We recently started a Lunch & Learn program at TAS. I did the first one on electronic road pricing and followed-up with the blog post below. Let me know what you think. It’s also cross-posted here on TAS’s website.

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Last week at TAS I kicked started our new Lunch & Learn program with a talk on electronic road pricing. It was based on an HBS case that I had prepared for a pricing class I took at the Rotman School.

The case is essentially about traffic congestion in Hong Kong and a decision to either build more road (a bypass road running adjacent to the harbour: The Central-Wan Chai Bypass) or implement an Electronic Road Pricing (ERP) system, similar to what was implemented in Singapore in the 70s and in London in 2003.

My own view is that road pricing makes a lot of sense. And I’ve written extensively about it on my own personal blog. But to quickly summarize the economics behind it all, take a look at this graph:

What this graph plots is the marginal cost of products and services with a fixed capacity.  An example of a product or service with a fixed capacity would be a road. Roads can only handle a certain amount of drivers before it becomes unusable (gridlock). What this graph tells us is that once you reach that capacity—variable k in the graph—the marginal cost goes from zero to basically infinity.

In laymen terms, it’s telling us that at 4am when nobody is on the road, the cost—to society, to productivity levels, and so on—of adding each one additional driver is basically zero. But, as soon as you hit capacity, at say 830am, and traffic is at a standstill, the cost shoots way, way up!

So how do you solve this problem? Well, you price congestion. This invariably removes or forces drivers to other times of day and makes it so that demand for the road drops below the available supply. Then the road is able to function as it’s intended to. I don’t know about you, but this makes a ton of sense to me. What good are roads if they’re clogged with traffic?

What I’d like to do now is bring the discussion back to Toronto. For those of you with an interest in transit, you’re probably aware that Metrolinx has a “Big Move” transit and infrastructure plan that’s going to cost the region $2 billion a year to implement. I view this as investment in our region and so I think it’s absolutely the right move.

However, the billion dollar question is, where is the money going to come from? Earlier this year Metrolinx proposed 4 main revenue tools. They are:

- A 1% sales tax (estimated to raise $1.3 billion annually)
- A business parking levy (estimated to raise $350 million annually)
- A $0.05 fuel and gasoline tax (estimated to raise $330 million annually)
- And a 15% increase in development charges (estimated to raise $100 million annually)

What I would suggest is that there should be a road pricing plan in this list in addition to—or instead of—some of the items listed above. Taxes are just taxes. And they discourage consumption depending on the elasticity of the demand for those items.

However, I would argue that a well executed road pricing model should be considered not as a tax, but instead as an incredibly accurate way to price roads according to actual usage patterns and costs incurred. Think of it like time-of-use utility billing. Do you think of high-peak utility billing as a tax or as simply the price to use the service when demand is the highest?

The benefits of a road pricing system would be numerous:

- We’d get a consistent revenue stream for transit investment in the region (instead of having to rely on government hand outs)
- We’d be helping to decouple transit building from the political process (because Metrolinx would now make its own money)
- We’d eliminate traffic congestion (yes, it can be done)
- We’d increase productivity levels across the region (people will actually be able to get around)
And we’d be reducing our impact on the environment by encouraging alternate forms of transportation

This is an incredible list of benefits. However, I think one of the challenges with implementing electronic road pricing is that it’s often misunderstood. People just view it as a tax. Hopefully by looking at the economics behind it all, it has become clearer that it’s actually a bit more nuanced than that.

When most people think of brands, I suspect that they think of companies, products and services. But what about the brand of your city? As cities continue to compete for talent in the global economy, brand is becoming a hugely important differentiator.

I just stumbled upon the Anholt-GfK City Brands Index and here’s their 2013 ranking:

1. London
2. Sydney
3. Paris
4. New York
5. Rome
6. Washington D.C.
7. Los Angeles
8. Toronto
9. Vienna
10. Melbourne

The study looks at 6 key dimensions: presence, place, pre-requisites, people, pulse and potential.

What do you think of the above list?

Here’s a bit more information on how the index was prepared:

"The Anholt-GfK Roper City Brands Index measures the image of 50 cities based on more than 50 questions related to perceptions of their Presence, Place, Pre-requisite, People, Pulse and Potential.  For the 2013 study, a total of 5,144 interviews were conducted in Australia, Brazil, China, France, Germany, India, Russia, South Korea, the United Kingdom and the United States.  Adults age 18 or over who are online are interviewed in each country.  Using the most up-to-date online population parameters, the achieved sample in each country has been weighted to reflect key demographic characteristics including age, gender, and education of the online population in that country.  Fieldwork was conducted from May 8th to May 23rd, 2013."

Yesterday the Globe and Mail published an article titled, “Weakening rental picture latest condo market worry." At first glance, this title seems worrisome. Particularly since Toronto’s condo rental market was supposed to be so robust, with vacancy rates hovering around historic lows.

But as I read the article, I was reminded, once again, about how opaque the real estate marketplace is. To make this prediction, the research group quoted in the article mined craigslist postings. Granted, craigslist is probably the largest source for condo rental listings (even more so than MLS), but I don’t think it necessarily makes it a reliable source.

Craigslist is a messy marketplace. You have expired listings; brokers posting listings in the owner section; brokers posting fake listings for the purpose of lead generation; and so on. It seems to me that there could be a huge margin of error if you tried to rely on this data. So I’m not so sure I would put a lot of weight on a supposed 1.6% rental rate decline.

But what does worry me is how imperfect the real estate marketplace is. It’s incredibly hard to get good data and I think that this is bad for everybody involved in real estate. But network effects are a hard thing to overcome, which is why a messy and ugly marketplace such as craigslist can remain so dominant.