What A Nobel Economist Can Teach Us On Congestion Pricing

Richard Thaler, one of the founders of modern behavioral economics, just won the 2017 Nobel Memorial Prize in Economic Sciences. His research holds some interesting lessons for transportation planners trying to reduce traffic.  Specifically, it highlights why people may be averse to policies that charge drivers more for peak-hour driving.

The goal of “congestion pricing” is to alleviate traffic and encourage more transit usage, walking and biking.  As I described last week, it tolls drivers during peak times for entering city centers.  It’s an important strategy for cities like Los Angeles that need to reduce traffic to increase mobility, while funding alternatives to driving with the revenue.

Yet Thaler’s research is a cautionary tale for congestion pricing.  He describes the “endowment effect,” which is closely related to loss aversion.  Basically, people try to avoid losses in their well-being, money, and so forth, much more (at least rationally so) than they try to pursue gains. As Vox.com explained:

The endowment effect helps explain why businesses don’t engage in rational behavior if it’s likely to enrage their customers. Take, for instance, concert venues that know their events are likely to sell out quickly, and yet do not jack up ticket prices to hundreds or thousands of dollars to control the demand. Because jacking up the price would entail taking away something people are used to — reasonable ticket prices — it prompts a strong feeling of repulsion and injustice, which can lead to consumers turning on businesses and hurting them more than raising prices would help.

How does this apply to congestion pricing? Simply put, if drivers are used to driving somewhere for free, and now they’re being charged, the endowment effect indicates that many of them are going to be upset (potentially irrationally so) and react against the policy makers who are now charging them.

So what can be done to counter it? Well, first of all, policy makers can ensure that drivers have options to avoid the charges, such as the ability to drive off-peak to avoid getting charged as well as having access to easy transit, walking or biking alternatives.  Second, policy makers can present the pricing arrangement as a temporary pilot, in order to give drivers the opportunity to see the “gains” from such an arrangement through decreased traffic and travel times.

Either way, congestion pricing may prove to be a tough sell in Los Angeles, albeit a needed one.