Wednesday, April 29, 2009

Chicago Parking Meter Monopoly

One of my current students (hat tip to Ryan M.) alerted me that the city of Chicago is leasing its parking meters to a private company (which will set the parking meter prices) for 75 years. The city of Chicago will receive over a billion dollars for leasing its parking meters and it seems the citizens of Chicago are paying much higher rates to park in Chicago. While the city has difficult budget issues to confront, the question that I have is why is Chicago only leasing the parking meters to one company - i.e. a monopoly? Maybe that was the best overall deal the city could make (in terms of dollars to the city), but if the city is interested in the economic welfare (i.e. well-being) of people parking in Chicago, then having more than one firm would allow some competition for parking meter rates and hurt those parking in Chicago less. Here is a blog roll of the new Chicago Parking Meter Privatization, along with short video from WGN, and a news piece from the Chicago Times.

What will also be interesting to observe is how people respond to this increase in price. I suspect that parking rates in non-city areas (such a private parking lots or parking garages) will increase, and that the incentive to build more parking lots will increase. Likewise the demand for public transportation will likely increase as some consumers switch from driving downtown to taking public transportation or cabs. In each case, as the price of parking meters increases, so will the demand for alternative (i.e. substitute) transportation and parking services.

The thing to keep in mind, the lease of the parking meters to the private firm is similar in economic effect of a tax on parking in Chicago, except the revenues from the tax (price hike) go to the private firm. In either case, consumers are worse off due to the parking meter privatization (or back-door tax) as their consumer surplus decreases due to the higher prices.

As an economist, there are some very interesting things to study from this natural experiment. One, what is the demand for parking and the price elasticity of demand. Two, what are the economic welfare effects of the change in parking meter prices. Three, to what degree do people respond to changes in the price in choosing alternative parking and transportation services, and four, how do alternative or substitute parking options change based on the change in the parking meter prices.

Bottom line: Monopolies have incentives to raise prices, thus allowing competition would limit some of the large hikes in prices.


nolaman said...

How would you implement competition for parking meters?

Isn't this a case of what you economists call a natural monopoly?

My welfare economics classes taught me that natural monopolies are one of the few cases where government control is clearly preferable to private ownership.

Stacey said...

While the actual parking meter is a natural monopoly, paying for the space does not have to be a natural monopoly. Chicago could have opened up the payment for meters to a number of different firms and thus consumers could buy tokens to put in the parking meters. Thus the different firms would compete on the price of the tokens.

As smart meters come into the market, then consumers can use a card (issued by different parking meter firms) to pay for parking meters and the firms can compete on getting customers to use their electronic card, which would be much like a credit card.

nolaman said...

Thanks Stacey, I honestly couldn't see a way to make parking meters competitive, but you are so right!

Are there natural monopolies that there would be no work around? Sewers maybe? The military?

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