An Unintended Consequence of Peak Pricing

Click Picture for Metropolitan Transportation Commission's (MTC) Toll Page

Bay Area commuters are experiencing new toll charges at their Bay Area bridges this month (July 2010). One of the more interesting toll changes is the congestion pricing schedule implemented at the Bay Bridge.  The pricing schedule works out where for single drivers, the toll Monday through Friday is $6 during commute (peak) hours and $4 during the non-commute (off-peak) hours.  Carpools will now be charged $2.50.

The single driver toll is $5 all day on weekends.  The idea is reduce congestion during the peak hours by price discriminating commuters to incentivize them to decide and use alternative modes of transportation or to cross the bridge during the off-peak hours.

Yet something interesting occurred the first day of the pricing scheme, as reported by the San Jose Mercury News reports (and also reported here), moments before 10 a.m. when the toll switched from $6 to $4 drivers started to slow down or stop.  The San Jose Mercury News reported that:

Motorists slowed up considerably, even stopped, as they approached the toll gates at 9:57 a.m., three minutes before tolls were scheduled to drop $2.

“You bet I waited,” yelled out one of those drivers, a guy in a beat-up red Oldsmobile as he inched ahead after tolls fell from $6 to $4. “I’m saving a couple of bucks.”

I am curious how widespread this is during this hour and if it occurs daily.  If drivers are aware of the peak pricing schedule, I am sure no one wants to be the last car and arrive at 9:59:59 a.m. (yes, early by one second) and pay the peak price toll.*  As such, the peak pricing schedule appears to be flawed system during this time period when the price to travel across the bridge depends on a matter of minutes or seconds.  Will many drivers then react daily by doing what the driver in the Oldsmobile did by slowing up and causing congestion for all the drivers behind him?  Further,  how about when the price is scheduled to switch from $4 to $6?  Would some drivers then react by aggressively speeding to the toll both before the toll switches to the higher rate?  Seems like the benefits from the peak pricing schedule would be negated by the behavior of drivers during these periods when the toll price changes.**

Unlike peak pricing schedules, the San Jose Mercury news article also reports of a different congestion pricing system that will be implemented on Interstate 680.  It is a responsive system, and the article reports:

But South Bay commuters won’t have such an obvious strategy for timing their commute when congestion pricing comes to Interstate 680’s southbound carpool lane later this year. That’s because the form of pricing there may vary every few minutes for the 14-mile drive from Highway 84 to Calaveras Boulevard.

It could be a $3 trip at 7 a.m. for solo drivers to buy their way into the diamond lane. But another driver entering the same lane a few minutes later could pay more as traffic stalls, or less if the commute suddenly eases.

With less warning on 680 and other freeways like 580, 85 and 101, where congestion pricing will be introduced in carpool lanes over the next several years, it’ll be harder to figure out what time to best avoid higher tolls and still get a faster drive.

Thus the toll used on 680’s HOT (High Occupancy Toll) lane will be real-time pricing and will be based on current demand and not by predicted demand pricing like the Bay Bridge’s peak pricing system.  This logic follows the late Nobel Laureate William Vickrey work on responsive pricing where he argued that real-time responsive pricing is a more effective to reduce congestion by allowing for an immediate feedback loop enabling users to respond to unexpected demand and supply shocks (Vickrey, 1971).  A peak pricing system would prohibit users to adjust their behavior during unpredicted market fluctuations since the prices would be fixed and set in advance.  So real-time pricing then is preferable by avoiding the inefficiencies created by having prices generated without an immediate feedback loop.  Expectations of price changes and other information play a central role in the behavioral decisions of users.

Yet I am not sure if the randomness of a responsive price system would be acceptable to Bay Bridge commuters, but at least it would be a more effective way to manage and measure congestion.  Moreover, it would eliminate this apparent unintended consequence of drivers at the toll plaza slowing or speeding up during the moment a scheduled toll price change occurs.  Besides if the responsive price system was implemented and the price ended up always near its upper limit and never near the minimum price, then at least policy makers concerned about congestion can justify an increase in the upper limit of the responsive price system.

*Would (some) drivers then hope for more congestion before they arrive at the toll plaza when the price changes downward to assure them of the cheaper toll?

**This peak pricing issue could also be applied to the peak pricing systems currently being applied to on-street parking (parking is one of my favorite topics).  Drivers wanting to park and avoid the peak price charge would do similar behavior, as mentioned above, where they would wait either in their parked car (if they are lucky to find a spot) hoping that a meter maid does not ticket them or might drive aimlessly around the block before parking to avoid a peak pricing charge and/or being ticketed for arriving early.  If the driver decided to drive aimlessly to pass the time to avoid the peak price, then that driver is not only imposing costs on others by increasing congestion, wasting fuel, and putting pedestrians at danger, but also imposing costs on him or herself .  The driver would have rather not waste their time driving aimlessly but actually reach their destination and not wait in their car.

Vickrey, W. (1971) “Responsive Pricing of Public Utility Services.” The Bell Journal of Economics and Management Services, 2 (1), 337-346.

Homeless (Ir)rationality – Scavenging for Recyclables In GARBAGE Bins

I have always been curious on whether homeless individuals act rationally.  The example I am about to explain favors the irrational side, but a few cases can be made that the individual in question acted rationally.

Here is the example that just occurred less than an hour ago…

Tonight was garbage night, and I placed my green garbage bin and my blue recycle bin outside for pick up around 6:30 pm.  The weekend before I had accidentally dumped some recyclables into the green garbage can, but not enough for me to sort through and to place them in the correct bin.  Only a few beer bottles were on top of the inside of the pile of garbage bags in the bin.  (I apologize to my environmentalist friends, there was no monetary benefit for me to gather and place the recyclables in the correct bin, nor did I have an incentive to negate the negative fuzzy feeling from not completing the ritual of recycling).

As such, my bins were outside for pick up in a an urban area location of Sacramento that has a lot of street and pedestrian traffic.  Only a few hours later, 9 pm, when darkness fell did I notice outside a male individual on a bike going through my bins.  Both bins were open and it seemed as if the individual was about finished scavenging through both bins.  Seeing the green garbage bin opened surprised me.*  The individual ought to know that the green garbage bin is dedicated to garbage and ought to be ignored for his search for recyclables.  Yet both were opened and I was curious if the individual scavenged my incorrectly sorted recyclable beer bottles.

Once he left, I went outside in the dark to investigate.  The inside of the opened green garbage bin looked completely different than when I last saw it last.  I sorted around the bin (with plastic protection!) to try find my unsorted beer bottles.  I could only find one, and it was not the brand of beer that matched what I noticed that was still left in the bin the last time I checked.  Still, my investigation verified that the individual scavenged through my garbage bin. (My guess is that the individual scavenged 3-4 beer bottles).

My knee jerk reaction to this behavior is that this individual acted irrationally.  The individual should have instead dedicated all of his time finding all the blue recycle bins and capitalize on the bins with the already sorted lucrative recyclables (cardboard and paper seem to be seldom collected by the homeless for its low recycle value).  In my opinion, the time scavenging through the green bins seem to be less profitable and time consuming.  Time ought to be dedicated solely to the finding and scavenging from blue bins.

Yet my assumptions of my conclusion could be suspect.  I assumed that the individual had a fixed amount of time to collect recyclables for that neighborhood for that night.  Also, I assumed that the individual could not scavenge the neighborhood the entire time period from when households placed their bins on the street and when the garbage men pick them up.  I doubt that all homeless are night owls.  My other assumptions were that households rarely mixed their recyclables with their garbage and that no considerable competition existed among the homeless for these neighborhood recyclables.

Now, I could be convinced with anecdotal evidence that my assumptions are invalid and that this homeless individual acted rationally.  It could be that the individual had a low opportunity cost and had no concern of exhausting their effort on scavenging in the green garbage bin.  And this low opportunity cost could be that the individual had no time constraint and could work the entire time the bins were out.  Also, if in fact households did not sort all their recyclables and for whatever reason placed their recyclables in both bins on the street then a rational homeless individual would search both.  The motives for why households would not actively sort their recyclables may be unknown, but a household might mix their garbage to maximize their garbage pickup capacity (e.g. after a big party with an excess amount of empty alcohol containers).  Or a household might not  dedicate themselves to sorting their recyclables and only place their blue recycle bin alongside their garbage bin because of moral environmentalist pressure from their neighbors.  Lastly, scavenging could be competitive by having many homeless individuals scavenging for recyclables thus making time of extraction and supply of recyclables scarce.   Yet this last explanation would conflict with my argument that an individual should dedicate their efforts and time solely on the blue recyclable bins since it would be assumed to have a higher payout.

So who knows if the homeless act rationally?  All I know is that after thinking  about this problem I figured out how to measure how dedicated communities are in recycling: ask a local homeless person that specializes in recycling.

*The action of leaving the bins could have been a signal to other individuals that this area has already been scavenged.  This leads to other questions I have regarding the homeless society of their internal laws, property rights, how to settle disputes, etc.  I am not saying that I want to write a dissertation about the behavior of the homeless but I think this is a fascinating topic.