Thursday, July 9, 2009

Traffic, stickers and everyday economics

A standard introductory economics question goes like this:

Suppose there are two routes to work. One is a longer drive, but is never congested. Another route is always congested, and as more people take that route, the time to destination along that route increases rapidly. Which route should you take if you want to get to work more quickly?

The counter-intuitive answer is that both routes take the same amount of time, at least on average. To see why, think about how you would chose between the two routes. If you expect that an abundance of people will take the congested route, you recognize that it is faster to take the longer, less congested drive. If you expect that few people will take the congested route, that's your faster option -- so you take the short, congested drive.

If enough people go through this line of reasoning, the congestion on the short route increases just enough so that the two routes take the same amount of time. Because everyone is looking out for their own best interest and no one can deviate from their driving plan to get to work faster, this is what economists call an equilibrium.

Economists usually think about equilibrium in terms of prices and markets, but equilibria work just as well for traffic, lines, congestion and beliefs about marriage opportunities. Equilibrium analysis is a powerful tool, even when there are no apparent prices. To illustrate this point, consider a couple of everyday examples.

Online sales of Chicago City Stickers. I recently read this article about online sales of Chicago City Stickers, which are required for parking in Chicago if you have an Illinois license plate. The sticker sales have increased by more than 50 percent over last year on account of a big advertising push and the fact that the Clerk's office "opened up online sales to customers two weeks before in-person sales began." The Clerk's office expects this year's online sales to be double last year's.

Let's think about the problem of obtaining a Chicago sticker using equilibrium economics:

Suppose there are two ways to obtain a Chicago City Sticker. One requires figuring out some online system, trusting that it will work and waiting a week for the sticker to arrive in the mail. The other method requires waiting in line, which takes longer if more people wait in line for the sticker. What's the best way to get your Chicago City Sticker?

This is just the traffic problem in a different setting. Using equilibrium economics, it does not matter which way you choose to get your sticker, you'll end up spending the same amount of time .... on average.

The problem is a little more complicated because some people are relatively computer savvy, whereas others are not. This heterogeneity of people using the system does not complicate things too much. If you're computer savvy, you're best option is to order online. If you're clunky with computers (or don't have one), you wait in line.

But, our equilibrium story still has a point: A person with the average computer skills will be just indifferent between ordering online or waiting in line. From this observation, we can see just how efficient (or inefficient) the online ordering system is for the average patron of the Clerk's office.

According to the article, the lines were still quite long at the Department of Revenue office, taking 60 to 90 minutes. In equilibrium, that means the average Chicagoan expects an online hassle equivalent to just over an hour of waiting in line. If the online system causes an average Chicagoan 60 to 90 minutes of trouble, either (a) the online system could still use some improvements, or (b) the average Chicagoan needs a lesson in using computers.

That's something that requires some reading between the lines. Here's another example of equilibrium economics:

Choosing a theme for an economics blog. I have been asked by several readers why my blog is devoted to everyday economics, rather than the economic crisis -- which is, of course, unprecedented. My answer can be phrased in terms of the traffic problem.

Suppose you are writing a blog that you want a bunch of people to read. You can write on a topic for which there is a small audience and little competition. Or, you can write what everyone wants to read, but there are also many more people who write that material. What's the best way to write to a larger audience?

Selecting a topic is a traffic problem. If everyone writes on the popular topic, the average writer does not get much of an audience, and it's better to pick the niche topic. In equilibrium, someone who is average at writing on the economic crisis and average at writing on everyday economics should be indifferent between the two topics. Otherwise, writers rationally change what they write to attract more readers.

Just as with the city stickers, different people should make different choices. Someone who is good at crisis writing, but inept at everyday economics should write on the crisis. Someone who is baffled by the crisis, but loves how economics pervades our lives should write on everyday economics. I am definitely in the second group.

I look at the world through economics-colored glasses and that gives me a deeper appreciation for things that happen in my life. More importantly, I think that most people like to ponder everyday questions. Apart from being a useful tool for sorting through the macroeconomy, economics is useful for these everyday questions. This second use of economics does not get enough attention. I write this blog to call attention to everyday economics and to show the world that economics can be fun.

If my writing gives you something to discuss at the dinner table or gives you a new perspective on what happens in your life, that means the world to me. Please keep coming back, and spread the word about economics: it's for life too!

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