All-you-can-eat vs pay-as-you-consume

Sounds like some frightening cannibal menu, but I’m really talking about pricing models. The wrong plan can have enormous unintended consequences. Take restaurants, for example. Given America’s rising obesity epidemic, all-you-can-eat buffets encourage us to over consume – an undesirable urge. So what does this have to do with cars you ask?

Economists will say that all-you-can-eat is the right way to price when you have lots of excess capacity and the cost to provide that extra unit of consumption very low. This is why cellphone providers offer monthly bundles of minutes. They know that people prefer having a stable monthly bill they can predict. They also know that people typically choose a higher rate plan than suffer the occasional penalty of going over. And then, people use their minutes right up to cut-off point.

The bottom line is that all-you-can-eat encourages more consumption than pay-as-you-go. Depending on the network I’m talking about, I have different opinions, which could make me sound like a hypocrite. When I’m talking about the internet, which I think everyone should have access to and use as much as they like, I usually favor all-you-can-eat pricing: please, consume as much information as you can! Produce as much content as you are inspired to produce! All for one monthly price!

But then, when I talk about cars, I say the exact opposite. We should pay-as-we-consume. We want people to know and experience the real cost of driving for every mile (and place) that they drive, so that they can make rational decisions about whether they should walk, bike, take transit, drive now, or bundle the errand with another trip. There is a reason for my flip flop (I’m in a political state-of-mind these days). There are enormous externalities associated with driving, that because they are don’t have a cost associated with them, make driving that extra mile appear free when it really isn’t. Take congested roads for an example, the cost of adding each additional vehicle is very high to every other person out there on the road. But there is a whole list of other underfunded costs as well: parking supply and demand, highway maintenance, traffic accidents (death and injury), the effects of car-dedicated pavement on land use, water quality, and the ability of other modes and people to share that same space. Can you believe I didn’t even say the CO word? I’m trying to make the point that even if no carbon dioxide were emitted from the engine, driving that extra mile has lots of other serious costs associated with it.

Over the last thirty years, the transportation profession has learned that if you build it, they will come – meaning you can never build your way out of congestion, because the more free roads and parking you offer, the more miles people drive and the more places they drive to instead of taking an alternative mode. In the last four years, the US government has been encouraging states to start making drivers more aware of the actual and marginal costs. In San Francisco, they have just launched an experiment with dynamic parking rates in a large area of the city. The tighter the on-street parking supply gets, the more it costs to park. [Conversely, you are always guaranteed to find a parking space in that section of town, you’ll just pay a lot for it at peak times.] Progressive insurance has just started offering pay-by-the-mile insurance: the more you drive the more you pay; the less you drive the less you pay. It makes sense.

I was reading about a keynote address Shai Agassi gave at a conference put on by Discovery Institute’s Cascadia Center for Regional Development. Shai has a compelling story to tell about how he is going to supply electric cars and refueling centers to entire countries (Israel and Denmark have signed up) to reduce CO2 emissions. Electric cars have an important role to play in reducing the 18% of the world’s emissions that come from our cars. Shai is doing some admirable work raising capital, building a business model, engaging partners, and accelerating the adoption of electric vehicles. People everywhere, who have been fretting about how to reconcile our car dependence and energy and environmental needs are loving Shai’s story. This from an article that covered the September 5 conference:

‘But what roused the audience to a level of enthusiasm comparable to the political conventions was the keynote address of Shai Agassi.

But Shai’s program has one element I’d like to see changed. His current plan is to offer drivers a cellphone-like plan. You get the car and x miles per month for a one fixed monthly price. And here is where I’d like governments and transportation planner and business people to take note: This pricing model for the electric cars runs counter to all the other steps transportation planners and city governments are taking. It undermines efforts underway to turn the fixed costs of car ownership into variable ones.

Cars aren’t bad, and electric cars are much better. But, all-you-can-eat buffets shouldn’t be on the menu.