ALS: thoughts on freedom

Ken Henry discusses road congestion pricing and appears to also get it wrong like Harry Clarke

Henry says

Most of the time, most cars impose minimal costs on other road users. However, when vehicles drive on a congested road they impose costs on other drivers. Each driver thinks of their own need to get to their destination, not considering how, by taking up space on the road, they impinge on the ability of other drivers to do so.

We’ve seen this argument before, from Harry Clarke, which is where Ken Henry may have got it, perhaps.

He’s wrong. Both John Humpheys and I demonstrated the logic/arithmetic error in this argument in a thread some time ago and Harry never came back to defend it. It appears to be wrong because they/he doesn’t appear to be counting correctly, which seems a pretty surprising error for a Treasury Secretory head to be making although i forgive Harry of course as I’m eternally gracious that way.

Here’s Harry saying pretty much the same thing in the thread by giving an example like Henry’s.

John suppose I enter a crowded road and work out that the time and petrol cost of getting to my destination is $15 (that’s the personal marginal cost of me entering traffic) but that by doing this I get a benefit of $25 so off I go.

I head off to this particular destination (’The Honey Motel’) along with 1000 other motorists who go to about the same place. I increase their travel times by 1 second per car so I cost them 1000 seconds or by about 17 minutes. If the value of their time is $50/hour I have increased their travel costs by about $14-20. That’s the larger social marginal cost of me entering traffic. It’s bigger than my personal marginal cost.

The $14-20 is the charge that should be levied on me if there was efficient tolling. So now my total travel costs would go to $29-20 (my new personal marginal cost of making the journey) so I forego the trip.

Its sad. In this deal I lose consumer surplus of $10 as a consequence of the charging since I now don’t go. But society saves $14-20 providing a $4-20 social gain. That is the basis for congestion pricing.

Without it I would have got my $10 surplus but other motorists would have lost $14-20.

Meanwhile back at ‘The Honey Motel’ my irrepressively sensuous adoring fan growls with annoyance into her mobile phone that ‘this is absolutely the last straw’. But I don’t believe her. I know that I project a well-worn, animal magnetism and that she will still come to offer me new invitations even though I valued an afternoon with her at a mere $25.

Here’s John response

The 1000 motorists lost 1 second each because of you.

And you lost 1 second because of each of the 1000 motorists.

So the cost to you of the congestion was 1000 seconds (or $14 assuming $50/hr). And the cost by your contribution to the congestion was 1000 seconds (also $14).

The problem with your example is that you shouldn’t have started with a cost to you which included the congestion cost. Start with your personal non-congestion costs… then add in the congestion cost to find the optimal decision. To work it out for society you should add $14 to the cost. To work it out for yourself you should also add $14 to the cost. So the incentives are already correct. Read more »

October 15, 2009 Posted by jc | General | 82 Comments