Wednesday, January 10, 2007

Regulation vs Freedom: the parking industry

Warning : Long Post !
After recent debates with colleagues over how parking spots should be allocated, I thought I'd summarize the debate held in this post.

On one side of the debate, are people who argue for the status quo:
  • A situation where each local council is the planning authority and state governments are the owners of the roads.
  • Local councils decide on where to place parking signs to indicate the restrictions on use of a particular parking spot.
  • If a parking place has no sign at all, then it is by default an "unlimited" parking space. It is free for all to use, and has no time limit. These constitute the vast majority of parking spots in residential areas.
  • Local councils hire an army of parking inspectors to monitor, patrol and enforce the parking restrictions. Inspectors have the power to distribute on-the-spot fines and penalties to motorists.
  • Residents who live in inner city areas, especially near busy commercial strips where parking is scarce, can apply to council for a local permit, allowing them to park in the allocated permit zones.
  • Parking meters (several thousand dollars each) can be installed in commercial districts so that motorists can pay a form of rent for the time used in that space. Motorists can only pay these with small change in the form of coins.
  • Outside shops and warehouses, there are often designated "loading zones" for commercial couriers/vans/trucks to collect and drop off items, with a 15min or 30min time limit.
I put forward many reasons why the above approach has been wasteful, inefficient, poor at allocating parking spaces, costly, hard to enforce and overly complex. But lets ignore the results for a moment, and look at it from a theoretical point of view. Despite whatever amount of effort, study, consideration and planning a government will put into these measures, they end up allocating the parking spaces in a way that is worse than if they didn't exist at all.

The benchmark for saying the allocation is better or worse ? Well, its people's levels of happiness and satisfaction with the results.

What is the actual reason behind these controls and regulations in the first place ? I don't think there is any debate about it. It is purely to allocate parking spaces as effectively as possible. i.e to give the spaces to those who most demand (or need or require or want) them.

Lets look at the underlying economics and the key definitions. Parking spaces are a commodity (land) in demand by motorists, and there is a limited and almost fixed supply.

I say the supply is almost fixed, because it is quite possible for an entrepreneur to build car parks on private property and increase the supply of parking spaces. On the other side of the equation, you have the forces of market demand. The definition of this is really the aggregate of all the people in the economy who place *some* value on parking spaces. Don't be mistaken for thinking that a person's demand is something simplistic and easy for a government body to estimate and thus manage. A person's individual valuation is based on a myriad of complex factors which they themselves only know about:
  • The location of their destination
  • What time of day they would like to park their vehicle
  • For what duration they expect to park their vehicle
  • How often they need to park near that destination (i.e daily for places of employment or homes)
  • How safe and visible the parking place appears to be for them and their car.
  • How much distance they are prepared to walk from the parking space to their destination, which itself can depend on:
    • Weather conditions (rain = preference to walk less distance)
    • How much time they have to spare.
    • Whether they need to carry items (heavy items = preference to walk less distance)
    • Their physical condition, or any disabilities that may hinder them
    • Whether they enjoy the exercise and act of walking itself
Now given how complex an individual's valuation is, imagine the complexity of accurately estimating an entire population's valuation and demands are. It cannot be done at all, by no genius, mastermind, politician, bureaucrat, traffic engineer or central planner. So for a central authority to be responsible for the regulation and allocation of spaces is going to be an abysmal failure right from the word go.

A further problem with government control is that even if the outcomes are abysmal, suboptimal, wasteful and inefficient, there exists no mechanism at all to end or remedy the status quo. The only way, is for an overwhelming majority of the public and the media to lobby a government to change the situation. Otherwise, bureaucrats and ministers will continue to assert that the regulations are in place to improve the situation and that they are vitally needed to address the issue of scarce parking places.

I'm not debating that parking places aren't scarce. But to hear a central planner claim that he is the only mechanism by which they can effectively get allocated is wrong. Especially given that centuries of human economic development under free markets have shown the exact opposite.

In the parking industry, we do have the market based option of allowing entrepreneurs to perform assessments, evaluate the market, look at an area and decide if a car park could be profitable and what amount consumers would be willing to pay per space per hour, and at what times of day it would be most in demand. They would weigh these up against the costs of building a car park, the costs of hiring an attendant, the costs of security and lighting and electricity, and then ultimately decide if the project should go ahead or not. The entrepreneur should be applauded because he is reacting to the information set available, and is driven by real market forces. Of course, his motives would be driven by profit, but profit cannot be captured unless there is a strong demand for a limited or scarce resource. Profit is indeed a good thing, because it justifies the very existence of an enterprise. It it wasn't profitable, then it shows that it was a bad decision, a bad venture, and a poor allocation of resources. Under the free market, everybody seems to be smart enough to avoid building car parks in country towns. When entrepreneurs and investors have to place their own money on the line, they don't throw it into risky and unprofitable ventures. If they do, they go broke instantly which is a good thing, because it shows how unprofitable and unnecessary that venture was.

Constructing a car park in a country town is a poor allocation of resources. The market judges it to be providing something that is not so scarce, and barely be willing to pay for it. Building a car park in downtown San Francisco, even at a cost of several million dollars, could be an excellent allocation of resources, as parking spaces are extremely scarce relative to the thousands of commuters and automobiles there who are willing to pay upwards of $50/day to park a vehicle.

So there exists a free market mechanism for allocating spaces. People often complain that its hard to find a spot in a particular low density suburb or shopping district, but this is often superficial, because they wouldn't be willing to pay $5/hr to park their car.

*IF* they, along with enough people were that willing, then entrepreneurs would be building a 5 storey car park so they could charge such an amount. The market forces in downtown Tokyo or London actually drive prices upward as populations and wealth grow, and the demand to work or shop downtown booms. We've seen property prices boom in western cities, yet people don't have the idiotic knee jerk reaction of suggesting that government planners should allocate land for homes and offices and shops. Could you imagine living like China does now, where you cannot own a property, and there is a 50 year limit of allocating homes to people, after which you are evicted ? It creates a lot of misery and unhappiness.

So whats wrong with private property for parking spaces ? Whats wrong with people following their rational valuations and purchasing land or paying rent on spaces that they need ? Whats wrong with the owners of parking spaces deciding on who may use it, or when they may use it, or how they can ask people to pay to park there ?

At this point in the debate, I have been accused of assuming that everybody would act and think like me. I strongly disagree, because I take a position where I admit that I cannot possibly know how other people think or act, or what kind of valuation they place on certain things. I was told that other people are often stupid, ignorant, irrational, make bad decisions, selfish, and that I was trying to overlook that.

But the only assumption I make is that they are rational in the economic sense, and that human action is purposeful and done according to that person's own personal and unique valuations and subjective preferences. By exposing a person to the consequences of their actions, they suffer the risks and uncertainties of that action, and the likely rewards or damages that accompany them, and that is a valuable mechanism in a free society. People learn things and develop their decision making process over time.

If a stupid person goes to the casino to earn a living, they are faced with the consequences - a high chance of bankruptcy. If a wise person invests in shares and superannuation over a long period, they have a high chance of financial security and wealth. If a stupid person eats cheeseburgers and coke, they will have cholesterol problems sooner or later. If a smart person eats healthy and exercises, they have a better chance of a healthy life. In todays world, there are a range of doctors, financial advisers, books, journals, newspapers, internet and mass media which help people be informed of these matters.

People still take harmful substances, young kids drive like maniacs, people gamble heaps, some people smoke heaps etc etc. Because any reasonably informed and intelligent person sees these as scary, stupid, risky and dangerous actions, they have no problem saying "government should ban it". This is where a huge rift emerges between the 2 sides of the debate. My opponents think they know better, think that they should have some control over all other people in society, and think that simply by a government making a harmful or unpopular action illegal, that all people are suddenly well informed of the dangers, and have learnt, and will stop the harmful action.

But alas, even today, children under 18 drink, smoke, have sex. Young adults take drugs. Young men are known to speed and drive aggressively. Even grown grandparents often gamble. So now, on top of doing something harmful to themselves, they are breaking the law. So clearly, the regulation didn't work, didn't educate, and didn't even improve the situation. Now in addition to being faced with the health costs of smoking, or drugs or whatever, the individual is faced with a threat of police violence, confiscation of their property and money (fines) and even an end to their freedom of movement (prison) simply because they did something stupid and harmful to themselves.

I believe victimless crimes such as these should not be crimes at all.

Lets get something straight though. Government should be focusing on enforcing and preventing crimes that do have victims. Acts of violence, theft, manslaughter, sexual abuse, assault and battery. These are capital crimes and should be the sole focus of law enforcement authorities.
Enforcing drug laws, road laws, smoking laws, alcohol laws etc are extremely costly and take up to half of the police resources.

Anyway, back to the issue of parking.

Of course, fans of government regulation will continue to provide dozens of examples of stupid people doing stupid things to try and convince me that my opinions are based on some false assumption where everybody is an intelligent and informed person. If people don't know better, then they believe that someone (the nanny state) has to immediately step in and make all the harmful actions illegal.

They say that without parking signs, people would be selfish and not "share" the parking space around. I counter that by saying that even with parking signs, people don't simply go home when the time limit lapses, but rather, they either receive a penalty notice from a parking inspector, or they waste time and petrol by returning to their car in time to drive around the area and find a different spot. People don't keep their cars in busy shopping or work areas for no reason. They arrived their for a certain reason which is known only to them. Whether it be a meal at a restaurant, a walk, shopping, groceries or even an 8 hour work shift, that is their own information.

The other flip-side of the coin is the scenario where I've seen huge public car parks and streets at night that are mostly empty of parked cars (low demand) but yet the parking meters still apply to regulate the allocation. How foolish indeed, when government bureaucrats claim the meters were needed to distribute and allocate the "scarce" parking places. But late at night, these resources are no longer scarce relative to demand, and a private business wouldn't even bother trying to charge rent on such a parking spot. The cost of hiring a night attendant exceeds the amount of money the business would earn, so they'd just leave it open. Of course with private multi-level car parks, they simply close the gate. But street parking and public car parks could easily be unregulated and free at night, even if private owned.

Government regulation is not sympathetic or responsive to individual customers. Under a free market, customers can express their disapproval of parking fees or restrictions by voting with their money. They can abstain and stop parking at a place. The business needs revenue, and it has to adapt by lowering prices or providing a better service than its competitors.

De-regulation, privatization and freedom would not be a utopia. I am not going to make such wild claims. How can everybody be happy when supply is scarce ?

  • If there are a limited number of parking spaces in downtown London, and millions of people would love to park their cars there for different purposes and different reasons, as they follow their own preferences. When you have a scarce resource and high demand, you gotta let the market allocate it. If you held an auction for a parking space outside a department store downtown, people would bid ferociously for it, perhaps paying $20,000 to own land for their car.
  • In most quiet suburban areas, it would be great, it would be pretty similar to what we have now.
  • In busier urban streets, people would find parking spaces aren't always available and either try to build a garage/driveway on their land, or purchase the parking space on the street level for their own use. An auction system could sell this off and land owners would probably be willing to pay several hundred dollars to purchase this. Its clear that they already are willing, because when a property goes to auction, it is a big selling point if it has a garage or double garage.
  • In shopping districts, if they are busy enough, private businesses will open car parks and charge people a certain rate depending on demand (i.e depends on day of the week, time of the day).
    • Business owners and shop owners would also have an incentive to own the land and provide it to customers and delivery vehicles, to help their business operate. They would be willing to buy on-street parking spaces.
    • Shoppers and employees would be motivated to arrive early, get a spot with no time limit or if there are none, park in the cheapest car park around. This form of competition would force car park owners to compete for business and drive prices down.
    • Shoppers and employees would typically park their cars there for as long as they need, but no longer. People eventually go home.
See ? Free markets really can work out something. Land for parking spaces is no different to land for homes, or offices, or theme parks, or shops. Why not allocate it the same way ?