Too expensive to meter: the influence of transaction costs in transportation and communication

David Levinson, Andrew Odlyzko

Abstract

Technology appears to be making fine-scale charging (as in tolls on roads that depend on time of day or even on current and anticipated levels of congestion) increasingly feasible. Such charging also appears to be increasingly desirable, as traffic on roads continues to grow and costs and public opposition limit new construction. Similar incentives towards fine-scale charging also appear to be operating in communications and other areas, such as electricity usage. Standard economic theory supports such measures and technology is being developed and deployed to implement them. But their spread is not very rapid and their prospects for the future are uncertain. This paper presents a collection of sketches, ranging from ancient history to very recent developments, that illustrate the costs that charging imposes. Some of those costs are explicit (in terms of the monetary costs to users and the costs of implementing the charging mechanisms). Others are implicit, such as the time or the mental processing costs of users. These argue that the case for fine-scale charging is not unambiguous and that in many cases such charging may lead to undesirable outcomes.

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Footnotes

  • One contribution of 16 to a Discussion Meeting Issue ‘Networks: modelling and control’.

  • Lowered collection costs is one reason to rely on the honour system with enforcement and a second reason might be faster boarding times. If, as is typical with a bus, each passenger pays on boarding a light railway vehicle, the boarding time with payment is much higher. Alternative station arrangements could resolve this to some degree, which would then require more space at the station to establish a prepay and post-pay zone.

  • Some smaller Internet service providers had offered flat rates earlier, but they were not a serious factor in the market, and so it was only the AT&T move that forced AOL to respond.

  • Interestingly, AT&T WorldNet customers did not increase their usage much when moving to flat rates, as they were interested in other activities than AOL subscribers (see Evslin 2005) and simply ended up paying extra money for the freedom from mental transaction costs that metered rates inflicted.

  • Increased cellphone usage may have resulted in more traffic crashes. Eby & Vivoda (2006) review the literature, and cellphones are blamed for 1.5–5% of distraction-related crashes.

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