Re: paid parking a market failure?
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Re: paid parking a market failure?
I think the problem is, that idea that marginal cost pricing is optimal is in some sense related to the assuming that marginal cost is rising at the optimal point. Recall that many authors define the supply curve as the upward-sloping portion of the marginal cost curve. That model was conceived with factor and farm production in mind -- and those two accounted for most production in those days. There was nearly always a point at which marginal cost started to increase, and after that once it intersected marginal benefit from the bottom, it was time to stop. (Call this the U-shaped average cost curve assumption.) The trouble is, this model starts to break down when marginal costs are either zero or nearly zero, usually with lumpy capacity (e.g., movie theaters and airline seats). In those cases, if you require P=MC, you almost guarantee that the firm will go bankrupt, because MC=0 for nearly all the possible levels of consumption -- and when the last seat or parking space is taken, who pays? The last consumer, or everybody? Because when the last spot is taken, the last consumer imposes the cost, but ANY other consumer could send MC back to zero by dropping out of the market. You no longer have either symmetry among consumers, or the same MC from above and below. Nowadays, there are a huge number of industries that don't satisfy the U-shaped average cost curve assumption -- not just parking and theater seats, but long-distance or cellular phone calls (very low MC, until you need a new line or switch), plane tickets (very low MC, until you need another plane or a larger one), internet services, published music, books, or software (low and everywhere-decreasing MC), and cable TV (zero MC for each program once the consumer is hooked up). In each of these cases, requiring P=MC would guarantee that no firm could make a non-negative profit. The industries simply could not exist. They would disappear, along with the substantial consumer and producer surplus they produce at their non-optimal prices. When I was in my second year of grad school, I thought of doing my dissertation on this problem -- what is the optimal (i.e., surplus-maximizing) price when MC is decreasing everywhere? I mentioned this to my advisor, he advised against it -- he said it has to be long-run average cost and that it's not really an interesting problem. I did my dissertation on something else, but I'm still not sure it's not an interesting problem. Now, I think there are some industries with downward-sloping supply curves -- which means there are certain cost structures that exist in real life that can produce them. (Before you say I'm crazy about this, check the price of, say, Super 8 movie film and compare it to the (inflation-adjusted) price 20 years ago when demand was much higher. Also, compare the price of short-wave radios to comparable-quality radios that receive only commercial AM/FM bands. In both cases, you have similar costs, but higher prices corresponding to lower demand functions.) --Robert Book [EMAIL PROTECTED] Fred Foldvary wrote: 1. Is it the case that if the government offers street parking, given that the marginal cost of one more parked car is zero, the efficient charge is zero when uncongested and when congested, a charge just high enough to eliminate congestion? 2. If the answer to #1 is yes, then is it the case that if a private parking lot charges for parking at a time when the lot is never congested, this is socially inefficient, and a market failure? 3. Is cases #2 any different from a move theater charging admission when there are still seats available, the MC of one more viewer being zero? 4. Is it a correct proposition that government-owned parking should use marginal-cost pricing, but private parking may charge the average cost, without this being labeled socially inefficient? If so, why the difference? If not, is it socially efficient for government to own all parking lots and charge MC? Fred Foldvary This would be true if it were possible to charge different people different prices for parking based on congestion. I guess, theoretically, you could implement some sort of dynamic pricing system [...]
Re: paid parking a market failure?
--- Ricardo Gambirasio [EMAIL PROTECTED] wrote: I fail to see what's so special about parking. Parking as such is indeed not a special case. It only illustrates the general case. also in software, I don't see how software, etc., are similar. With software, shoes, etc., I pay for actual use and also for their availability. In the case of parking, if a city government provides it, nobody is paying for empty spaces. The availableness of street parking increases the productivity of the area and increases the rentals charged to tenants. People pay for empty street spaces as higher land rent or land prices. If city-provided street parking is not congested, what is the efficient price for parking, zero or greater than zero? I guess a tougher question would be: where isn't there this kind of market failure? Are you saying there is, or is not, market failure? I can't see how that is any more of a waste I don't claim it is a waste of space. The question is whether charging for parking space when there is no congestion, is efficient. problem is: where do we find such a government? It seems to me that is a separate question. Mine is about economic theory. Fred
Re: paid parking a market failure?
I seem to recall learning that rather than demonstrating an inefficiency, the presence of inventories represents a form of insurance against uncertainty in demand. David Levenstam Right, but suppose that the parking lot is an evenly rotating economy, and the parking use is the same day after day. The parking lot is full at particular times and not full other times. There is no uncertainty. It is known how many cars will park at particular times. Unlike produced goods, the number of parking places is fixed. Now, is it efficient to charge for a parking place when the lot is not full? Fred Foldvary
Re: paid parking a market failure?
Robert A. Book [EMAIL PROTECTED] wrote: I think the problem is, that idea that marginal cost pricing is optimal is in some sense related to the assuming that marginal cost is rising at the optimal point. But suppose the marginal cost curve at that point is horizontal. Does marginal cost pricing cease to exist? Recall that many authors define the supply curve as the upward-sloping portion of the marginal cost curve. MC rises because MP falls. MP falls because in the short run, one factor is fixed. But MC can be zero. Textbooks also have an illustration of the Nash equilibrium for a duopoly of water provision, where the MC of water is zero. In perfect competition, the price of water is zero. In monopoly, revenue is profit, and is maximized where MR is zero, where MR=MC=0. what is the optimal (i.e., surplus-maximizing) price when MC is decreasing everywhere? -- he said it has to be long-run average cost and that it's not really an interesting problem. He was wrong. A hotel elevator has a zero MC for another user. The hotel prices the use at MC. Shuttles are often user-priced at zero. A restaurant bathroom is usually priced at zero (but not always). Drinking fountains have no charge. Lots of services are priced at zero. Fred Foldvary
Re: paid parking a market failure?
--- Xianhang Zhang [EMAIL PROTECTED] wrote: This would be true if it were possible to charge different people different prices for parking based on congestion. It is possible, and is done in practice. Many parking lots charge more during peak times than in other times. There is predictability, because the typical usage does not vary much. cost of admitting an extra person is NOT zero because it requires you to drop prices which means you lose the revenue from all the other parkers/theatre goers. I don't follow this. Why does charging zero at some times require a drop in price when the lot is full? Fred Foldvary
Re: paid parking a market failure?
I seem to recall learning that rather than demonstrating an inefficiency, the presence of inventories represents a form of insurance against uncertainty in demand. David Levenstam Right, but suppose that the parking lot is an evenly rotating economy, and the parking use is the same day after day. The parking lot is full at particular times and not full other times. There is no uncertainty. It is known how many cars will park at particular times. Unlike produced goods, the number of parking places is fixed. Now, is it efficient to charge for a parking place when the lot is not full? Fred Foldvary Depends on your assumptions. If the asphalt or concrete deteriorates at a rate dependent on how often a car is parked there, the charge should be related to rate of deterioration and the cost of replacement (repaving). And as long as there's no uncertainty, we can even set different rates for different spaces, since they are different distances of people's destinations, and therefore of different value. High-value parking spaces will be more desirable and therefore deteriorate faster (in calendar time, if the same amount per use), or perhaps slower, if deterioration is related to sun exposure. (In that latter case, perhaps people should be paid to park there!) :-) OK, I'll be serious now: One characteristic about parking is that people park for particular time intervals. Suppose you know that there are 10 spaces, and 5 cars come at 1pm and another 5 at 2pm. In this case, the marginal cost-- even when the lot is full -- is zero, since no one else wants to park there. Now, suppose 5 cars come at 1pm and SIX cars at 2pm. Now, someone doesn't get to park. So what do you do? Start charging when there is only one space left? If so, the 10th car when you arrive has to pay, and the 11th doesn't get to park (unless the 10th declines to pay and the 11th is willing to pay). This sounds efficient when the 10th and 11th drivers have different valuation being able to park there, and the price in somewhere in between. But there's another possible outcome -- everyone races to be the 9th to arrive and get the last free space. This is costly in time, since you have to come (say) at 1:55pm when really you don't want to be there until 2:00pm. If there's not uncertaintly in anybody's schedules, whoever has the lowest time value wins -- that is, the 4 drivers with the lowest value attached to the minutes before 2:00pm get the free spaces, and the next two bid for the 10th space. This is a deadweight loss, since the value of that time is dissipated rather than collected by somebody. You could get rid of this by charging anybody who arrives earlier than they would otherwise need to for the purpose of getting a parking space. But this requires assuming away far more uncertainty (not to mention assuming far more omniscience!) than I think is reasonable. And in any case, these lower-value-of-time folks could line up outside the entrance to the parking lot and come in at the last minute anyway. I think there are three problems with your question: First, uncertainty is an inherent part of the problem. Assuming it away makes the problem intractable. Second, I think you are (inadvertently) assuming that there is some non-price way of allocating spaces taht is superior to an allocation with prices. For example, allocating by arrival order. Third, the way you've set things up, it's never clear what the marginal cost is, or who the marginal consumer is. Is the marginal consumer the last to get a space, or the first to be turned away? Or some person who parked in the middle when there were plenty of empty spaces, but values the space at less than the first person turned away? --Robert Book [EMAIL PROTECTED]
Re: paid parking a market failure?
--- Xianhang Zhang [EMAIL PROTECTED] wrote: This would be true if it were possible to charge different people different prices for parking based on congestion. It is possible, and is done in practice. Many parking lots charge more during peak times than in other times. There is predictability, because the typical usage does not vary much. Yeah, but it's weird pricing. In Chicago, there are early bird rates where you get in by a certain time and get a cheap fixed price for as long as you want that day -- if you come in later, you pay by the hour, which could result in a higher or lower charge than the fix price, not to mention a higher or lower rate per hour. And after a certain time, you get the evening rate, which is fixed as long as you get in AFTER a certain time. There is clearly more going on than simple congestion, or the people who get in at 7am and stay the whole day would pay more than the people who come in for two hours in the middle. (It is quite possible to have something like 7am-7pm for $12 and 11am-3pm for $25.) cost of admitting an extra person is NOT zero because it requires you to drop prices which means you lose the revenue from all the other parkers/theatre goers. I don't follow this. Why does charging zero at some times require a drop in price when the lot is full? Fred Foldvary I think he was assuming that the ticket price had to be the same for everybody. That may not be necessary, but you didn't assume the opposite. --Robert Book [EMAIL PROTECTED]
Re: paid parking a market failure?
--- Robert A. Book [EMAIL PROTECTED] 5 cars come at 1pm and SIX cars at 2pm. During that time, charge just high enough so that all who want to park, can. The last car in does get a space, if he is willing to pay. between. But there's another possible outcome -- everyone races to be the 9th to arrive and get the last free space. Everybody knows the price will go up at a particular time. Every car there will pay the price. The spaces are no longer free. I think you are (inadvertently) assuming that there is some non-price way of allocating spaces taht is superior to an allocation with prices. No, that is not a correct inference. Is the marginal consumer the last to get a space, or the first to be turned away? It is the next one to get a space. Nobody gets turned away, because when the lot is full, there is a positive price. Fred Foldvary
