Popcorn, Parking, Exercise and the Theory of the Second Best

By Seamus Hogan 28/09/2012 1

The University of Canterbury recently announced that it will be charging faculty and students alike something close to marginal cost for parking. The stated reason was that they saw no reason why scarce resources should be allocated to providing an amenity benefit that is of value to some staff and students but not to others.

The economists, of course, cheered. A parking permit at Canterbury is currently very cheap, but it is only a licence to hunt, not a guarantee of a park. We have been saying for years that parking should be charged at a market-clearing price. After all, charging parking at less than marginal cost generates a deadweight loss in which the marginal units consumed are valued at less than cost, and so reduces the total value that the university can deliver to staff and students. If there was a reason for thinking that the UoC-specific elasticities of demand of students or of labour supply of staff are higher for those who want parking than those who do not, you could make a Landsburg popcorn price-discrimination argument for subsidising parking, but that assumes that the University is a profit-maximising monopolist, rather than a not-for-profit utility maximising institution.

Then today, I heard from students that in another move, the Univeristy is increasing the student levy next year but including free gym membership as an offset. My first reaction was that this is the exact opposite of the move to increase the price of parking, and is silly for exactly the reasons that the former policy makes sense. But then it became clear. The students explained that a student levy can be added on to a student’s interest-free student loan, whereas the cost of gym membership as an optional extra cannot. Given that every dollar of student loan is roughly equivalent to a straight out grant from the government of 33c if it is paid off at the slowest possible rate (from memory of a back-of-the-envelope calculation I made some time ago, so don’t take this number to seriously), the new policy might make sense as a way of increasing the total government contribution to the University, as long as that benefit outweights the effect of the created deadweight loss, including, possibly, the cost to some students of having to queue for gym services.

But then I reaslied, we have to pay for parking permits out of after-tax income, but the University’s expenditure on parking net of parking fees is not subject to fringe-benefit tax. So subsidised parking is also a way of increasing the government’s total contribution to the University……   Isn’t second-best analysis fun!

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