by Adam Juda on Thursday, February 15, 2018
Are you familiar with the concept of congestion pricing (aka surge pricing)?
It's a pricing method that works under the assumption that some people are willing and able to pay higher prices than others for a given item at a given time. As such, vendors can raise prices at times of peak demand, pushing penny-pinchers to make their purchases at times when demand is relatively low. This change in buyer behavior results in a more manageable and stable level of demand for vendors. It cuts down on wait times for customers, as well as the extraordinary costs that vendors must bear to properly service simultaneous demands from large numbers of consumers.
Surge pricing isn't just a concept you'll see in textbooks. It's used quite often in the business world. Movie theaters charge more for shows in the evening than they do in the early morning. Similarly, Christmas decorations typically cost more in December than they do in April.
Cities are increasingly turning to surge pricing as a solution to the congestion plaguing their over-stressed roads and bridges. While mainstream economists find themselves praising this new paradigm, advocates for the poor have been horrified. Many of them believe that congestion pricing is little more than a means of punishing the poor, forcing them to either alter their schedules or spend money that they simply do not have.
I, too, am noticeably upset - but for a different reason. I'm upset that people are attacking congestion pricing. Just as I came to the defense of hourly pricing in a previous article, I find myself donning sword and shield once more in order to defend this helpless pricing technique.
Can congestion pricing hurt the poor? Absolutely. By its very nature, it is intended to inconvenience those without the means (or desire) to pay increased rates. However, the poor can also be helped by surge pricing. In fact, I would argue that surge pricing can be implemented in ways that are so progressive as to cause those on the left to put down their Starbucks' Cherry Mocha Frappuccinos with soy milk and double pumps of flavored sugar-free syrup and rise in support of this powerful pricing system.
How would I accomplish this monumental feat of brilliance?
steal leverage the methodology made famous by Robin of Loxley (better known as Robin Hood). He sought out wealthy folks traveling to and fro, relieved them of large sums of money, and made a gift of his proceeds to the poor. Congestion pricing could be implemented in just the same way (minus the swords, bows, and arrows). Those traveling at peak times (and relieved of their wealth) would most likely by on the higher end of the financial spectrum. Collected revenues could then be used to provide benefits specifically targeted to those who are the least well off. Revenue could be allocated to tax credits, dental subsidies, after-school programs, job retraining, college scholarships, or even cash payments.
As with all matters in the world of pricing, it is a grave mistake to think of a given pricing strategy as intrinsically either good or bad. Like fire, electricity, chainsaws, or even nuclear reactions, a pricing strategy can be neither good nor bad. It is far more appropriate to evaluate a pricing technique's utility and means of implementation as a solution to a given business problem.
So please, let's stand together and agree to forgo any condemnation of congestion pricing. Instead, let's start thinking about how we can use pricing to achieve our societal goals, whatever they may be.
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