Taking a Higher Toll

When E-ZPass electronic toll systems are installed, tolls tend to rise:

Technology Eases the Ride to Higher Tolls, by David Leonhardt, NY Times: ...I spent a good part of my childhood summers at the Jersey Shore, and the tollbooths on the parkway always seemed to be a cruel final obstacle between me and the beach. Every 15 minutes or so, our car would have to stop yet again to drop a measly quarter in a bucket.

The ride is very different today, thanks mostly to the electronic toll system known as E-ZPass. At four of the tolls along the Garden State, the system is so sophisticated that cars barely have to slow down. A little box attached to the car’s windshield sends a message to a computer reader looming over the road, and money is then deducted from an electronic account. ...

As a result of E-ZPass and its ilk, ... many [drivers] don’t notice the cost of a toll. Which raises an interesting question: If you don’t know how much you’re paying for something, will you notice when the price goes up? Or has E-ZPass, for all its benefits, also made it easier for toll collectors to take your money?

A young economist named Amy Finkelstein started thinking about these issues a few years ago... So she collected decades of toll records from around the country and found a clear pattern.

After an electronic system is put in place, tolls start rising sharply. Take two tollbooths that charge the same fee and are in a similar setting... A decade after one of them gets electronic tolls, it will be about 30 percent more expensive on average than a similar tollbooth without it. ...

“You may be less aware you’re paying the toll,” said Ms. Finkelstein, now an associate professor at M.I.T., “but you’re paying a higher toll than you used to.”

The implications of this go well beyond highways. We increasingly live in an E-ZPass economy, in which bills are paid online, corporate cafeterias are going cashless and people take along their debit card, instead of cash, when they leave the house. Last year, 55 percent of consumer spending was done electronically..., while checks accounted for less than 25 percent and cash only 20 percent...

The E-ZPass economy is indisputably more convenient. It saves time and frustration. But the old frustrations that came with cash also brought a hidden benefit: they forced you to notice that you were spending money. With electronic money, it’s much easier to be carefree.

Marketers understand this dynamic well, which is a big reason they promote refillable gift cards and other forms of money that don’t feel like money. Part of what’s so intriguing about Ms. Finkelstein’s work is that it suggests that government officials may be coming to understand the dynamic, too. ...

Ms. Finkelstein obviously can’t prove that electronic tolls cause prices to rise by making drivers less aware of them. ... But she makes a spirited case for her conclusion. She has considered a number of alternate explanations for the increases and says the evidence doesn’t support them. At the very least, electronic systems do seem to make it easier for toll collectors to increase prices. ... Ms. Finkelstein discovered that tolls don’t usually rise as soon as an electronic system arrives. The increases tend to come a number of years later, once electronic payment becomes old hat. ...

Let me try an alternative to the agents don't notice price increases when the payments are electronic story (i.e. that agents are irrational). One thing to note is that after the E-ZPass system is installed, waiting times fall, frustration falls, and the inconvenience of not having correct (or any) change also falls. Thus, the economic cost is lower even if the dollar cost of the toll stays the same, and this would cause the quantity of trips demanded to increase. Over time, with inflation, the real cost of the toll falls further, the number of trips increases further, and eventually the increased congestion could require a return of the toll to its original value (in terms of the full economic cost, and assuming congestion is the reason for the toll), or even a higher value if demand for road trips grows due to economic or population growth.

[Another possibility, though I don't think it quite fits here, is that under the old system changing the price of a toll is costly in terms of transaction and collection costs. That is, a $1.00 toll is much more convenient than a $1.05 toll (more currency and coins are involved in the payment, and making change for, say, two dollars also involves more coins and hence more time), but with an electronic system it doesn't matter. Thus, under the old system, instead of changing tolls in small increments between, say, one dollar and two dollars as would occur with E-ZPass, changes will be larger and more infrequent (perhaps in quarter, fifty cent, or even dollar increments rather than nickel increments). The result will be that E-ZPass tolls that are more flexible and rise sooner than under the old system though with this story, in the long-run, the average toll would be the same (net of differences in transactions and collection costs).]