Salience and Subways
I use the Washington subway—the Metro—to commute from my home in the D.C. suburbs to my downtown office. The system has just approved a $109 million fare increase. But, in a tour de force of obfuscation, it has designed the hike so that few riders will have any idea what a given trip will cost.
This is, in part, a result of Metro’s effort to tie fares to demand. Thus, folks who ride at rush hour or use the busiest stations will pay more than those who do not. Economists love this idea.
But Metro has taken to slicing its pricing system like the local deli guy carves corned beef. There are regular fares (Metro calls them “reduced”), rush hour fares (Metro calls them “regular”), peak of the peak fares, surcharges for traveling through certain stations, and fare differentials for those who pay with cash and those who use those plastic SmarTrip cards. Best I can tell, this means I could pay as little as $2.15 or as much as $4.20 for my ride to work.
Someone who makes my commute each day could face an annual fare increase of more than $1,000. But because most of us pay with those plastic cards, which we refill regularly with a credit card, Metro is betting we won’t fully recognize this painfully steep hike.
Unlike demand pricing, economists don’t like this at all. In general, it is better that we know what we pay for something. This consumer awareness of price (salience in econo-speak) helps us buy smarter. But if we don’t know the real cost of something, we are likely to overpay. See, for example, health care.
A couple of years ago, MIT economist Amy Finkelstein looked at those highway E-Z passes, where drivers have their tolls deducted from a pre-paid card as they roll through toll booths. Amy’s conclusion: the levies are 20 percent to 40 percent higher than they'd be if people were still throwing quarters into baskets. Sweet, if you are the highway authority. Not so so much if you are a driver who worries more about cost than time.
It has been obvious to us regular riders that Metro is desperately short of money. While it was built with federal tax dollars (thank you all for that, btw) Metro relies heavily on fares to meet its operating budget. Remarkably, Metro has no other dedicated funding source so it must go, tin cup in hand, to local jurisdictions for help paying its bills. The entirely unsurprising result: Metro is falling apart.
In town meetings, riders overwhelmingly preferred fare hikes to service cuts. And making people pay more when trains are most crowded probably makes sense. It may encourage some commuters to adjust hours, thus reducing pressure on Metro to buy more equipment and hire more staff to meet peak demand. But while opaque fares may generate more revenue, the transit system may lose the benefit of congestion pricing if riders don't know how much they are paying.
Tax policymakers would do well to keep this all in mind, especially as they think about levies such as a Value Added Tax. In the meantime, I suppose somebody will write a smart phone app to help me figure out my Metro fare.