Friday, July 06, 2007

Sunday dollars+sense: Why the cashless tunnel costs

If you are in Sydney these school holidays, watch out for the harbour tunnel.

It’ll cost you money. But unless you have an e-tag or similar device you won’t be able to pay it.

From today the tunnel will be cashless, as are a number of other toll roads in Sydney and Melbourne already.

It’s inconvenient if you don’t have a tag, and it deprives you of your privacy. Although technically it would be easy to sell pre-paid tags that didn’t add your name to a database every time you used the road, it hasn’t been done.

And it’ll cost you more. Hear me out...

I don’t mean that the price of using the harbour tunnel will go up as soon as it becomes cashless. I do mean that it is more likely to go up some time after it becomes cashless.

An economist named Amy Finkelstein from the Massachusetts Institute of Technology has just examined 50 years of toll data from more than 100 toll roads in 22 different US states.

She finds that after a decade or so of using tags a toll road will charge around 30 per cent more than will an otherwise similar road that doesn’t use them.

Her theory is that we don’t pay as much attention to what we are being charged when we don’t pay cash, or at least we don’t pay as much attention at the time we use the road, so the price bugs us less.

Being an economist she has a fancy name for the concept – “salience”.

She also finds that are more willing to make trips when we don’t’ have to find the cash, even where the tolls are higher. As she puts it – we experience a decline in the short-run price elasticity of driving.

It’s a concept other suppliers already know about.

My mobile phone company sends me bills electronically, which I never read, and takes the money straight out of my bank. Amy Finkelstein has got me thinking that they’re doing it as much for themselves as for me.

And then there’s the government itself. I pay PAYE tax. I never notice it, which is how the government wants it. (Except when it comes to this month’s tax cut. I won’t notice that either.)

And there’s the GST. It’s illegal to display a sign indicating the before and after tax price.

I am getting an idea as to why.

HT: Joshua Gans

Amy Finkelstein, E-ZTax: Tax Salience and Tax Rates. MIT and NBER. February 2007