Of course, all these questions depend on one’s preferences. Each one of us have [...]]]> Most of consumer’s theory in Economics is based on – guess what – consumption. How do people make their consumption decisions? What if the price of one good increases or if suddenly you have more income or an increase in your salary?

Of course, all these questions depend on one’s preferences. Each one of us have preferences – I for instance HATE mayonnaise, but love Spinach Pie and, say, Peanut Butter. But depending on the “levels” of my preferences I will decide how to spend my money among Spinach Pies, Peanut Butter and all the other goods. Of course that this decision depends on how much money you have available. If you had infinite money, you could buy all of everything you like, what would you care? But since this is not the case – at least for me (and if it is for you, maybe you might consider contributing to my blog with some small donation) – you have to decide what share of your budget goes to every good – and one of those “goods” might be tomorrow’s consumption, meaning: savings.

In any case, many policies are based in this simple model. If you want to create an incentive to consume more of an specific good (such as education for example) you just reduce the price of that good. Consumer’s theory shows how – in most cases – reducing prices will make you consume more of that good and less of others – proportionally.

But one thing that economist almost never talk about is that another way to generate incentives to induce an specific outcome is not to change prices or increase the wealth of the individual, but inducing a change in one’s preferences. For instance, if we convince people that sending their children to primary education is very important, then we would not see policies such as hot meals or a daily glass of milk in school – which are meant to create incentives by reducing the costs of school for your children.

But why don’t economist talk about this often? Well, it is because in real life, we don’t know – and we cannot know – what are the preferences of individuals. Therefore we don’t know how to change them. However, when creating and effective policy is out of our hands or we don’t have the political power to do so, people engage in activities that are aimed to change the preferences of people. This is what information campaigns are all about.

For example, vegetarians in the USA don’t have the political power to impose taxes on meat or poultry so that people will consume less of those. But they can engage in demonstrations and information campaigns that are intended to change the preferences of people, such as the one I saw in Boston a couple of weeks ago.

Protest Outside McDonald's

Some vegetarian protesters gathered outside McDonald’s to try to convince people not to eat there. This is clearly their best bet to reduce consumer’s demand for meat, because they cannot close the establishment or increase prices. Both measures would probably increase the cost of McDonald’s hamburgers: the second one by increasing prices directly and the first one by increasing searching costs of looking for another establishment with meat (imagine that in a small city in India should be very hard to find an restaurant nearby that sells a steak, so it will involve more time to look for it, increasing the costs of meat indirectly). However, as I said, they cannot promote these policies, so they have to try to change people’s preferences by standing there and handing out pamphlets with information.

Another example of this is Al Gore. He cannot clearly impose environmental laws in all countries in the world. So aside from lobbying for laws that protect the environment worldwide, he also tries to engage with “final consumers” by convincing them that there are some activities we could be doing to help the environment. He is clearly trying to affect our preferences so that we will invest part of our time in environmental activities (since time is costly, deciding to what we dedicate our time it has costs involved, so we also do it according to our preferences). A previous related post about recycling and why people choose most of the time not to invest their time in recycling activities is here.

Changing preferences is possible, but we don’t know how effective it would be. Think about smoking. The real decrease in smoking in the USA didn’t come after all the information campaigns against smoking, but after the bans for smoking in public closed areas. This last “policy” just increased the cost of smoking, therefore, reducing demand for it.

The reason of the  “inefficiency” of changing preferences is that we don’t know how to measure preferences, therefore, we don’t know how to change them – and if indeed they changed. However, aside from being costly and unmeasurable, it is still a very used method. The world of marketing is intended to change preferences, by trying to convince people that one particular brand is better, even though the product is the same across all brands. Information campaigns are aimed to do the same thing.

In short, next time you see an add or any information campaign, be careful, they are trying to change your preferences!

My loyal reader with the nickname “Anonymous” (I still don’t know if he choose that nickname or he [...]]]>

Some of the readers of my previous post about tolls efficiency have commented about a new policy in the I-95 Highway in Miami area that have more or less some similarities with my ideas about efficiency in tolls.

My loyal reader with the nickname “Anonymous” (I still don’t know if he choose that nickname or he just lack of nicknames), have commented about this. I publish his comments:

Your main point, if I understand correctly, is that there should be programs that permit people to pay MORE and get through traffic quicker. There are, however, programs that allow people to pay LESS…and get through traffic quicker. E-Z Pass (in NY, NJ, PA)..Sunpass in Florida, among others. There is a time incentive and an economic incentive (not to mention an environmental incentive since)

Another new program, recently implemented in Florida, does precisely what you describe. The 95 Express Program provides 2 lanes over a 7 mile, highly congested are of the freeway, where motorists are guaranteed an average speed of at least 50 MPH. To use these lanes, drivers can either pay a toll (which varies depending on traffic), buy and register a hybrid vehicle, or register a 3+ person carpool. While the details of this program are worth discussing (there are certain incentives to cheat) in general this does what you describe…while also encouraging people to carpool more or buy more eco-friendly cars.

So, first of all, thank you Anonymous for your comments and for your being such a loyal reader. I actually looked at some of the details of this project right at the 95 Express Website and it certainly looks interesting. However, there are some important questions to raise. For instance, the policy guarantees for those who get into the 95 express lanes that their average speed will be at least 50 MPH, and that those who are exempt of paying after registering: hybrids and 3+ car pools (motorcycles and public transportation are exempt from paying but don’t have to register), should take out their Sunpass (so that they won’t be charged automatically) and they should have a sticker given by the authorities to identify their car as “exempted from pay”. However, as soon as they enter the 95 Express the system won’t detect the Sunpass and will send an alert to the police or – as they describe in the website: “Drivers without transponders will have their license plates photographed and receive an Unpaid Toll Notice (UTN) for failing to pay a toll. Failure to resolve the UTN will result in a Uniform Traffic Citation (UTC)”.

So the question that arises is, is the police able to see every car that didn’t pay if (1) they have a sticker? and (2) if they are hybrid and/or they are a carpool of 3+ individuals? All these at 50 MPH. It sounds a bit difficult, doesn’t it? If they stop every car that goes by without paying, and it happens that everything is OK with that car, so he wasted 5 or 10 minutes of his time because of this. It doesn’t sound terrible. But how many policemen you need in the roads? Or maybe they will stop cars randomly and do an aleatory check?

So, my question is, why instead of using those cameras that they describe in the website to picture the plates, they don’t use the cameras to photograph the plate of every car and use another technology to determine how many people are in the car (maybe x-rays or another camera), and then send them the bill by mail. Through the plate they can now if the car was registered as a car pool, if it is hybrid or otherwise he will have to pay the toll… and forget about the Sunpass for this 95 Express Lane.

Thank you Anonymous for your insights!

Together with my friend MR we drove from Providence to Philadelphia Wednesday night, before thanksgiving began. We hardly [...]]]> Thanksgiving weekend is one of the most (if not the one) busiest travel weekend in the year in the United States. This is the main lesson I learned during the first Thanksgiving ever I spent in this country.

Together with my friend MR we drove from Providence to Philadelphia Wednesday night, before thanksgiving began. We hardly found any traffic in our way down there, and we made very good time: around 5 hours. We supposed that if we drive back on Sunday afternoon, we would make at least 10 hours because of the traffic. So Saturday was the best option. Since I wanted to get in time to catch the last train from Providence to Boston at 10pm we decided to leave around 3:30pm.

Everything was fine during the first hour. We went through New Jersey, and even made a stop to grab something to eat. However, after that stop, there was a huge traffic jam waiting for us around New York City. The traffic was because of the George Washington Bridge Toll.

Saturday Nights in New Jersey Turnpike

The toll costs $8. This is very costly for a toll. Of course, the high price should be correlated with the incentive the authorities want to create to reduce traffic in that area. That is the main idea of the expensive tolls to get into Manhattan as well.

However, they can do much better. We spent almost two hours in traffic. Two hours. I would have pay more than $8 to skip the traffic. I guess that the vast majority of the people on the road were willing to do the same. My friend told me (even before I talked about the cost of time in economic models) that his hourly wage is much more than the cost of the toll, and that he was willing to pay more to skip the traffic – even $50!

People’s time cost money – either for unemployed people (say, the minimum wage). And this is the main variable that makes people decide between many factors that have to do with time: such as the decision between labor and leisure, or fertility decisions (children cost time and money).

So, the toll system there was totally inefficient – mainly because of two reasons:
1) People were willing to pay more than $8 to avoid the traffic.
2) The excess of carbon dioxide that the cars in the traffic were emitting could have been minimized in the absence of that toll, minimizing as well the costs of the externalities of pollution.

Now, how can this be done? Israel has an interesting system of tolls in Itzhak Rabin Highway (Highway 6). There are cameras located at the entrances and exits to the highway which take pictures of the license plate of your car. Then the pictures are processed and they send you the bill by mail with the cost depending on how long was your ride in the highway, what kind of car you have (sedan or truck) and how many individuals were inside the car. The cost can be around $10 for one ride in average.

People decide to go into the highway depending on factors such as how much time they will save (the highway crosses Israel in a straight line, as opposed to other highways), the price of gasoline (you may save gasoline by using that highway), and of course the traffic.

As opposed to Highway 6 in Israel, in the George Washington Birdge toll you have to pay not only cash, but with your wasted time as well, instead of having a more intelligent system. It is a shame that the State of NY could have triplicated the money they did in tolls during this weekend if they would have send bills by mail asking for even $15.

Think about the time you spend in traffic, and how much money will you be willing to pay not to be in traffic during your whole lifetime. I assure you that your answer will depend on your (expected) hourly wage multiplied by the amount of time you expect to be in traffic. I guess that in a city such as Caracas, people would pay thousands of dollars for assuring themselves a traffic-free city. This money could be used to create more efficient roads, and probably people would be better-off… But yes, I know, this is a crazy idea.

By the way, I didn’t catch the last train on time, and I spent the night in Providence. We should have gone back the day after.