travel to concession travelers. And if combined with an off-peak system, an off-peak concession passenger can save 70% of the on-peak full fare.

In France, there are commuter trains that have "first class" and "second class" tickets, and the only difference between the train cars are the ticket required to get in ... because the first class ticket costs more, the first class carriages tend to be less crowded.

So there are three forms of price discrimination already in use in various parts of the world, any or all of which would seem to be straightforward to implement.

Alon Levy said...

First class and second class cars work on systems with multiple conductors. If you have fare gates and just one conductor making announcements, the extra first class income is not worth the cost of enforcement.