The revenge of the marketplace

The mass transit system in Washington, D. C., is in a financial crisis.  This is because, in an effort to raise money, the government raised prices.  Which has resulted in fewer and fewer people using the system.

The across-the-board fare increase imposed by Metro this summer has led to a drop in bus ridership and less-than-expected rail revenue as a result of changing travel patterns, an initial analysis by Metro shows.

Bus ridership has fallen 7 percent, with overall Metro system ridership 2 percent below the levels of the last fiscal year, which ended in July, and 3 percent below Metro’s projected level. The lower-than-expected passenger revenue is the main factor in Metro’s overall revenue shortfall of 4 percent so far this year.

The number of rail riders remained flat (though it was boosted by major events on the National Mall), but 2 to 3 percent of rail riders have moved their commutes from peak times to the window with the lowest fares, and others avoided certain trips, according to the analysis.

Metro this summer implemented nearly $109 million worth of rail, bus and paratransit increases, including a new 20-cent “peak-of-the-peak” surcharge for some rush-hour riders.

via Revenue, ridership on Metro fall short.

As prices rise, demand goes down.  That is an iron law of economics that cannot be legislated away.  Pricing has to be set by the market, not by government fiat.  The economic marketplace operates as a natural law, whether or not policy makers believe in it.

I lived in Estonia for a few weeks back when it was still a part of the Soviet Union, staying with a family as part of a college faculty exchange program.  Under Communism, prices were set by the state so as to make goods affordable for the masses.  But when the prices were set lower than the cost of production, you couldn’t buy the goods because the stores were virtually empty.

Also, production was not determined by market demand; rather, the government set quotas.  Factories had to meet their quotas or the managers and workers would get in big trouble.  So they took shortcuts.  A shoe factory could meet the quotas easier if they didn’t have to keep resetting the machinery to manufacture different sizes.  So they would produce a whole run of, say, size 6 shoes, the smaller size also having the advantage of saving material.  So if you went into a shoe store, you might find that it only had shoes in size 6.  If you wore a different size, you were out of luck.

Governments can certainly interfere in the marketplace, but the marketplace will have its revenge.

About Gene Veith

Professor of Literature at Patrick Henry College, the Director of the Cranach Institute at Concordia Theological Seminary, a columnist for World Magazine and TableTalk, and the author of 18 books on different facets of Christianity & Culture.

  • WebMonk

    “As prices rise, demand goes down. That is an iron law of economics that cannot be legislated away. Pricing has to be set by the market, not by government fiat. The economic marketplace operates as a natural law, whether or not policy makers believe in it.”

    Hmmm, sort of. Kinda. Depends on the elasticity of the demand. And there are situations where as price goes up, demand goes up as well. This isn’t one of those situations, but price-demand isn’t as straightforward as you say, especially not when there are other factors which are also affecting demand.

    For example, demand is dropping heavily because of the rise in unemployment. Ridership has been dropping for the last several years, and the price jump hasn’t been much of an effect when you look at the historic trend over the last couple years.

    Metro ridership is pretty inelastic in regards to price. What they’ve seen is that riders are shifting their patterns of WHEN they ride the metro so they can avoid the peak charges, but are not avoiding riding the Metro entirely. This is disappointing for the Metro since they were hoping for less of that to happen, but it’s hardly a “market revenge”. More of an oversight on their part – they REALLY should have expected that to happen. Maybe they just underestimated how much it would happen. I haven’t found their original report estimates to see what they predicted.

    The Metro Bus system is a bit more elastic, but not much. The variation within the year-to-year numbers with the general dropping trend in ridership easily contains the drop seen in the Sept 2010 vs Sept 2009 numbers mentioned in the article.

    Far and away the VAST majority of the shortfall in expected revenue comes from the lower numbers of riders caused by the rise in unemployment, not by the rise in fare prices.

    No market revenge in this situation – other things are driving this.

  • WebMonk

    “As prices rise, demand goes down. That is an iron law of economics that cannot be legislated away. Pricing has to be set by the market, not by government fiat. The economic marketplace operates as a natural law, whether or not policy makers believe in it.”

    Hmmm, sort of. Kinda. Depends on the elasticity of the demand. And there are situations where as price goes up, demand goes up as well. This isn’t one of those situations, but price-demand isn’t as straightforward as you say, especially not when there are other factors which are also affecting demand.

    For example, demand is dropping heavily because of the rise in unemployment. Ridership has been dropping for the last several years, and the price jump hasn’t been much of an effect when you look at the historic trend over the last couple years.

    Metro ridership is pretty inelastic in regards to price. What they’ve seen is that riders are shifting their patterns of WHEN they ride the metro so they can avoid the peak charges, but are not avoiding riding the Metro entirely. This is disappointing for the Metro since they were hoping for less of that to happen, but it’s hardly a “market revenge”. More of an oversight on their part – they REALLY should have expected that to happen. Maybe they just underestimated how much it would happen. I haven’t found their original report estimates to see what they predicted.

    The Metro Bus system is a bit more elastic, but not much. The variation within the year-to-year numbers with the general dropping trend in ridership easily contains the drop seen in the Sept 2010 vs Sept 2009 numbers mentioned in the article.

    Far and away the VAST majority of the shortfall in expected revenue comes from the lower numbers of riders caused by the rise in unemployment, not by the rise in fare prices.

    No market revenge in this situation – other things are driving this.

  • Kirk

    Even at raised rates, metro fares are significantly less expensive that parking fees in DC, even when you carpool.

  • Kirk

    Even at raised rates, metro fares are significantly less expensive that parking fees in DC, even when you carpool.

  • WebMonk

    Kirk – one of several reasons that Metro rates are still at an inelastic stage – the cost isn’t the main issue for the number of riders. Riders may shift their riding times to avoid the high-cost periods, but they won’t stop riding.

  • WebMonk

    Kirk – one of several reasons that Metro rates are still at an inelastic stage – the cost isn’t the main issue for the number of riders. Riders may shift their riding times to avoid the high-cost periods, but they won’t stop riding.

  • http://www.bikebubba.blogspot.com Bike Bubba

    Well, cost is an issue, but part of that “cost” is the travail of navigating DC roads and parking costs, no? So theoretically, you could hike the price a bunch before people said “the heck with this”.

    (great way of reducing subsidies, no?)

    It’s oddly comforting to see that at least part of the recession appears to be hitting DC! :^)

  • http://www.bikebubba.blogspot.com Bike Bubba

    Well, cost is an issue, but part of that “cost” is the travail of navigating DC roads and parking costs, no? So theoretically, you could hike the price a bunch before people said “the heck with this”.

    (great way of reducing subsidies, no?)

    It’s oddly comforting to see that at least part of the recession appears to be hitting DC! :^)

  • http://www.toddstadler.com/ tODD

    I have to agree with WebMonk (@1). Why was anyone surprised (if they actually were) that “2 to 3 percent of rail riders have moved their commutes from peak times to the window with the lowest fares”. That’s what the fare system told them to do! When you create a structured fare system like that, you don’t do it to make more money, you do it to send a message about scarce system resources and to encourage people to ride when there are fewer riders. Which they did. If they wanted to make more money off of rush-hour riders, they should have raised fares across the board (with fares being the same price no matter when you ride). That’s how it is in Portland. And, as WebMonk notes, people just suck it up. Because it’s still cheaper to ride the bus, even if the fare increase makes it less so.

  • http://www.toddstadler.com/ tODD

    I have to agree with WebMonk (@1). Why was anyone surprised (if they actually were) that “2 to 3 percent of rail riders have moved their commutes from peak times to the window with the lowest fares”. That’s what the fare system told them to do! When you create a structured fare system like that, you don’t do it to make more money, you do it to send a message about scarce system resources and to encourage people to ride when there are fewer riders. Which they did. If they wanted to make more money off of rush-hour riders, they should have raised fares across the board (with fares being the same price no matter when you ride). That’s how it is in Portland. And, as WebMonk notes, people just suck it up. Because it’s still cheaper to ride the bus, even if the fare increase makes it less so.

  • SKPeterson

    A quick note – price elasticities for goods vary over the range of prices, moving from relatively elastic to relatively inelastic depending on the qualities or properties of the good in question. Also, a rise in price will always, always result in a decrease in the quantity demanded. However, prices may rise may not necessarily coincide with a shift in demand or result in an observed decrease in the quantity demanded. We have to remember ceteris paribus – all other things being held constant. In instances in which price increases are not met with an obvious decrease in quantity demanded, the other things that are not held constant are having greater impacts – things like changes in tastes, or as noted above, income (unemployment means no or reduced income), or, the prices of other goods (cross-price elasticity). So, we therefore say that the price increases resulted in the quantity demanded to be lower than it otherwise would have been.

    It also sounds like Metro is experimenting with congestion pricing schemes – which have been suggested by pro-market economists as a means of introducing market pricing incentives into the demand for publicly provided goods. While most of the attention has been paid to public roads, it could also be applied to public transit.

  • SKPeterson

    A quick note – price elasticities for goods vary over the range of prices, moving from relatively elastic to relatively inelastic depending on the qualities or properties of the good in question. Also, a rise in price will always, always result in a decrease in the quantity demanded. However, prices may rise may not necessarily coincide with a shift in demand or result in an observed decrease in the quantity demanded. We have to remember ceteris paribus – all other things being held constant. In instances in which price increases are not met with an obvious decrease in quantity demanded, the other things that are not held constant are having greater impacts – things like changes in tastes, or as noted above, income (unemployment means no or reduced income), or, the prices of other goods (cross-price elasticity). So, we therefore say that the price increases resulted in the quantity demanded to be lower than it otherwise would have been.

    It also sounds like Metro is experimenting with congestion pricing schemes – which have been suggested by pro-market economists as a means of introducing market pricing incentives into the demand for publicly provided goods. While most of the attention has been paid to public roads, it could also be applied to public transit.

  • WebMonk

    SK – “Also, a rise in price will always, always result in a decrease in the quantity demanded.”

    Yes and no. There are situations where price increases can cause demand increases, usually due to perceptions of quality/affluence/society caused by the higher price.

    None of that applies to the Metro, though. In this situation the price increase had its typical negative impact on demand, but that impact was quite small, hardly to compare with the drop in demand caused by other factors.

  • WebMonk

    SK – “Also, a rise in price will always, always result in a decrease in the quantity demanded.”

    Yes and no. There are situations where price increases can cause demand increases, usually due to perceptions of quality/affluence/society caused by the higher price.

    None of that applies to the Metro, though. In this situation the price increase had its typical negative impact on demand, but that impact was quite small, hardly to compare with the drop in demand caused by other factors.

  • DonS

    Keep in mind, of course, that fares cover only a fraction of total operating costs, and none of the costs of construction of the Washington Metro system. So to apply market principles to this type of economy is a little odd.

    As noted above, the stated purpose for congestion pricing, whereever it occurs, is to move demand to off-peak times, not to make money. So this article, in essence, lifts the veil a little bit on the fact that the statements of government do not always match their real motivations. Governments also insist that traffic tickets and “red light” cameras are only for the purpose of public safety. Uh-huh. Unfortunately for Metro, congestion pricing does actually, at least at the margins, move demand.

    This article tells me two things. One is that prices should go substantially higher, across the board. The system is still very heavily subsidized by both local and federal taxpayers vis-a-vis other forms of transportation, so total demand is indeed fairly inelastic — people really don’t have alternatives which are anywhere near as inexpensive. Two is that the system needs to get its costs in line. Its operators and other staff are unionized and substantially overpaid. I’m sure they get the kinds of pensions that long ago disappeared in the private sector. Time to sharpen that pencil.

  • DonS

    Keep in mind, of course, that fares cover only a fraction of total operating costs, and none of the costs of construction of the Washington Metro system. So to apply market principles to this type of economy is a little odd.

    As noted above, the stated purpose for congestion pricing, whereever it occurs, is to move demand to off-peak times, not to make money. So this article, in essence, lifts the veil a little bit on the fact that the statements of government do not always match their real motivations. Governments also insist that traffic tickets and “red light” cameras are only for the purpose of public safety. Uh-huh. Unfortunately for Metro, congestion pricing does actually, at least at the margins, move demand.

    This article tells me two things. One is that prices should go substantially higher, across the board. The system is still very heavily subsidized by both local and federal taxpayers vis-a-vis other forms of transportation, so total demand is indeed fairly inelastic — people really don’t have alternatives which are anywhere near as inexpensive. Two is that the system needs to get its costs in line. Its operators and other staff are unionized and substantially overpaid. I’m sure they get the kinds of pensions that long ago disappeared in the private sector. Time to sharpen that pencil.

  • http://www.toddstadler.com/ tODD

    Also, Dr. Veith, while I appreciate your attempt to compare the Metro governing board (or whatever) to a Soviet-era command economy, I found this statement of yours fairly quizzical: “Pricing has to be set by the market, not by government fiat.”

    And what, exactly, do you think is driving the government to set higher fare prices? Isn’t it … the market? I mean, if fuel prices go up, or maintenance prices increase, or salaries or health care benefits cost more … are you suggesting that the government should just eat those costs and not pass them along at all to the transit rider? Isn’t that exactly the sort of thing that “conservatives” think is a bad idea?

    By which I mean to say, calling this “government fiat” is to exactly miss the market’s influence on the government, and thus to make a rather inapt comparison when it comes to soviet Estonia’s footwear industry.

  • http://www.toddstadler.com/ tODD

    Also, Dr. Veith, while I appreciate your attempt to compare the Metro governing board (or whatever) to a Soviet-era command economy, I found this statement of yours fairly quizzical: “Pricing has to be set by the market, not by government fiat.”

    And what, exactly, do you think is driving the government to set higher fare prices? Isn’t it … the market? I mean, if fuel prices go up, or maintenance prices increase, or salaries or health care benefits cost more … are you suggesting that the government should just eat those costs and not pass them along at all to the transit rider? Isn’t that exactly the sort of thing that “conservatives” think is a bad idea?

    By which I mean to say, calling this “government fiat” is to exactly miss the market’s influence on the government, and thus to make a rather inapt comparison when it comes to soviet Estonia’s footwear industry.

  • Kirk

    @tODD “Also, Dr. Veith, while I appreciate your attempt to compare the Metro governing board (or whatever) to a Soviet-era command economy”

    If you lived in DC, you’d be comparing the Metro board to Soviets, too. Just not for their economic policies, per se.

  • Kirk

    @tODD “Also, Dr. Veith, while I appreciate your attempt to compare the Metro governing board (or whatever) to a Soviet-era command economy”

    If you lived in DC, you’d be comparing the Metro board to Soviets, too. Just not for their economic policies, per se.

  • http://www.toddstadler.com/ tODD

    Kirk (@10), well, I did once get harrassed, police-state-like, by a Metro guard who insisted — apparently incorrectly — that I could not take a photo of the subway infrastructure (though he would have been fine if I’d had a human in the frame, which makes no sense). But I’m guessing that’s not what you mean.

  • http://www.toddstadler.com/ tODD

    Kirk (@10), well, I did once get harrassed, police-state-like, by a Metro guard who insisted — apparently incorrectly — that I could not take a photo of the subway infrastructure (though he would have been fine if I’d had a human in the frame, which makes no sense). But I’m guessing that’s not what you mean.

  • WebMonk

    DonS, just to put some numbers in there, right now the funds which come to the DC Metro from fares and parking is almost exactly 1/3 of the total operating funds. (33.5%)

    Basically, to get the DC Metro up to self-sufficiency, you would need to triple the ticket cost.

    Now that would affect the number of riders dramatically – the number of riders would drop through the floor. That would mean that there would be vastly less income coming in for the DC Metro. I’m virtually positive that there is no reasonable expectation that they could ever be self-sufficient based on fares and parking.

    Just for a thought experiment:
    This is one of those issues that has a billion and one consequences to that sort of decision. Let’s posit that somehow the DCM could somehow manage to stay running with ticket prices tripled and ridership around a third of current levels.

    That would cause a massive flood of additional drivers on the roads. There are around 1,150,000 daily riders on the DCM, and let’s say roughly half would try to continue getting into DC by car. (1/3 would stay on the DCM, and 1/6 would just avoid the trips entirely) That would require drastically increased roads around DC and massively more parking areas. And then there is the lost business of the 1/6 that avoid DC entirely. And the reactions keep spreading out from there.

    All in all, not a pretty picture. If we look at the subsidization and spread it across DC, Virginia, and Maryland, that’s $1.3952 billion spread across 14,181,725 people, that’s about $100 in taxes per person to support the DCM each year. (the Federal portion is $422.9 million, and that gets spread over a lot more people, so the numbers are skewed a bit)

    All that to say that any changes need to be made fairly slowly, with a VERY keen eye out for the consequences, and probably can’t ever be enough to make the DCM completely self-sufficient.

    The question then becomes how self-sufficient do we want the DCM to be and how much of it should be supported by taxes.

  • WebMonk

    DonS, just to put some numbers in there, right now the funds which come to the DC Metro from fares and parking is almost exactly 1/3 of the total operating funds. (33.5%)

    Basically, to get the DC Metro up to self-sufficiency, you would need to triple the ticket cost.

    Now that would affect the number of riders dramatically – the number of riders would drop through the floor. That would mean that there would be vastly less income coming in for the DC Metro. I’m virtually positive that there is no reasonable expectation that they could ever be self-sufficient based on fares and parking.

    Just for a thought experiment:
    This is one of those issues that has a billion and one consequences to that sort of decision. Let’s posit that somehow the DCM could somehow manage to stay running with ticket prices tripled and ridership around a third of current levels.

    That would cause a massive flood of additional drivers on the roads. There are around 1,150,000 daily riders on the DCM, and let’s say roughly half would try to continue getting into DC by car. (1/3 would stay on the DCM, and 1/6 would just avoid the trips entirely) That would require drastically increased roads around DC and massively more parking areas. And then there is the lost business of the 1/6 that avoid DC entirely. And the reactions keep spreading out from there.

    All in all, not a pretty picture. If we look at the subsidization and spread it across DC, Virginia, and Maryland, that’s $1.3952 billion spread across 14,181,725 people, that’s about $100 in taxes per person to support the DCM each year. (the Federal portion is $422.9 million, and that gets spread over a lot more people, so the numbers are skewed a bit)

    All that to say that any changes need to be made fairly slowly, with a VERY keen eye out for the consequences, and probably can’t ever be enough to make the DCM completely self-sufficient.

    The question then becomes how self-sufficient do we want the DCM to be and how much of it should be supported by taxes.

  • DonS

    Webmonk @ 12: Thank you. I knew it was bad, but I couldn’t immediately put my finger on any hard reliable numbers, so I chose to speak in generalities.

    It’s actually a lot worse than you posit, because even tripling fares, while somehow managing to keep ridership at the same levels, would only cover operating costs. Not a dime would be available for construction.

    As I mentioned before, operating costs could be reduced substantially by tackling labor costs, which are very high because of unionization and a generous defined benefit lifetime pension and medical plan. We really need to get over the idea of guaranteed defined benefit and lifetime medical plans for government employees. And it’s not really very hard to drive these trains. Hardly skilled labor. Most of the operators cannot even announce the next stop in an intelligible manner.

    I agree that you cannot triple the fares overnight, but they need to go up substantially. And there is room to do so because of the fact that local roads are congested, private auto travel is expensive, and D.C. imposes punitive parking tax rates. Riders have few cost effective alternatives. In the long term, reducing government subsidies to Metro would theoretically free up funds to improve the local road system, which is badly in need of attention.

  • DonS

    Webmonk @ 12: Thank you. I knew it was bad, but I couldn’t immediately put my finger on any hard reliable numbers, so I chose to speak in generalities.

    It’s actually a lot worse than you posit, because even tripling fares, while somehow managing to keep ridership at the same levels, would only cover operating costs. Not a dime would be available for construction.

    As I mentioned before, operating costs could be reduced substantially by tackling labor costs, which are very high because of unionization and a generous defined benefit lifetime pension and medical plan. We really need to get over the idea of guaranteed defined benefit and lifetime medical plans for government employees. And it’s not really very hard to drive these trains. Hardly skilled labor. Most of the operators cannot even announce the next stop in an intelligible manner.

    I agree that you cannot triple the fares overnight, but they need to go up substantially. And there is room to do so because of the fact that local roads are congested, private auto travel is expensive, and D.C. imposes punitive parking tax rates. Riders have few cost effective alternatives. In the long term, reducing government subsidies to Metro would theoretically free up funds to improve the local road system, which is badly in need of attention.

  • http://www.toddstadler.com/ tODD

    Also, can we make all roads entirely funded by per-use-fees, as well? Because I don’t drive very much, but a lot of my tax funds go towards building roads I’ve never even been on.

  • http://www.toddstadler.com/ tODD

    Also, can we make all roads entirely funded by per-use-fees, as well? Because I don’t drive very much, but a lot of my tax funds go towards building roads I’ve never even been on.

  • DonS

    tODD, maybe it’s different in Oregon. But in California, we don’t even get to use all of our gas tax funds on road construction and maintenance. A substantial fraction of those user fees are diverted to public transit.

  • DonS

    tODD, maybe it’s different in Oregon. But in California, we don’t even get to use all of our gas tax funds on road construction and maintenance. A substantial fraction of those user fees are diverted to public transit.

  • WebMonk

    DonS, I didn’t specifically state it in what I said, but those numbers do include money for capital improvements (construction) and stuff.

    Total payroll fees were $952.6 million. You can probably get a 10-20% savings if you remove unions. That would certainly be enough to get it in the black with its current funding structure, but that is WAY short of making up for the potential loss of support from taxes.

    However, I would VERY VEHEMENTLY object to your claim about it being stupidly easy to drive a train/bus well. There have been quite a number of accidents and near misses because of the lack of training. From the outside, we may think of their job as a George Jetson sort of job – just sit there an push a button – but there seems to be a LOT more to it than that evidenced by the number of accidents which have been happening because of a lack of training. (besides, the VAST majority of the workers don’t actually drive the trains – they maintain all the systems which is a job with fairly high training requirements)

    And the incomprehensibility of the voice is an issue with the speakers most of the time. I can tell when I get on a new car because the voice comes over nice and clear while in the old cars it’s always garbled.

    The DCM will always need to have subsidies, and heavy ones at that. The difficulty will be in finding that balance point where the savings from not supporting the DCM so much isn’t counteracted (or even overwhelmed) by the increased road usage.

  • WebMonk

    DonS, I didn’t specifically state it in what I said, but those numbers do include money for capital improvements (construction) and stuff.

    Total payroll fees were $952.6 million. You can probably get a 10-20% savings if you remove unions. That would certainly be enough to get it in the black with its current funding structure, but that is WAY short of making up for the potential loss of support from taxes.

    However, I would VERY VEHEMENTLY object to your claim about it being stupidly easy to drive a train/bus well. There have been quite a number of accidents and near misses because of the lack of training. From the outside, we may think of their job as a George Jetson sort of job – just sit there an push a button – but there seems to be a LOT more to it than that evidenced by the number of accidents which have been happening because of a lack of training. (besides, the VAST majority of the workers don’t actually drive the trains – they maintain all the systems which is a job with fairly high training requirements)

    And the incomprehensibility of the voice is an issue with the speakers most of the time. I can tell when I get on a new car because the voice comes over nice and clear while in the old cars it’s always garbled.

    The DCM will always need to have subsidies, and heavy ones at that. The difficulty will be in finding that balance point where the savings from not supporting the DCM so much isn’t counteracted (or even overwhelmed) by the increased road usage.


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