Rationing can backfire : the day without a car in Mexico City

POLICY RESEARCH WORKING PAPER 1554 Rationing Can Backfire In Mexico Ciy, a ban restricting each car from driving on a specified work- The "Day Without a Car" day actually increased total in Mexico City driving and congestion. Gunnar S. Eskeland Tarhan Feyzioglu The World Bank Policy Research Department Public Economics Division December 1995  | POLICY RESEARCH WORKING PAPER 1554 Summary findings In November 1989, Mexico City's administration Some feel that it may be so inefficient that it is imposed a regulation banning each car from driving on a counterproductive. And Eskeland and Feyzioglu found specific day of the week. The regulation has been both evidence to support that view. Many households bought popular and controversial. Some feel that it is a an additional car to get additional "driving permits," and reasonable concession aimed to alleviate congestion and the amount of driving increased. Greater use of old cars pollution problems. Others feel it is both inefficient and and increased weekend driving may have contributed to unfair: inefficient in the way most rationing systems are the disappointing results of Mexico's one-day ban on inefficient, and unfair in that it is costly to some and driving: high welfare costs and none of the intended easily avoided or accommodated by others. benefits. This paper - a product of the Public Economics Division, Policy Research Department - is part of a larger effort in the departmenttoanalyze environmental policiesandwas initiated in conjunctionwith operational supportto the Infrastructure Division, Country Department II, Latin America and the Caribbean. The study was funded by the Bank's Research Support Budget under the research project "Pollution and the Choice of Policy Instruments in Developing Countries" (RPO 676- 48). Copies of this paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Cynthia Bernardo, room N10-053, telephone 202-473-7699, fax 202-522-1154, Internet addresscbernardo@worldbank.org. December 1995. (33 pages) The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be used and cited accordingly. The findings, interpretations, and conclusions are the authors' own and should not be attributed to the World Bank, its Executive Board of Directors, or any of its member countries. Produced by the Policy Research Dissemination Center  Rationing Can Backfire: The 'Day Without a Car' in Mexico City Gunnar S. Eskeland Public Economics Division Policy Research Department The World Bank Tarhan Feyzioglu The World Bank and Georgetown University We would like to thank our colleagues without implicating them.   1. Introduction and Summary In November 1989, the Mexico City administration imposed a regulation that banned each car from driving a specific day of the week'. The regulation has been both popular and controversial: some feel is a reasonable concession from each car owner - aimed to alleviate congestion and pollution problems. Others have felt that it is inefficient and unfair; inefficient in the way most rationing devices are inefficient, unfair because it will be particularly costly to some - easily avoided or accommodated by others. Finally, some feel that the regulation may be so inefficient that it is counterproductive - increasing the levels of congestion and pollution - because some have purchased additional cars to circumvent the ban, and end up increasing their driving. The authors of this study find evidence in support of the latter view. This paper aims at analyzing this question in a pragmatic, policy oriented fashion. Section 2 briefly presents the idea that the effects of rationing can be analyzed by comparing the demand reductions with those one would obtain by market based implementation mechanisms - mechanisms that systematically rank trips for elimination according to willingness to pay. This theoretical framework is sufficient to illustrate that rationing will entail at least as high welfare costs (using the compensation criterion) as would a market based mechanism producing the same reduction in driving. Section 3 presents an empirical framework for estimating the demand reductions provided by the regulation. A model of gasoline demand is estimated using aggregate time series data from before the regulation, and used to simulate a counterfactual for demand in subsequent periods - as if the regulation had not been introduced. Surprisingly, the results of the model are that the regulation - after an initial adjustment period of about six months - actually increased total driving rather than reducing it. The result was surprising because the simple theoretical model allowed for the possibility that regulation should be a costly way of reducing demand, but not that it should be counterproductive in reducing demand. We pursue the investigation a little further by noting three particular features of this market: Called Hoy no circula (this one doesn't circulate today), the "Day without a Car" regulation specifies that license plate numbers ending with digits 0 or I does not drive on Monday, 2 or 3 not on Tuesday, etc. The regulation applies to all cars (except those of the fire department), and thus to firms as well as households. We use the term household, for simplicity. Registration officials report that "Friday plates" are the least popular among licence plate applicants. Compliance is generally believed to be high - police is visible and fines are heavy.  2 (a) due to the integer nature of cars and the fact that cars effectively come bundled with "work-day drivingpermits", some households will want more cars once their existing cars are made less useful by the regulation; (b) multiple drivers in a family could mean that total car use increases even though an additional car is purchased primarily to substitute for the family's existing car on its banned day; (c) effects of congestion, substitution between trips, and differences in fuel efficiency all could blur the basic expected reduction in gasoline consumption per car. Among these possibilities, we are able to investigate empirically only (a) and (b). For (c) we can only add some tentative calculations of plausible numbers. In section 4, we estimate a car ownership model based on household survey data. The focus is on the fact that cars come in lumpy units, while income and other explanatory variables are continuous variables. Thus, a household owning one car may be in an income range where it is almost indifferent between owning zero or one car, while another one-car household is indifferent between owning one or two. When the regulation effectively expropriates a part of the car's service flow, some households in the first category will rather have no car, and some in the second category will rather buy an additional one, to have two. Whether total demand for cars go up or not depends on some coincidence between the income distribution of households and the income ranges in which the first and second car purchases typically take place. Our estimated model indicates that the groups are of about the same size - but there will be somewhat more car sellers than buyers. Thus, while increased ownership would have made it easier to understand the observed increase in total gasoline consumption - our model (based on pre- regulation ownership data) does not succeed in capturing and predicting such a response. We discuss some known weaknesses of the model that we are unable to address - in particular transaction costs in the used car market - which would indicate that some "sellers" will decide not decide to sell (this would be an asymmetric correction to the model's predictions: no similar culling of "buyers" would result from transaction costs). In section 5, we discuss the unresolved puzzles in the light of potential features that our model may have failed to capture. Use per car might increase if trips substitute imperfectly for each other  3 and if less convenient travel is compensated for by more travel2. Also, if conditions are congested on workdays, and workday travel is sensitive to congestion, then removed work-day trips in part will be compensated for by additional travel responding to reductions in congestion, so that a slight increase in week-end driving can be enough to leave driving per car unchanged or increased. Finally, casual observation in Mexico City indicate that many families have bought an additional old car, with the effect that Mexico City has imported used cars from the rest of the country3. If these cars are less fuel efficient, then it is possible that gasoline consumption would increase as a result of the regulation even if aggregate car use was constant, or slightly reduced. In section 6, we conclude by making two points: (1) We highlight our finding that car use was increased (or at best held constant) by the regulation, but admit that there are remaining puzzles about what combination of specific mechanisms produced this result. (2) We remind the reader of the original empirical question: how does this rationing scheme compare to market based instruments in terms of the welfare costs of demand reductions? That question was, in the end, rendered uninteresting - as the rationing scheme was found counterproductive in delivering demand reductions. With this finding, we also make no apology for not investigating whether the rationing scheme has merits on distributional grounds that could compensate for its problems in the arena of efficiency. 2. Market Based Versus Regulatory Demand Management Instruments to economize on polluting trips may be gasoline taxes, driving bans, parking fees, toll rings and subsidies to public transport.4 But when consumers sacrifice trips in response to demand 2 One must think carefully about the units involved. As an illustration with other goods, think of beer as an imperfect substitute for wine. If wine prices go up, beer consumption would swell, and in liters possibly by more than the observed reduction in wine consumption. For car use, if a leisurely trip (to visit grandma or to go shopping) is moved from Wednesday afternoon to Saturday, it may very well end up being a longer trip. ' An admittedly unrepresentative survey (100 households surveyed for a newspaper at a fee-charging parking lot) found 39 percent of drivers stating that an additional car had been their response to the regulation 4 We shall use pollution as metaphor for the policy objective (which may be pollution, congestion, etc.), and trips or gasoline as metaphor for associated goods, services and inputs. Congestion charges and pollution charges are first-best instruments: if they are used, reductions are provided at the lowest possible welfare costs. Often, and some times with good reason (such as the high costs of monitoring individual flows of emissions) such instruments are not in use. Eskeland (1994) and Eskeland and Devarajan (1995) show how many real world pollution control strategies could be improved by including instruments that discourage car use directly. The reason is that existing programs provide incentives to make cars and fuels cleaner (standards), but fail to discourage their use. Bemdt and Botero (1985) and Eskeland and Feyzioglu (1994) estimate demand  4 management instruments, what are their welfare costs of doing so? We shall make the simplifying assumption that transfers of income can be made costlessly with other instruments - between households, and between the private and the public sector. This allows us to abstract from analysis of income distribution effects, and to apply no penalty or premium to public revenue generation. Importantly, when a trip is sacrificed due to a marginal increase in the gasoline price, the value of the sacrificed unit to the consumer is the retail price of gasoline. Thus, while there are inframarginal units of gasoline (and trips) that are worth more to consumers, a gasoline price increase will screen out, systematically, the trips that are worth the least. This property of the gasoline tax allows it to reduce trips at the lowest possible welfare cost. Demand reductions resulting from a regulation will rarely have this selection quality. The "Day without a car program" may curtail trips in households with a very high willingness to pay, and it may block a household's Tuesday-driving, say, even if the household could more easily have sacrificed other trips. Both of these effects resultbecause the regulation does not allow 'trading' of the rationed commodity, with the result that the regulation curtails inframarginal as well as marginal trips. If we compare it with a gasoline tax that would have yielded the same demand reduction as a regulation, the unit costs of the demand reductions delivered by the regulation will be at least as high, and possibly much higher. An illustrative comparison of the welfare cost of a regulation and a tax increase calibrated to give the same demand reductions is shown in Figure I below. A key assumption in this argument is that the regulation, if providing emission reductions at all, would provide these through its impact on aggregate gasoline consumption. Then, using market forces to allocate any reductions (in gasoline consumption, this time, rather than in emissions) will assist in containing the costs of the reductions. relationships in Mexico, finding demand elasticities for gasoline in the range of -0.7 to -1.25.  5 Cost of Increase in Tax, dt Welfare Cost of Driving Ban Pesos Pesos I P+t Pdt P t P~ q L +T ~ dq aoline. litus dq Gsoline. Him Figure 1: The crossed area in the,figure to the right illustrates the extra costs when the demand reduction is found on different parts of the demand curve, rather than squeezed to the right, selecting the least essential trips, as a tax increase would. With the particular rationing mechanism used in Mexico City, issues are slightly more complex, because the demand reductions provided by the regulation are unknown. First, the ration applies to the utilization of a plant (the vehicle) which was not at the outset fully utilized (24 hours a day, 7 days a week). For this reason, if users can move trips from one day to another, or exchange car services (on Tuesdays, I drive twice my distance, to pick you up, and on Thursdays, you return my favor), vehicle kilometers may remain unchanged by the regulation even if the number of vehicles were to remain the same. Second, households can purchase an additional car, thereby purchasing four work-day "driving-permits" and 2 weekend "permits". This could increase the total car stock in Mexico City or redistribute car ownership between households with different utilization rates5. The latter opportunity places, in effect, an upper bound on the costs of compliance for a household: no household will be subject to a higher cost of compliance than the costs of holding an additional car (for many households, the upper bound is lower, since an additional car would yield benefits additional to substituting for the other car on the banned day). The effect on total driving will depend I There is casual evidence that Mexico City has attracted used cars from the rest of the country.  6 on the effect on the total car stock, as well as on the distribution of cars amongst households according to usage. We turn now to the estimation of the effect on total driving, as measured by aggregate gasoline demand in the Metropolitan Area. 3. Aggregate Gasoline Consumption In this section, we investigate the behavior of the aggregate gasoline consumption in Mexico City Metropolitan Area around the time of the ban. We trace the consumption pattern from January 1987 through December 1992. The consumption level is given in Figure 3; driving ban became effective approximately in the middle of the sample. We assume that aggregate gasoline consumption in Mexico City depends on gasoline price and income:6 c=