Thursday, January 7, 2016

Atlanta streetcar's high cost of free rides

Shoulda built BRT bro  Source: AJC.com
Matthew Kahn highlights one unintended side-effect of Atlanta's decision to offer its new streetcar service free of charge:
The NY Times reports that an unintended consequence of the Atlanta Streetcar charging $0 for a ride is that it attracted the homeless and this repelled the middle class from riding it.  So, is this a case of demand curves sloping up?  Should Greg Mankiw revise his text?   No, all else isn't equal. As Atlanta dropped its price of riding this public transit to zero, it attracted a certain type of rider who lowered the overall quality of the riding experience and this shifted the middle class' demand for riding this piece of public transit.  So, the "free ride" had two effects. It dropped the price and shifted the demand curve for this service.  This is an example of "endogenous disamenities" at work.
I'm pretty sure the total failure of design, minimal distance covered, and overall lack of demand by residents has played a larger role in the streetcar's flop than homeless people. But setting that aside, the 'endogenous disamenities' idea is interesting.

For many goods and services, a price change can have two effects. One is to change the quantity demanded (movement along the demand curve). This was the logic behind offering Atlanta's streetcar for free: lower the price in order to make the streetcar appealing to people who didn't value its benefits highly enough to buy a ticket, or were unsure of the benefits and didn't value the chance to find out highly enough to buy a ticket.

The second effect is more subtle: price changes causing shifts in demand (moving the whole demand curve). Whether or not Atlanta planners explicitly considered this effect, their free ride strategy was in fact relying on it for success. By exposing people to the joys of #streetcarlife, their intention was to permanently shift marginal riders' demand, i.e. "locking them in". Once the free ride sale works its magic, Atlanta can raise the price while retaining some enlightened riders.

Complications arise, however, because this second 'demand shifting' effect of price changes occurs through many channels, not just the individualistic information-centric one. As Kahn says, free rides "attracted a certain type of rider who lowered the overall quality of the riding experience", presumably via diverse effects like identity and reputation ("I'm not one of those streetcar riders"), racism, physical disgust and comfort, fear of harassment or assault, etc. etc.

In this scenario, what makes the Streetcar's free rides an 'endogenous disamenity' for non-homeless people is that the causal effect of changes in demand (reduced demand for rides at all prices) outweighs the causal effect of changes in quantity demanded (increased demand because rides are free). Even though streetcar rides are costless and presumably have some benefit, the free rides have created a bundled service of "streetcar plus homeless people" that apparently has a very real cost.

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