Daily insights for city builders, delivered every morning at 6 AM ET. I’m Brandon Donnelly — a Toronto-based real estate developer and founder of Globizen. I’ve been writing here since 2013.

Search results for: “road pricing”

  • The tragedy of the commons

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    In 1968, Garrett Hardin wrote an article where he coined the term: the tragedy of the commons. Hardin was an American ecologist who was obsessed and concerned with the prospect of human overpopulation.

    In his article, the term tragedy of the commons was used to describe a situation where individuals – all acting independently and in their own self-interest – actually end up behaving in a way that is detrimental to the larger group and that negatively impacts some sort of common resource.

    Just in case, here’s another definition via Investopedia:

    An economic problem in which every individual tries to reap the greatest benefit from a given resource. As the demand for the resource overwhelms the supply, every individual who consumes an additional unit directly harms others who can no longer enjoy the benefits. Generally, the resource of interest is easily available to all individuals.

    So what would be an example of a tragedy of the commons?

    You may not have thought of it in these terms, but I bet you that everybody reading this blog has experienced one.

    I will give you two examples.

    1. The first is that of electricity consumption. 

    In most condominiums, there are two types of ways that electricity gets billed and paid. Either the whole building gets one bill (master metering) or each individual resident gets a bill (submetering). 

    In the case of master mastering, each resident’s consumption isn’t tracked and so nobody knows who is consuming what. But in the case of submetering, each individual resident only pays for the electricity that they use.

    Not surprisingly, the data shows that submetering can cut electricity consumption by 10 to 30%. That’s because it creates a 1:1 relationship between usage and cost. There’s now a strong incentive to conserve.

    With master metering, there isn’t a 1:1 relationship between usage and cost. The additional burden/cost of consumption actually gets shared by everyone else in the building. And since each individual is looking to maximize their own benefit, they lose the incentive to conserve. As a whole, this makes the entire group worse off.

    2. The second example is that of congestion on public, un-tolled roads.

    In most cities, public roads are a resource that is “easily available to all individuals” (to use Investopedia’s terminology). They are basically free. The marginal cost of driving another kilometer to work on a road is basically nothing (other than a bit of gas and some time).

    What this does is create a situation where individuals – in their pursuit of maximum individual benefit – start to overload the road. Everybody just wants to get where they need to go and there’s no incentive to conserve the resource (i.e. the road). Once again, the result is that the entire group becomes worse off.

    That’s why building more road rarely/never works. You’re simply increasing a resource that is easily available to all individuals. What we should instead be doing is looking at submetering our roads (i.e. pricing our roads). It’s been proven time and time again to reduce road congestion basically overnight.

    I had never heard of the term tragedy of the commons before today, but I like it a lot. So the next time you’re stuck somewhere in traffic, you can now scream to yourself: What a tragedy of the commons!

  • How much should a ride on the Union Pearson Express cost?

    When I was in Chicago a few weekends ago, one of the things we did was take the train from Midway Airport to downtown. We were a large group, but since it was only $2.25 and we figured it would be easier and faster than contending with traffic, we decided to take it.

    Since it was their local transit service (as opposed to a dedicated airport rail line), the train came within a few minutes and it took us about 25 minutes to get to the Loop. It was a great experience. And I would take it again the next time I go to Chicago.

    I mention this because there’s been a lot of debate in Toronto recently about the potential ticket price for the new Union Pearson Express train to the airport. Some are suggesting that it could cost upwards of $30 for a one way ride, which would also take 25 minutes and would leave every 15 minutes.

    The concern is that at this price, the train will only serve the business community and the rich. And indeed, it’s a lot more than the $2.25 I paid when I landed in Chicago earlier this month. But at the same time the Union Pearson Express promises to offer a more refined travel experience than your regular old subway train. So how should it be priced?

    Pricing exercises are really interesting because, as David Fitzpatrick pointed out in a recent tweet, increasing the price of the ticket will lower ridership. And at a certain point, this will cause overall revenues to also decline (the loss in ridership stops being made up by the higher ticket price). So, in theory at least, there exists a magic, profit maximizing number.  

    Of course, profit may not be the only goal. One might also be interested in reducing the number of vehicles on the road, promoting sustainability, and generally providing people with a convenient way to get to and from the city’s biggest airport. And should this be case, then those factors also need to be worked into the pricing model.

    Now, I don’t know what that magic number should be off hand, but I do think we need to be clear on our goals as that decision is made.

    I personally believe that we underprice roads in this city, which is why we have such a supply and demand imbalance (i.e. gridlock). And so if we decide that rail travel should be a premium service, then I don’t think it’ll do much to correct that imbalance.

  • Closing the homeownership affordability gap

    Through TAS, I’m involved in an affordable homeownership seminar at Ryerson University. The goal of the semester is to develop a comprehensive policy document for how best to deliver affordable homeownership units in Ontario. 

    The students are still working on their final report, but I wanted share one thought that came to mind as I was reviewing the draft.

    As a first step, I think the question of affordability needs to begin with a broader look at the market rate housing market. Have we optimized for the delivery of new housing or are we operating in a state of perpetual supply deficits?

    The reason for this question is that—as I’ve written before—I subscribe to Edward Glaeser’s argument that easing housing regulation and increasing supply can go a long way to broadly improving housing affordability. It won’t make New York as affordable as suburban Houston (Glaeser says), but it will help to avoid some of the outrageous pricing that can occur in severely supply constrained markets like San Francisco.

    Once this has been addressed, it then comes down to deciding how you want to make up the shortfall. If you want to provide housing below its costs (the market rate), somebody is going to have to pay for the difference. However, if you’ve optimized around the market rate, it means that the required subsidies should be less than they otherwise would have been. This makes it more cost effective for governments, or whoever else is providing the subsidy.

    So my point is to not take the market conditions as a given when looking at affordability. Are there structural changes that could be made to improve affordability more broadly?

    There’s certainly no easy answer, but it’s an important discussion to be having. Let me know your thoughts in the comments below.

  • It turns out that the average rake at Priceline Group is even higher today, as they allow merchants to voluntarily bid up their rake for better placement in the network (you can see this in the table above). This is one of my favorite marketplace business model “tweaks.” You start with a low rake to get broad-based supplier adoption, and you add in a market-driven pricing dynamic that allows those suppliers who want more volume or exposure to pay more on an opt-in basis. This way no one leaves the network due to excessive fees, yet you end up with a higher average rake over time due to the competitive dynamic. And when prices go up due to bidding and competition, the suppliers blame their competition not the platform (part of the genius of the Google AdWords business model). This also allows you to extract more dollars from those suppliers who desire to spend more to promote themselves (without raising the tax on those that don’t).

    Bill Gurley