D3

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Together, these three insights tell us that the market outcome makes the sum of consumer and producer surplus as large as it can be. In other words, the equilibrium outcome is an efficient allocation of resources. The benevolent social planner can, therefore, leave the market outcome just as she finds it. This policy of leaving well enough alone goes by the French expression laissez faire, which literally translates to “leave to do” but is more broadly interpreted as “let people do as they will.”

In the News

The Invisible Hand Can Park Your Car

In many cities, finding an available parking spot on the street seems about as likely as winning the lottery. But if local governments relied more on the price system, they might be able to achieve a more efficient allocation of this scarce resource.

A Meter So Expensive, It Creates Parking Spots

By Michael Cooper and Jo Craven McGinty

San Francisco—The maddening quest for street parking is not just a tribulation for drivers, but a trial for cities. As much as a third of the traffic in some areas has been attributed to drivers circling as they hunt for spaces. The wearying tradition takes a toll in lost time, polluted air and, when drivers despair, double-parked cars that clog traffic even more.

But San Francisco is trying to shorten the hunt with an ambitious experiment that aims to make sure that there is always at least one empty parking spot available on every block that has meters. The program, which uses new technology and the law of supply and demand, raises the price of parking on the city’s most crowded blocks and lowers it on its emptiest blocks. While the new prices are still being phased in—

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the most expensive spots have risen to $4.50 an hour, but could reach $6— preliminary data suggests that the change may be having a positive effect in some areas.

Change can already be seen on a stretch of Drumm Street downtown near the Embarcadero and the popular restaurants at the Ferry Building. Last summer it was nearly impossible to find spots there. But after the city gradually raised the price of parking to $4.50 an hour from $3.50, high-tech sensors embedded in the street showed that spots were available a little more often—leaving a welcome space the other day for the silver Toyota Corolla driven by Victor Chew, a salesman for a commercial dishwasher company who frequently parks in the area.

“There are more spots available now,” said Mr. Chew, 48. “Now I don’t have to walk half a mile.”

San Francisco’s parking experiment is the latest major attempt to improve the uneasy relationship between cities and the internal combustion engine—a century- long saga that has seen cities build highways and tear them down, widen streets and narrow them, and make more parking available at some times and discourage it at others, all to try to make their downtowns accessible but not too congested.

The program here is being closely watched by cities around the country. With the help of a federal grant, San Francisco installed parking sensors and new meters at roughly a quarter of its 26,800 metered spots to track when and where cars are parked. And beginning last summer, the city began tweaking its prices every two months—giving it the option of raising them 25 cents an hour, or lowering them by as much as 50 cents—in the hope of leaving each block with at least one available spot. The city also has cut prices at many of the garages and parking lots it manages, to lure cars off the street….

The program is the biggest test yet of the theories of Donald Shoup, a professor of urban planning at the University of California, Los Angeles. His 2005 book, “The High Cost of Free Parking,” made him something of a cult figure to city planners—a Facebook group, The Shoupistas, has more than a thousand members. “I think the basic idea is that we will see a lot of benefits if we get the price of curbside parking right, which is the lowest price a city can charge and still have one or two vacant spaces available on every block,” he said.

But raising prices is rarely popular. A chapter in Mr. Shoup’s book opens with a quote from George Costanza, the “Seinfeld” character: “My father didn’t pay for parking, my mother, my brother, nobody. It’s like going to a prostitute. Why should I pay when, if I apply myself, maybe I can get it for free?” Some San Francisco neighborhoods recently objected to a proposal to install meters on streets where parking is now free. And raising prices in the most desirable areas raises concerns that it will make them less accessible to the poor.

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The new San Francisco electronic parking meter helps equilibrate supply and demand.

CRISTINAMURACA/ SHUTTERSTOCK.COM

That was on the minds of some parkers on Drumm Street, where the midday occupancy rate on one block fell to 86 percent from 98 percent after prices rose. Edward Saldate, 55, a hairstylist who paid nearly $17 for close to four hours of parking there, called it “a big rip-off.”

Tom Randlett, 69, an accountant, said that he was pleased to be able to find a spot there for the first time, but acknowledged that the program was “complicated on the social equity level.”

Officials note that parking rates are cut as often as they are raised. And Professor Shoup said that the program would benefit many poor people, including the many San Franciscans who do not have cars, because all parking revenues are used for mass transit and any reduction in traffic will speed the buses many people here rely on. And he imagined a day when drivers will no longer attribute good parking spots to luck or karma.

“It will be taken for granted,” he said, “the way you take it for granted that when you go to a store you can get fresh bananas or apples.”

Source: New York Times, March 15, 2012.

Society is lucky that the planner doesn’t need to intervene. Although it has been a useful exercise imagining what an all-knowing, all-powerful, well-intentioned dictator would do, let’s

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face it: Such characters are hard to come by. Dictators are rarely benevolent, and even if we found someone so virtuous, she would lack crucial information.

Suppose our social planner tried to choose an efficient allocation of resources on her own, instead of relying on market forces. To do so, she would need to know the value of a particular good to every potential consumer in the market and the cost for every potential producer. And she would need this information not only for this market but for every one of the many thousands of markets in the economy. The task is practically impossible, which explains why centrally planned economies never work very well.

The planner’s job becomes easy, however, once she takes on a partner: Adam Smith’s invisible hand of the marketplace. The invisible hand takes all the information about buyers and sellers into account and guides everyone in the market to the best outcome as judged by the standard of economic efficiency. It is a truly remarkable feat. That is why economists so often advocate free markets as the best way to organize economic activity.

Case Study

Should There be A Market for Organs?

Some years ago, the front page of The Boston Globe ran the headline “How a Mother’s Love Helped Save Two Lives.” The newspaper told the story of Susan Stephens, a woman whose son needed a kidney transplant. When the doctor learned that the mother’s kidney was not compatible, he proposed a novel solution: If Stephens donated one of her kidneys to a stranger, her son would move to the top of the kidney waiting list. The mother accepted the deal, and soon two patients had the transplants they were waiting for.

The ingenuity of the doctor’s proposal and the nobility of the mother’s act cannot be doubted. But the story raises some intriguing questions. If the mother could trade a kidney for a kidney, would the hospital allow her to trade a kidney for an expensive, experimental cancer treatment that she could not otherwise afford? Should she be allowed to exchange her kidney for free tuition for her son at the hospital’s medical school? Should she be able to sell her kidney and use the cash to trade in her old Chevy for a new Lexus?

As a matter of public policy, our society makes it illegal for people to sell their organs. In essence, in the market for organs, the government has imposed a price ceiling of zero. The result, as with any binding price ceiling, is a shortage of the good. The deal in the Stephens case did not fall under this prohibition because no cash changed hands.

Many economists believe that there would be large benefits to allowing a free market for organs. People are born with two kidneys, but they usually need only one. Meanwhile, some people suffer from illnesses that leave them without any working kidney. Despite the obvious gains from trade, the current situation is dire:

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The typical patient has to wait several years for a kidney transplant, and every year thousands of people die because a compatible kidney cannot be found. If those needing a kidney were allowed to buy one from those who have two, the price would rise to balance supply and demand. Sellers would be better off with the extra cash in their pockets. Buyers would be better off with the organ they need to save their lives. The shortage of kidneys would disappear.

Such a market would lead to an efficient allocation of resources, but critics of this plan worry about fairness. A market for organs, they argue, would benefit the rich at the expense of the poor because organs would then be allocated to those most willing and able to pay. But you can also question the fairness of the current system. Now, most of us walk around with an extra organ that we don’t really need, while some of our fellow citizens are dying to get one. Is that fair?

Ask the Experts

Supplying Kidneys

“A market that allows payment for human kidneys should be established on a trial basis to help extend the lives of patients with kidney disease.”

Source: IGM Economic Experts Panel, March 11, 2014.

QuickQuiz

Draw the supply and demand curves for turkey. In the equilibrium, show producer and consumer surplus. Explain why producing more turkeys would lower total surplus.

Chapter 7: Consumers, Producers, and the Efficiency of Markets: 7-3b Evaluating the Market Equilibrium Book Title: Principles of Microeconomics Printed By: Alejandro Vivero ([email protected]) © 2018 Cengage Learning, Cengage Learning

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