I could see this being a case of behavioural economics where there are a lot of people who steadfastly refuse to pay for a much better traffic experience, even if the price is very low. And among the people who do properly recognize the value of their own time, they're already happy to pay $3 and lowering to $1.50 won't entice many more. We saw from the recent congestion tax implementation in New York that there were quite a few people happy to wait ages in traffic when it was free, but once a small fee was added, a significant amount switched to using the subway.
There might be better returns from making an advertising campaign to concince people to value their time better, instead of just lowering price.
I'm sure there are behavioral economics at play (there is also some fixed transaction cost to dealing with the toll operator). And as other people have pointed out the operators are clearly not profit maximizing, e.g. they let people with more people in their car pay less. However, if you consider a short term profit maximization curve where the X axis is price and the Y axis is profit and you consider two points on the curve with equal profit, does the operator prefer the lower price or the higher price?
Ordinarily, a business prefers the lower price because it helps with long term retention. However, here the quality of the product varies as a function of the *prior* price and the current price, i.e. it takes time for cars to clear out of the toll lanes when the price increases. So now consider what happens when there is a demand shock: profits were equal remember in the two scenarios, but the quality of the product in the new period is higher the higher the *prior* price was. Thus, all else equal the operator prefers a higher price now because it will in fact give them a higher quality product that they can charge more for in the future and make more money.
That is under perfect information about the *current* road conditions *before* we consider reputation with the driver. Under asymmetric information, the driver has to consider what is the probability that the toll lane is actually fast enough to justify the expense. A policy of setting the price above rather than below what the operator thinks is profit maximizing at a *single* point in time provides the driver with an assurance that the probability that the toll lane will actually be too slow is very low. A price is a signal wrapped in an incentive, congestion pricing above short term profit maximization is a costly signal that directly impacts the quality of the product.
Is that more profitable in the long run? I don't know, but they do have to *estimate* the curve, cannot easily measure long run reputation effects without suffering them, and face limited competition from new entrants so they face a different calculation than a typical business in a competitive market that would be crazy to set prices at what they think are *short* term profit maximizing, let alone above which would be insane for a typical business.
"there were quite a few people happy to wait ages in traffic when it was free, but once a small fee was added, a significant amount switched to using the subway."
Standing in line, as a means of allocating something scarce, is incredibly appealing as a matter of simple fairness; anyone can do it regardless of their poverty or wealth. I get the impression that people tend to think of traffic congestion in much the same way: you're just waiting your turn in line to use the road, and everyone else is in the same boat.
I recognized that bridge right away, even before hearing you mention it in the video. We live about a mile and a half away from it as the crow flies and occasionally watch 66 traffic from the Blake Lane overpass (or the Vienna Metro footbridges).
Regarding the 66 HOT lane tolls: if I remember correctly, the contract between VDOT and the HOT lane operator (Transurban) requires the latter to maintain traffic free-flowing at speeds greater than 45 mph and penalizes them if that condition isn't met.
This is sensible on its face, as transportation engineers have found that drivers are more willing to pay for free-flow traffic conditions than for any other controllable variable. But it also gives the operator a goal that's something other than "continuously maximize the toll revenue from the HOT lanes", since they can't make it so attractive that it starts to get congested and lose its free-flow condition.
That makes sense to me: once you lose free flow, it becomes much less clear what you’re paying for. Another thought that occurred to me is that there is a normative element of encouraging commuters to car-pool, and thereby avoid the toll.
Re: people not valuing their time. In Ottawa, Canada, on weekend evenings, people who are clearly upper-middle-class (based on their 2024 SUVs) will circle the downtown restaurant and bar district for 30 minutes to get free street parking several blocks from the bar district, even though paid parking lots sit half-empty.
These drivers appear not to value their leisure time, as they spend 30 minutes circling and 10 minutes walking, whereas they could have been parked in a paid lot for $10 in a few minutes and be comfortably ensconced in a bar with a cold beer.
> Have you considered that "inconveniencing DC motorists" is considered a feature, not a bug?
100% - the Virginia DOT in particular seems maximally hostile to all drivers, and despite farming them for gas tax AND registrations and inspections AND vehicle property tax, never improves or expands roads anywhere.
I've always idly wondered where those billions per year go, if not to the roads. Solid gold toilets? Amazing "team building" exercises and parties? Plush conferences in various tropical locales?
In Ottawa, the city has no city-run system for finding, tracking and triaging potholes. Citizens have to call on and report the potholes. When you report the potholes, you have to give the street address. With an arterial road intersection, I have tried to tell the city about potholes in an intersection, but it's like speaking to a Martian or a poorly programmed robot: "please provide the street address." I explain what an intersection is, and explain that of the road repair crews come to this point where the two roads cross, they will easily find the 5-inch deep potholes. "Please provide the street address."
This makes me wonder what the road repair management team does, if they aren't finding road maintenance problems, ranking them by importance, and tracking and implementing the repairs. Perhaps they are attending Initech-style planning meetings.
Some general points: (1) People over-estimate time-savings. (2) In that case, the toll was dynamic with respect to the congestion in the HOT lane, people took it as a signal for the time savings compared with the parallel free lanes. (3) People are paying for reliability, and there is an aspect of prestige good as well. (4) HOT lane users are sufficiently well off that their average value of time and value of reliability is above average. (5) Short-run profit-maximisation is not the game, (and it is certainly not welfare maximisation) -- the operators want to keep prices high so that they have more headroom to keep them even higher in the future. I believe they think they are being long-term strategic.
If you’re paying 3 dollars per minute saved, that’s a charge of 180 dollars an hour. I’m not from the US and I know the US is rich, but that’s surely too high for most people most of the time, so yes, I’m sure you’re right about the tolls being too high.
Maybe irrelevant to changes in paid users but: I have multiple times received warning letters that i improperly had my HOV switch on my EZPass turned to “on” and thus incurred a charge and could face penalties. I did not recall ever using the HOV lane with fewer than three passengers. Based on a quick Google, plenty of people have faced similar problems. Maybe it has been fixed by now, but it certainly deterred me from ever using the HOV lanes even when it should be free for me to do so. It only takes one errant charge from government to make you give up on a service! (Edited to add: happy to hear if I am misunderstanding how the EZPass component works with all this.)
I'm only familiar with the HOT lanes on 95 between DC and Fredericksburg, but there it's a combination of cameras at the transponder gantries and selective enforcement by cop car.
I think you have to consider elasticity of demand. It likely doesn’t follow a smooth curve in this case. It’s probably spiky or kinda stair stepped. The treads and risers are probably all different sizes. Also, high occupancy vehicle drivers are distinct from single occupant drivers.
Government price-setting for services like this may appear illogical because it may be the product of committee consensus and community consultations, rather than clear, rational economic analysis that aims at a sweet spot between maximizing revenue and reducing congestion.
Maybe the higher pricing was done with the idea of transferring the extra money to another department. Such transfers of monies from an enterprise fund to a general fund are not unusual.
I could see this being a case of behavioural economics where there are a lot of people who steadfastly refuse to pay for a much better traffic experience, even if the price is very low. And among the people who do properly recognize the value of their own time, they're already happy to pay $3 and lowering to $1.50 won't entice many more. We saw from the recent congestion tax implementation in New York that there were quite a few people happy to wait ages in traffic when it was free, but once a small fee was added, a significant amount switched to using the subway.
There might be better returns from making an advertising campaign to concince people to value their time better, instead of just lowering price.
I'm sure there are behavioral economics at play (there is also some fixed transaction cost to dealing with the toll operator). And as other people have pointed out the operators are clearly not profit maximizing, e.g. they let people with more people in their car pay less. However, if you consider a short term profit maximization curve where the X axis is price and the Y axis is profit and you consider two points on the curve with equal profit, does the operator prefer the lower price or the higher price?
Ordinarily, a business prefers the lower price because it helps with long term retention. However, here the quality of the product varies as a function of the *prior* price and the current price, i.e. it takes time for cars to clear out of the toll lanes when the price increases. So now consider what happens when there is a demand shock: profits were equal remember in the two scenarios, but the quality of the product in the new period is higher the higher the *prior* price was. Thus, all else equal the operator prefers a higher price now because it will in fact give them a higher quality product that they can charge more for in the future and make more money.
That is under perfect information about the *current* road conditions *before* we consider reputation with the driver. Under asymmetric information, the driver has to consider what is the probability that the toll lane is actually fast enough to justify the expense. A policy of setting the price above rather than below what the operator thinks is profit maximizing at a *single* point in time provides the driver with an assurance that the probability that the toll lane will actually be too slow is very low. A price is a signal wrapped in an incentive, congestion pricing above short term profit maximization is a costly signal that directly impacts the quality of the product.
Is that more profitable in the long run? I don't know, but they do have to *estimate* the curve, cannot easily measure long run reputation effects without suffering them, and face limited competition from new entrants so they face a different calculation than a typical business in a competitive market that would be crazy to set prices at what they think are *short* term profit maximizing, let alone above which would be insane for a typical business.
"there were quite a few people happy to wait ages in traffic when it was free, but once a small fee was added, a significant amount switched to using the subway."
Standing in line, as a means of allocating something scarce, is incredibly appealing as a matter of simple fairness; anyone can do it regardless of their poverty or wealth. I get the impression that people tend to think of traffic congestion in much the same way: you're just waiting your turn in line to use the road, and everyone else is in the same boat.
Eat shit and die, "Bryan Caaplan".
I recognized that bridge right away, even before hearing you mention it in the video. We live about a mile and a half away from it as the crow flies and occasionally watch 66 traffic from the Blake Lane overpass (or the Vienna Metro footbridges).
Regarding the 66 HOT lane tolls: if I remember correctly, the contract between VDOT and the HOT lane operator (Transurban) requires the latter to maintain traffic free-flowing at speeds greater than 45 mph and penalizes them if that condition isn't met.
This is sensible on its face, as transportation engineers have found that drivers are more willing to pay for free-flow traffic conditions than for any other controllable variable. But it also gives the operator a goal that's something other than "continuously maximize the toll revenue from the HOT lanes", since they can't make it so attractive that it starts to get congested and lose its free-flow condition.
That makes sense to me: once you lose free flow, it becomes much less clear what you’re paying for. Another thought that occurred to me is that there is a normative element of encouraging commuters to car-pool, and thereby avoid the toll.
Re: people not valuing their time. In Ottawa, Canada, on weekend evenings, people who are clearly upper-middle-class (based on their 2024 SUVs) will circle the downtown restaurant and bar district for 30 minutes to get free street parking several blocks from the bar district, even though paid parking lots sit half-empty.
These drivers appear not to value their leisure time, as they spend 30 minutes circling and 10 minutes walking, whereas they could have been parked in a paid lot for $10 in a few minutes and be comfortably ensconced in a bar with a cold beer.
Typo, it's High-Occupancy, not Home-Occupancy.
I wonder what OTHER typos are in there, non-detectable and thus distortive.
"The more convinced I am that whoever sets the tolls is losing money and inconveniencing DC motorists at the same time."
Have you considered that "inconveniencing DC motorists" is considered a feature, not a bug?
> Have you considered that "inconveniencing DC motorists" is considered a feature, not a bug?
100% - the Virginia DOT in particular seems maximally hostile to all drivers, and despite farming them for gas tax AND registrations and inspections AND vehicle property tax, never improves or expands roads anywhere.
I've always idly wondered where those billions per year go, if not to the roads. Solid gold toilets? Amazing "team building" exercises and parties? Plush conferences in various tropical locales?
In Ottawa, the city has no city-run system for finding, tracking and triaging potholes. Citizens have to call on and report the potholes. When you report the potholes, you have to give the street address. With an arterial road intersection, I have tried to tell the city about potholes in an intersection, but it's like speaking to a Martian or a poorly programmed robot: "please provide the street address." I explain what an intersection is, and explain that of the road repair crews come to this point where the two roads cross, they will easily find the 5-inch deep potholes. "Please provide the street address."
This makes me wonder what the road repair management team does, if they aren't finding road maintenance problems, ranking them by importance, and tracking and implementing the repairs. Perhaps they are attending Initech-style planning meetings.
I wrote a paper on this about the I-394 HOT lanes in Minnesota: https://www.sciencedirect.com/science/article/pii/S0739885914000092
Some general points: (1) People over-estimate time-savings. (2) In that case, the toll was dynamic with respect to the congestion in the HOT lane, people took it as a signal for the time savings compared with the parallel free lanes. (3) People are paying for reliability, and there is an aspect of prestige good as well. (4) HOT lane users are sufficiently well off that their average value of time and value of reliability is above average. (5) Short-run profit-maximisation is not the game, (and it is certainly not welfare maximisation) -- the operators want to keep prices high so that they have more headroom to keep them even higher in the future. I believe they think they are being long-term strategic.
How does the system count the number of people in your vehicle (and differentiate the toll applied)?
The driver has to use a special EZ-Pass transponder with a sliding switch to enable "HOV Mode" when they have 3 or more people.
I’ve thought about this so many times. Glad you’re doing some data collection. Seems pretty obvious to me - get more money and use.
That one extra A in Caplan
If you’re paying 3 dollars per minute saved, that’s a charge of 180 dollars an hour. I’m not from the US and I know the US is rich, but that’s surely too high for most people most of the time, so yes, I’m sure you’re right about the tolls being too high.
Maybe irrelevant to changes in paid users but: I have multiple times received warning letters that i improperly had my HOV switch on my EZPass turned to “on” and thus incurred a charge and could face penalties. I did not recall ever using the HOV lane with fewer than three passengers. Based on a quick Google, plenty of people have faced similar problems. Maybe it has been fixed by now, but it certainly deterred me from ever using the HOV lanes even when it should be free for me to do so. It only takes one errant charge from government to make you give up on a service! (Edited to add: happy to hear if I am misunderstanding how the EZPass component works with all this.)
dumb question: how does the system know how many passengers you are actually carrying?
I'm only familiar with the HOT lanes on 95 between DC and Fredericksburg, but there it's a combination of cameras at the transponder gantries and selective enforcement by cop car.
I think you have to consider elasticity of demand. It likely doesn’t follow a smooth curve in this case. It’s probably spiky or kinda stair stepped. The treads and risers are probably all different sizes. Also, high occupancy vehicle drivers are distinct from single occupant drivers.
Revenue maximisation is not the same as profit maximisation.
If there are extra costs incurred for each additional HOT lane user then that could partially explain this.
Government price-setting for services like this may appear illogical because it may be the product of committee consensus and community consultations, rather than clear, rational economic analysis that aims at a sweet spot between maximizing revenue and reducing congestion.
Houston, Texas toll roads have $2.1 billion in cash, and they are lying about it:
https://x.com/GrooganFox26/status/1910437946970567110
Maybe the higher pricing was done with the idea of transferring the extra money to another department. Such transfers of monies from an enterprise fund to a general fund are not unusual.