Pricing out poor people is not a solution

It is a sign of the neoliberal times that these days even liberals spend a lot of their time advocating fiddling with prices. Liberals who want to curb carbon pollution advocate increasing the price of that pollution either through a Cap and Trade system or a straight carbon tax. Liberals who want to decrease traffic congestion or car use altogether often advocate levying tolls or increased gasoline taxes. Those concerned with housing scarcity support the demolition of rent control in order to let the price float up to a market equilibrium.

I understand the impulse to advocate these sorts of policies, and sometimes messing with current prices would be an overall good thing. But when neoliberals talk about these clever market-oriented solutions, certain considerations that really should be included in the discussion never are.

Let’s take congestion pricing for instance. The problem we currently have is that many highways are so congested that people waste enormous amounts of time sitting idle in traffic jams on their way to their destination, especially during rush hours. One way to understand this problem is as a market failure. Wasted time is a pretty big cost, especially if you add up all of the wasted time of everyone who sits in traffic jams. Naturally then, people would want to pay to avoid the wasted time if they could. But since highways are free to use, this is not possible. So, the solution then — for the market minded — is to create tolls and continually jack them up until only enough cars come through as allows for a good flow of traffic.

There is no doubt that such a policy would eliminate congestion. After all, you could theoretically start charging thousands of dollars to get through these tolls, which would definitely cut down traffic. But the way it would cut down traffic is what is problematic: it does so by pricing out poor people. Although it is rarely discussed, using price increases to achieve some policy aim generally works by making prices so high that low-income people cannot afford some good. In congestion pricing, that good is highway access during peak hours. In carbon pricing, that good is access to energy. In eliminating rent controls, that good is housing. The equilibriums that are generated by these pricing schemes generally result in more hardship for poor people.

The congestion pricing case is an especially compelling one. What happens there is that wealthier people who can pay the tolls end up having a quicker commute, saving themselves time and stress while paying a fee that will probably be pretty nominal. On the other end, poor people cannot get to work anymore, or poor people lose a much more meaningful amount of their paycheck getting to work, or poor people waste even more time and money than before by catching multiple buses to get to work.

Again, I am not saying that pricing schemes are necessarily bad. If our income distribution was very egalitarian (as I think it should be), pricing schemes would not even be a problem. But up against the reality of high inequality, discussions about these pricing schemes must take into consideration the sort of impact they will have on low-income people. Decongesting the road through a pricing scheme effectively decongests the road of poor people, something that only helps wealthy folks.

In the place of such schemes, there are usually alternatives. For instance, instead of congestion pricing, we could build more public transportation infrastructure and subsidize fares through some sort of progressive tax. For carbon pollution, we could subsidize clean energy alternatives through a progressive tax. And so on. Simply jacking up prices on poor people to reduce the overall consumption of some good however is not a terribly progressive solution, and doing so should be avoided in almost all cases.