No 'Free Parking' in Real-Life Monopoly?

It’s a tradition as old as consumerism itself. You’ve mastered the art of procrastination, and it’s now Christmas Eve and you have yet to finish buying presents for your loved ones. Unless you’re lucky enough to live in a city where Amazon offers same day shipping, you’re going to have to venture out into the cold to shop at an actual store. But everyone knows you don’t venture out to just any store for Christmas presents, you head to your local shopping mall! The problem is, everyone else has the same plan, and you find yourself circling the parking lot for hours, looking for a place to leave your car before the stores close or sell out of Tickle-Me-Elmos.

Wouldn’t it be great if there were a way to deter others from using up all of these parking spots that you find so valuable? Well one mall in Colorado is attempting to do just that. According to this article from an NBC News affiliate in Colorado, the Cherry Creek Mall in Denver has decided to begin charging for parking in its surrounding lots and garages. In terms of economics, we can speculate on why this change was made (and whether it’s a good or bad idea) from a couple of different perspectives.

It’s possible that the mall is charging for parking spots specifically to improve the use experience on days like the one described above, where the fixed quantity of parking spots available is exceeded by the number of shoppers looking for them. The mall may consider that happier shoppers who are willing to pay a bit to park may also be the types of shoppers who will spend more in the stores inside.

The mall is more likely to be making its decision using a profit-maximization framework. Clearly, assuming some people continue to choose to park at the mall for more than an hour (the first 60 minutes will be free), the mall will be bringing in more revenue from parking than when parking was free. The first question, however, is how many customers will be turned away by the new up-front fixed cost of shopping at the mall, and how this will impact the sales of the mall’s tenants? The mall is hoping to gain more from charging people to park than it will lose through a decrease in the prices it is able to obtain from charging stores to lease spots within the mall. These factors are influenced both by the elasticity of demand for parking, as well as the elasticity of demand for tenant space in the mall itself.

The elasticity of demand for parking is a measure of how many fewer people will park at the mall, if the price of parking increases. It is largely dependent on how many substitutes people can find for parking at the mall. These could take a variety of forms. If people are mainly parking at the mall now to shop at the mall’s stores, then substitutes could include parking elsewhere and walking or riding over to the mall to shop, parking and shopping at other malls or shopping centers, or even staying home and shopping online. There may also be people, however, who use the mall’s parking facilities as a free way to store their car close to downtown Denver, and then travel into town via public transportation or carpooling. These people may choose to instead park closer to downtown, or to find a lot farther out which is less expensive. It will depend on the cost of other parking and transportation options available to them.

It is clear from the mall’s ability to increase prices that it is not in a perfectly competitive market for parking in the area. This is because, while the potential substitutes above exist, many consumers will find spots close to mall (especially garage spots) to be more valuable/higher quality than spots in nearby areas. With this limited monopoly power, standard analysis will show that raising prices and restricting quantity can maximize profits for the monopoly, although it would likely decrease overall welfare, as those previously parking at the mall for free who now don’t park there at all lose Consumer Surplus in the amount of what they would have been willing to pay to park in the mall lot (more than $0 but less than the new price).

So did the mall make the best choice for how to handle its parking situation? This largely depends on what its other options were. Another solution that may have been considered, and may limit the backlash from the public to some extent, would be to have stores validate parking if a purchase is made. This would allow the mall to more directly target the two different groups of people who are looking for parking spots; shoppers and commuters. If the mall is able to raise the price of parking for commuters, but keep the parking free (through reimbursement) to shoppers, it can improve upon any issues with congestion and a shortage or spots without giving up too much revenue from its store tenants. So if you live in the Denver area, keep in mind that while the new parking fees may be irritating now, they could save you a huge headache when you’re already back at home with family and friends on Christmas Eve, instead of sitting in a snowy parking lot for looking for a spot.

Are ‘Sin Taxes’ All Smoke and No Fire?

In teaching basic economic concepts, I always enjoy when we arrive at the lesson combining elasticity with taxes. It is an interesting topic, because it allows students to think about the true motivation for different laws, and excise taxes provide a rather simplified example to tie the two concepts together. As an example, I recently came across an article in the Denver Post which details a proposed constitutional amendment in Colorado to implement a pretty drastic increase in the per-pack cigarette tax in the state.

Before I address the article directly, I’ll provide a quick overview of the terms used above. Consider an excise tax to be a tax on a specific item, such as cigarettes, as opposed to a sales tax which would apply to most or all items you purchase. When thinking about elasticity of demand, think of it as measuring the percent increase or decrease in quantity demanded, when the price of that good changes by some percent. Basically, if a good that you want to buy gets more expensive, how much less of that good are you now willing to buy? This elasticity ranges from Perfectly Elastic (you won’t buy any quantity of the good anymore if the price goes up even a penny), to Perfectly Inelastic (you’ll keep buying the exact same amount of the good, no matter how much the price increases).

As you can see in the graphs above, if the price of cigarettes were to increase due to a tax, the quantity demanded would drop off precipitously if demand for cigarettes were very elastic, but would hardly change at all if the demand for cigarettes were very inelastic.

Thus, it is important for us to consider the ultimate goal of those proposing the increased tax. In the article, the proposed initiative is said to include an increase in the per-pack tax on cigarettes in Colorado from $0.84 to a whopping $2.59. It is argued that this would be done “in the hopes of persuading more people never to start smoking.” However, how easy is it really to get people to stop smoking, or never to start, by raising the price of a pack of smokes? This is where elasticity should examined. The article cites “research on consumer behavior” which “suggests as many as 35,000 kids could be kept from starting as smokers by the proposed tax increase.” However, a quick google search finds that estimates of the price elasticity of demand for cigarettes are consistently in the “inelastic” range, with absolute value between 0 and 1.  What this means is that, if the elasticity were -0.50, a 10% increase in the price of cigarettes would only result in a 5% reduction in the quantity of cigarettes demanded. Thus, an increase in the amount of the excise tax on cigarettes wouldn’t get many people to quit smoking, but it would increase tax revenues.  The article notes that the proposed tax is expected “to bring in $315 million in its first year.” If this is the true goal of the tax, the supporters should be clear about it.

The proponents of the amendment seem to be relying on two things in this scenario. The first is that they are focused on preventing children from beginning to smoke, rather than stopping current smokers. Perhaps children’s demand for cigarettes when they do not yet smoke is much more elastic than the other groups cited in the estimates above. Secondly, the money raised through the tax is, for the most part, going to be funneled in to programs aimed at helping people stop or never start smoking. Through these programs, the elasticity of demand for cigarettes could be changed over time. If people did stop smoking, less tax money would be collected, but less money would also be needed to fund programs to help people stop smoking.

A final point of consideration is to keep in mind that elasticities are really just estimating the slope of the Demand curve at one given point. They are great for obtaining an estimate of how steep the Demand curve is in close proximity to this point, and thus for estimating the elasticity of demand for small changes in prices. However, they are much less accurate for estimating how much quantity demanded will change due to extremely large changes in prices. As such, any estimates of a fairly large increase in prices (such as the 159% increase in the proposed amendment) must be taken with a grain of salt.

The point of this post is to keep in mind that when an excise tax increase is proposed, the desired result may be to substantially decrease consumption or to increase tax revenues, but it is difficult to accomplish both.