ESSA

ESSA

Lessons of congestion from the Goldman Sachs


Kim Liu

By

October 26th, 2013


Kim Liu investigates congestion on our roads, and what we can learn from Wall Street.


A recent Business Insider article detailed how the Goldman Sachs managed to solve the long tolerated issue of lunchtime cafeteria crowding (unrelated humour-plenty Goldman Sachs video).  The analysts at the Goldman Sachs had identified that during the typical midday hunger-period of 11:30am to 1:30pm, the cafeteria was crowded, lines for food collection were long and stagnant, and for the average Goldmanite this was an inefficient use of their time.

The solution?

Apply a “timed discount” whereupon food purchases made before 11:30am or after 1:30pm receive a 25 per cent discount.  Or from the other side, discourage consumption during the “cost penalty window” where prices are inflated with a 33 per cent premium.

Any economics student could tell you that this is a simple problem of supply and demand, or more specifically a generic scarcity problem, where during certain periods of the day, there is a shortage of timely access to food (supply) and excess hungry employees (demand).  This shortage prompts lines! Lines mean waiting! Waiting equals underutilisation of labour! Oh no, the lost profits!

By decreasing the price outside the prescribed lunching time, Goldman has appealed to utility-maximising individuals with better-matched prices to their willingness-to-pay, or willingness-to-eat-at-a-non-traditional-meal-time, and hence succeeded in clearing the cafeteria market and eliminating this dead-weight-loss.

So what can we learn from the Goldman Sachs?

One situation – one which particularly frustrates me – is the market for road space.

Anyone knows that turning onto the Monash at 8am on a Monday morning is a bad idea.  Bumper to bumper. Start stop. Cars cutting each other off trying to find the elusive moving lane.  Forget the ludicrously low legal limit of 80kmh, VicRoads estimates that during the now even longer peak period of 6:30am to 9:30am, average speeds vary from 20kmh to 60kmh on our major motorways (link).

Congestion not only results in longer and more volatile travel times (which reduces our leisure, contributes to uncertainty, and interrupts schedules) but also leads to a higher probability and risk of road accidents; depreciation of vehicles through greater wear and tear; increased carbon emissions from longer drive times, lower speeds, and more frequent throttling; as well as stress, frustration and aggressive road rage.  From a fiscal perspective, the recent State of Australian Cities Report 2013 (link) estimates that congestion is currently costing capital cities $9 billion a year, with projections of $20 billion by 2020 and $6 billion for Melbourne alone.

So given the extensive economic, environmental, social, and fiscal costs and externalities of congestion, what is being done to solve this market failure of over-consumption?

At the moment, not much really.  Traffic is worsening and current policies are not working, nor is the debate improving (Fiona Scott anyone?).  Infrastructure and supply are crucial to addressing long-term congestion – improving public transport systems, removing railroad crossings, expanding road networks – but these things take years to lobby, years to agree, years to plan, and then they have to be built!

What really irks me is that if I’m picking up someone from the airport at 1am on a Sunday night when the freeway is ghostly empty, I’m charged the same toll or usage charge as someone jamming up the on-ramp at 8am on a Tuesday morning.  Shouldn’t the price of using the freeway and consuming our scarce road space reflect demand and supply, just as the prices of Goldman-approved sustenance reflect market conditions?  What are the incentives here, and what role do they play?

I know people who will catch the train an hour earlier just so that they don’t have to deal with the mass of commuters during the public transport rushes, and people who drive in early to avoid the gridlock of Melbourne’s peak hour roads.  But why not incentivise more people to do so?  What if the Punt Road exit was free if you beeped through before 6am? Or, what if it cost you double during peak hour(s)? Or triple? Or quadruple?

Cars already need e-tags, the scanning gates already exist, and prices already vary according to entry/exit points and type of vehicle. Why not add a time component to that as well?

In San Francisco, to cross the Oakland bridge during peak periods costs only US$2 more ($6 compared to $4), but since the introduction of temporal pricing, commuter delays have decreased by 15 per cent (link). The important realisation here is that cars using the freeway is not necessarily a bad thing, but rather it is the excess cars at the margin that breaches capacity and breeds congestion.  By varying prices even slightly, incentives can be adapted so as to shift marginal commuters away from peak periods, thus allowing for the free-flowing movement of the remaining drivers.

Smoothed or staggered price points would avoid choke-points and reduce volatility, whilst pre-setting prices would ensure consumer awareness and effective price information so that commuters would be able to adjust their driving habits ahead of time.  Another important pricing consideration is that due to the private-public partnership between The State of Victoria and Transurban, higher peak prices would be needed to offset cheaper non-peak prices and potential reduced usage, in order to compensate for any lost revenues and avoid litigation.

The pertinent point is that by appealing to people’s willingness-to-pay, price sensitivities and even social pressures – You drove in at 8am and paid what?! – market forces can help achieve an economically efficient outcome, whereby only those willing to bear higher tolls will consume road space during peak times, whilst those who are not will be pushed to off-peak times or onto public transport.

Concern may arise over a rebound or feedback type effect, whereby as a result of reduced congestion, non-drivers may begin driving and hence contribute back to the problem.  This would apply to individuals with a low tolerance for traffic and high price inelasticity, however, by definition their preferences would also ensure that the increase in road users would be limited to an upper bound where congestion is at a tipping point.

Another concern of course, is that those who are already departing early to avoid congestion may find themselves having to leave even earlier, but that may just be their utility-maximising outcome and the most society efficient outcome.  As well, road users may instead leak onto thoroughfares and arterial roads, but current drivers already do so, and most find it even worse and more costly than our blocked freeways.  Ultimately, these capacity issues further prompt the shift of commuters onto public transport, which is where investment in infrastructure and services is most needed.

So really, for now I’ve got one good solution for you – get a bike.  No traffic, no tolls (for now), no parking fees. Happy times …just hope it doesn’t rain.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

  • Joey Moloney

    Great read Kim! You’ve got an incredibly engaging writing style.

    It seems like an increasing trend is families living in the outer suburbs losing valuable family time due to longer and longer commutes. With that in mind, I think an important consideration would be whether taxes on the most convenient times of travel may force lower to middle income commuters to compromise family time even more by changing their transport times. For example, unless they can negotiate unconventional office hours, they may simply have to leave earlier and depart later. If it is impractical for them to change, it would lead to a budgetary strain that a lot of higher income families could simply absorb and continue to commute at convenient times.
    Public transport is clearly the silver bullet for me. If we invest heavily in a world class urban rail system (which we should given we are geographically one of the largest cities relative to population in the world!), then the families I’m talking about will have a clear alternative which shouldn’t decrease life satisfaction. This is not a problem that ‘building the roads of the 21st century’ will solve.

    Cheers,
    Joey

    • Kim Liu

      Thanks for the comment Joey.

      The social/leisure costs of such a plan have been mostly ignored here, but you are most correct to bring them up, especially for lower income families and those living in the outer suburbs. What happens to people who have no other option? Not everyone has access to public transport or flexi-hours.

      Unfortunately, they will have to bear the cost of higher tolls, but hopefully as marginal drivers (who have convenient public transport or the ability to change their work hours) are shifted away from peak times, the higher tolls come with shorter commute times, which would increase leisure. So then we have a classic trade-off between money and leisure (albeit a forced, and hence not clearly Pareto-efficient trade-off). Again, this is an idealistic outcome, but hopefully with some level of price elasticity in the roadway market, a realistic outcome as well.

      Urban sprawl is and will remain a potent issue for all Victorians.

      Kim

      PS. Although a tax of sorts most definitely, if we have learnt anything from the previous government (and their opposition), I would personally label it as a “congestion-minimisation premium levy”, or something equally as wordy and unsightly.

  • Erika

    Hi Joey

    Great essay however I must say failing to see the benefit of public transport as an option was a bit disappointing.

    I found a report by Griffith University titled Unsettling Suburbia: The New Landscape of Oil and Mortgage Vulnerability in Australian Cities really great as it discusses a few of the issues that you mention in your essay.

    One of the problems of urban sprawl and following from your comment to Joey that ‘unfortunately the people living further out will have to pay more’, is that it’s just not fair to put more financial problems onto those who can’t afford to live closer to the city. Without addressing the social issues, it’s difficult to paint the full picture. Most families living on the fringes are younger, are lower on the pay scale, ae also more likely to have young children, which means they often need their vehicle to drop off and pick up their kids before or after work and may be only one of the parents works full time, while the other works part time. Charging people more will mean they will be in even greater stress and it’s them who keep our economy going too.

    Tolls on the road that disadvantage an already money-tight people, is not a solution. The only way the problem can be solved is through high speed above ground rail that reaches the outer regions of Melbourne and gets people into the city quickly and efficiently. Take for example the station at Knockholt in Greater London (google this on the London Map), it is zone 6 and 34kms from the city and it’s serviced by an above ground train. You can try it using the journey planner in the Transport for London site. It takes just 18 mins by train to get into the city (Chairing Cross and then another 9 minutes to London Bridge) and as it avoids the traffic, it’s much quicker than driving. Driving would easily take close to two hours if you tried. Living out of the City becomes an option for families and people who can’t afford to live closer but still need to commute to work into the City. It is slightly more expensive, but the service is excellent and people are happy to pay a little extra as a result.

    Yes, transport is a long term solution, however it’s only a long term issue because people make it lesser of a priority than building more roads that will eventually congested anyway because people don’t have other options available to them. If public transport was a priority then it would not have been privatised and it would have allowed the government to have enough cashflow to invest in it as the patronage increases. London transport is still publicly owned and as a result, ensures the services are there to meet the needs of all as well as those who pay to use the system on a daily basis.

    Cheers,

    Erika

    • Kim Liu

      Thanks for the comment Erika, however I am disappointed that you think I don’t value public transport as an option (although as the author, I guess that really is my fault). An efficient and wide-reaching PT system is 100% the long-term solution for congestion.

      I also don’t believe that tolling is the solution, however I do think it has a place as a short-term strategy. A realistic time frame for this policy from planning, to implementation, to impact could be under a year, whereas huge infrastructure and investment plans would take decades, when we need real action now.

      The social costs are of course significant, and I would’ve liked to discuss them further and they do deserve merit, but at the end of the day, how else do we ration roadways when their current over-use is so inefficient both economically and socially. This would also push the support for PT that we need, and shift support for trains over roads.

      Thoughts on any other short-term immediate policies? Perhaps one with less impact on lower-income families?

      And yes, the continuing privatisation of essential services is something we should all be concerned about.

      Kim

  • economicstudents

    Test comment.

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