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John Cochrane on surge pricing, economic freedom and the sad paradox of free markets…. – Publications – AEI

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AEI John Cochrane on surge pricing, economic freedom and the sad paradox of free markets…. John Cochrane on The Grumpy Economist blog offers some insightful comments about the economics of surge pricing and free market solutions and economic freedom in general in a post titled  “The hard road of free markets” (my emphasis): But perhaps people just don’t understand the basics of how markets work. Evidence for this proposition comes from the Washington Post article “Upset about the I-66 tolls? These Virginia lawmakers are with you.” I-66 is a new toll road in the Virginias suburbs of DC with full real time congestion pricing. This idea is about a Week 2 quiz in Economics 101. If you have a real-time congestion price on a road, calibrated to keep traffic at 55 mph, then either you make a huge

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John Cochrane on surge pricing, economic freedom and the sad paradox of free markets….

John Cochrane on The Grumpy Economist blog offers some insightful comments about the economics of surge pricing and free market solutions and economic freedom in general in a post titled  “The hard road of free markets” (my emphasis):

But perhaps people just don’t understand the basics of how markets work. Evidence for this proposition comes from the Washington Post article “Upset about the I-66 tolls? These Virginia lawmakers are with you.”

I-66 is a new toll road in the Virginias suburbs of DC with full real time congestion pricing. This idea is about a Week 2 quiz in Economics 101. If you have a real-time congestion price on a road, calibrated to keep traffic at 55 mph, then either you make a huge amount of money to pay for roads and underwater pensions, or you clear up traffic forever. Win-win. The basic economic principle is, lines for free stuff are inefficient. Yet,

Several Virginia lawmakers are calling on the state to suspend tolls on Interstate 66, condemning this week’s variable tolls that hit as high as $40 as “outrageous” and “unacceptable.”

The high tolls almost immediately sparked outage on social media and drew national attention. Drivers took to Twitter to condemn the high rates with the hashtag #highwayrobbery.

“The tolls on I-66 are outrageous,” Sen. Jennifer Wexton (D-Loudoun) tweeted Tuesday. “$30+ tolls are unfair, especially for those of us with limited east-west travel options.”

Earlier this week, Del. Timothy D. Hugo (R-Fairfax), the chairman of the House Republican Caucus, called on his colleagues to immediately “come together to craft a realistic public policy solution that helps lower the costs of commuting for single-occupancy vehicles on I-66.”

I wonder what the solution will be. Magic? Building more highways? With what money? You pay with tolls or you pay with taxes.

Republican members of the Northern Virginia Transportation Commission will introduce a resolution calling on state officials to “lower, cap and reconfigure” the tolls and restore the previous rush-hour periods, eliminating the 90-minute expansions of High Occupancy Vehicle (HOV) restrictions during mornings and evenings.

It does not occur to anyone that you’re really not paying tolls to the government. You are paying your fellow drivers to stay home, carpool, come later, so that they will get out of your way and let you sail to work.

The reaction to Uber surge pricing is a similar test. Economists love it. You mean rather than sit in the rain and wait, I can pay more, compensate someone else for waiting, encourage a driver to skip dinner, and take me where I want to go, now? I’m in. Or, I can save some money and go later. Everyone else hates it. And gets cities to ban it. And we go back to waiting.

The fundamental reason so many markets are not free, and so dysfunctional, is that the voters of our democracy don’t really want freedom. Freedom will come when we want it, when we insist on it, when the average voter sees a free market solution rather than endless controls as the answer to real world problems. The sad paradox of free markets is that free markets don’t need people to understand them to work. But democracy does require voters to understand how things work.

MP: In addition to the fact that free markets don’t need people to understand them to work, here’s another advantage of free markets: they generally don’t require enforcement mechanisms for them to work. For example, when the government imposes price controls in the form of minimum wage laws, ticket scalping laws, rent controls, anti-price gouging laws, anti-surge pricing laws, etc. those artificially-imposed prices require public resources to be invested in enforcement and adjudication. In contrast, market prices/wages/rents for unskilled workers, concert tickets, apartments, scarce goods following a natural disaster, and services in period of high demand require no costly, bureaucratic enforcement mechanisms.

John Cochrane on surge pricing, economic freedom and the sad paradox of free markets….
Mark Perry

Mark Perry
Mark J. Perry is concurrently a scholar at AEI and a professor of economics and finance at the University of Michigan’s Flint campus. He is best known as the creator and editor of the popular economics blog Carpe Diem. At AEI, Perry writes about economic and financial issues for American.com and the AEIdeas blog.

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