Using the price mechanism to boost allocative efficiency: car parking charges

The price mechanism should help the economy to allocate resources more efficiently. Scarcity drives up prices, sending a signal to the economy – usually giving firms an incentive to produce more, and households the motivation to ration their consumption.Offering free parking sounds like a terrific idea, until you think of some of the possible consequences.

Many towns have ample space and parking is never a serious issue, so perhaps there’s no point in charging users. Yet in urban areas, a shortage of parking causes real problems. According to The Economist, congestion is made worse. In some cities, as much as a third of traffic consists of people searching for a space to park.

In one part of Washington, DC, the problem is immediately apparent. The streets are clogged and drivers circle, looking for spaces to come up. Residents pay just $35 a year for a street-parking permit, but since demand outstrips spots, finding a space can be fiendishly difficult. Time-strapped commuters often don’t use their cars for fear of being unable to park when they return home. The system is clogged up.

So improved use of the price mechanism could tackle several problems at once. Higher charges could force motorists to pay the social costs (negative externalities) associated with their search for car parking spaces. The funds raised could compensate society in other ways, for instance by using the revenue to contribute towards public transport services.

More ambitious schemes, like one planned for San Francisco, would measure demand for parking and adjusting the cost accordingly. The scheme uses sensors to estimate whether spaces are in use or not. Prices now vary according to the time of day, and are adjusted upwards or downwards each month to target particular occupancy levels. The idea is to use the price mechanism to send signals and incentives to motorists, so that a scarce resource (parking spaces) is allocated more efficiently. You could imagine a future version of the scheme, so that when there are few places left, motorists would see higher charges and maybe travel another day, or use public transport. Plenty of spaces would send charges down, encouraging people to take advantage and perhaps schedule an unplanned shopping trip. A study found that this helped to reduce the amount of time drivers spent looking for a spot by 43%. Mobile apps can help drivers find cheap spaces.

Convincing motorists to pay according to road use has a long and troubled history. Road pricing is often offered as a solution to traffic congestion, but it seems to be an idea that never quite arrives. Perhaps motorists are right to be suspicious about what they see as new charges. But equally, they might be reminded that in 2013 the government in Washington, DC issued 1.7m parking-violation tickets, taking some $80m in fines. If it charged for more of its spaces, perhaps it could get by with issuing fewer tickets.

A similar blog asks if variable electricity prices that adjust to the level of demand could help allocate that resource more efficiently. And the idea of a rental market for car parking spaces isn’t new, either.