How to Kill Jakarta Traffic Jam, Economically Speaking (Part 1)

I am now reading an excellent book by Edward Glaeser of Harvard, Triumph of The City . It's about (great) life in cities and it brings me to the work of Gilles Duranton and Matthew Turner as well as William Vickrey.

Let us imagine a typical situation many of us face in Jabotabek. Every morning you ponder if you would drive your car to work. While taking a shower, you make a mental calculation on the benefit of driving your car (for example, comfort) and the cost of it (gas, time, car depreciation, etc). If the net is still higher than taking taxi, bus, or KRL train, off you hit the road by car.

You may feel good about yourself because you think you've done proper marginal benefit and cost analysis? Alas, it's not the case. You miss important point: your decision makes other drivers' cost of driving increase.

As now the road is one car more crowded, time to drive is longer. Your private cost and benefit analysis does not take into account social cost of having one more car, your car, on the road.

Econ 101 calls this a negative externality. It is more evident when we use resources with zero or artificially low price, such as road. Multiply such (private) miscalculation with hundred thousands of Jabotabek car owners, we have all too familiar traffic jam we see every morning in the city.

Jakarta's traffic jam can be maddening indeed. Out of your frustration, you may demand for building more roads. After all, it's just about supply for roads that doesn't meet the demand, so you think.

Alas, this might be not feasible for two reasons. First, there is space limitation in already crowded Jakarta. Second, even if technology can overcome this constraint (tunnels or fly-over, for example), we'll soon come across Duranton and Turner (2010) and their fundamental law of traffic congestion.

The law says that more roads will proportionately increases car's kilometer traveled. Why? Because it increases the current residents' as well as previously-beyond-road-network residents' car use. It also brings more travel intensive production activities in the city. As a result: more roads, same traffic jam.

OK, what about, you say, more public transportation in Jakarta?

It will reduce traffic jam only if substantial number of car owners shift to public transportation. But, you know that if I leave my car at home and take bus, road will be less congested and travel by car will be more pleasant.

The catch-22 is that I know it well, too. As a result, nobody gives up his/her car. After all, who wants to takes trouble by taking bus only to allow more pleasant travel of other car owners? Public transportation will just reach more non-car owners previously outside public transportation network to enter Jakarta.

We again may end up with more public transportation, same traffic jam.

So, what’s the solution? To know it, we need to see the late William Vickrey and his work on road congestion problem. But it has to wait for another blog posting.

Stay tuned.

Unruly City Works Well

I think the economy of big cities is one of under-researched topics in economics, particularly on the positive contribution from otherwise "unruly" features of a city --slums, city dwellers, crowded sidewalk, counterfeiting business, etc.

During this weekend, I am reading the captivating Jane Jacobs' classic, The Death and Life of Great American Cities. I know this is way too late, it has been published since 1961, but her fresh attack on how the then latest urban planning trend (such as Le Corbusier, --the architect, not the mentalist (sic!)) misunderstood city life still sounds relevant even today. It makes a lot of economic sense, too.

Having been reading some of the early chapters, I have a question, perhaps to criminologist: Is the crime record in Jakarta's crowded housing districts (Tanah Abang or Senen area) higher than in the suburbs (Depok, Tangerang, Bekasi), where the so called modern urban housing planning has been heavily exercised? --If the records are neither available nor reliable, a careful observation on Pos Kota will do.

My guess, it isn't. Presumably, high population density and close interaction will produce positive externalities of an informal surveillance system for public order. But maybe I am wrong.

The cost for having religous preference

During our term in the U.S., my wife and I once had lunch in the student cafeteria of Brandeis University in Waltham, Mass – some 40 minutes from our place in Cambridge. It was an 'all-you-can-eat' type of café; you can take everything for a flat charge.

Being a Jewish institution, the café served kosher meals. According to the Jewish rule, the kosher and non-kosher food must not be processed together. Not only that, the cutleries must also be separately treated. So they divide the café into the kosher and non-kosher sections. The cutleries are provided in two different colors. I forget what they are, but I think blue for the non-kosher, and green for the kosher section. Although no separator for the two sections, you can not buy your meals from one section and eat it in the other one. Same thing applies for the cutleries. And after you finish, you must bring your cutleries to different return trays. (Maybe the green ones will go to heaven, and the blue go to hell?)

As the kosher food is the closest one to halal food, and I was in the mood for being a good Muslim at that day, I chose the kosher ones. Then, I found out that the kosher food costs about a dollar more than the non-kosher one. It was my fault, anyhow, as I did not read the price list before.

I started to wonder, why should it cost more? I guess because processing kosher food adds to your production cost. You need to manually slaughter the animal, means additional procedures to process the food. You may also have to pay to have the food examined by some kind of religious council, another extra cost.

More interestingly, what makes someone – anyone – pay more for kosher-but-not-necessarily-more-delicious meals? The extra dollar may serves as the 'premium' for... well, being religious. Perhaps this is similar to insurance premium. You are willing to pay more to get some degree of certainty to your expected wealth. For the believers, the extra dollar, maybe, is your ‘post-life’ insurance.

Another way to see this is ‘consumer discrimination.’ Consider the term discrimination in its generic meaning: ‘being selective over a product that is made only by certain people or using certain procedure.’ Milton Friedman and Gary Becker once said that if you are being discriminative, the market will punish you by limiting your choice, so you’ll have to pay more. However, as long as:

1. you are willing to take that price
2. nobody forces you to take that price
3. you don’t force anybody to take that same price
4. you don’t force anybody to pay that price for you
5. you don’t prohibit other people to take other choices (with different price)
6. the price you pay is the result of voluntary actions (and exchanges)

then it does not make any problems. Violation to any of the above conditions is coercion, hence unjustifiable (see this posting).

Note that the price for your religious preference does not need to be explicit. Sometimes the price is your ‘search cost’ (you must travel a bit far to find halal meat). Sometimes it is has no monetary value, but in terms of depletion of your social capital (love this term!). Think about your being exclusive, having to reject dinner invitation, or having to refrain from enjoying delicious meal in a party.

As for myself, actually I kinda regretted my decision to go to that kosher section. I don’t think that extra dollar guaranteed me a place in heaven. But after all, nobody forced me to do that anyway…

Side story. By the way, my wife was a bit annoyed by having to pay more. As a non-Muslim, she did not have to bother eating kosher or halal food anyway. In other words, she experienced a negative externality from my religious preference-of-the-day. However, we can settle this issue internally and domestically. Like Aco said, the intervention from government is not needed, nor from anyone or anything.

Externality misunderstood

We were about to take off. That guy sat right next to the window with emergency exit sign on it (and a red handle to open it). Then this stewardess came. She told the guy that because his seat was the closest to the exit, he needed to read the information on how to quickly act in case of emergency.

The guy asked the stewardess, "Do you think it is fair? Why is it me who should be the responsible passenger? I believe I paid the same fare with this man (he was pointing at me, who was sitting right in front of him)". The stewardess looked confused. She said hesitantly, "Ugh, Sir, it is the rule. We've been doing this ... ugh, forever". The guy insisted, "But, look. I don't care how long you have been doing this stupid rule, but if you want me to be the exit handle guy, you should pay me".

Alright, that's it. I stood up. "Dude, I guess you learned econ?". Yup, he said quickly. He said he is doing econ in one of those big name universities. "No wonder! Your argument is familiar to me," I said, "But you are ... wrong, dude".

So I spent the next three minutes humiliating him (OK, maybe I was trying to impress the poor but rather cute stewardess). I told him that in case of emergency, he has the biggest chance to get off the plane first. Compared to me and other passenger, he is relatively luckier. But we paid the same fare. Is it fair? Yes, I said. Because that guy also had to be the one who should read that information leaflet and who should pull up the handle. In other words his cost of assuming the responsibility cancels out his benefit of sitting in the supposedly safest place.

OK, I made the story up. But this could have happened in that Fokker 100.

Theoretically, the canceling out might not be perfect (i.e. the cost might be slightly larger than the benefit, or just the opposite). In such case he could have demanded payment from the rest of the passengers for his being the handle guy, and other passengers might have demanded payment from him to compensate for their relative disadvantages as far as seatings were considered. But the cost of managing all this transaction is prohibitively high. That's why it's not normal for passengers to negotiate seats among themselves.

You might say, hey, what if that dude is more risk taking, compared to others in the plane? That is, what if he values the safe seat less than other guys? That might happen. In this case, the best solution is actually to give any seat to the highest bidder. But again, transaction cost would be extremely high.

My point in fact is, don't be too quick in calling a problem an externality and demand a money compensation to 'internalize' it. Transaction costs might as well be too high, you don't want to 'internalize the externality'.

And again, I owe this to Coase (1960). I hope I got it right.

(Mis)understanding the externality

The concept of externality is again easily overplayed.

When you and I transact and somebody else gets affected (in a good or bad way) without any compensation, externality arises. That is more or less the standard definition in almost all textbooks. That definition is dangerous. Because, come to think of it, almost every transaction therefore causes externality.

The second, and even worse, misunderstanding is that in the presence of externality, you should call for government intervention. This is a fallacy. Believe me, if you don’t like me smoking next to you, we can work it out by you pay me not to smoke, or I pay you to suffer. We don’t need the government to ‘internalize that externality’. But let’s do some simple arithmetic to make this argument clear.

Suppose A pollutes and B is harmed. If B would pay Rp XXX to avoid such harm, and if A would have to incur an additional cost of Rp YYY to eliminate the pollution, then if XXX is less than YYY, the government should do nothing.

So if instead XXX is greater than YYY, the government should do something, you say? It depends. If XXX is in fact greater than YYY, then B should have offered some money to A in the first place, so as the latter did not pollute, don’t you think? But why hasn’t B made a bargain with A? Because, that might have required some costly process (think about tiring negotiation or time costs or lawyer’s fee, for an example). In other words, there is a non-zero transaction cost, say Rp ZZZ. So, here, it must be the case that ZZZ > (XXX – YYY). Then what is the answer to the question ‘should the government do something?’ Well, remember, intervention can be costly, too. First, the government should calculate XXX. Next it should also discover YYY. Finally, it should administer the scheme (costly, too) – whatever it is. If the total cost of undertaking these three tasks is WWW, then only when WWW < (XXX – YYY), the government intervention is justified.

More on alternative solutions later.

Note: Of course I owe this argument to Coase (1960, The Problem of Social Cost, The Journal of Law and Economics)

Sutiyoso is an environmentalist

... or at least that's what he might think he is. The Jakarta mayor has just agreed 1) to ban smoking in public place and 2) to run compulsory emission test on vehicles.

I don't think any of these green policies could work well. Not as environmentalists would like them to. For smoking ban, see my takes here (on New York's case two years ago) and here (on the right to smoke and externality). As for emission standard, here's a related post. In short, I am skeptical on command-and-control approach. It's too much prone to abuse. I'm risking my face for papercup throwing session once again; but I'm gonna just say it: if clean air is the goal, gasoline tax* will do better than emission standard. You ready with another increase in gasoline price?

*) ... and I mean a uniform tax on kilometers, not an emission tax. See a paper by Sarah West here.