South-Western College Publishing - Economics  
Technology Doesn’t Always Make the Price Fall
Topic Utility and consumer choice
Key Words tolls, tax, consumers, utility
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Reference ID: A165997964

News Story Is it possible to be willing to pay more for something when you don’t realize that you’re paying for it? Are governments increasing tolls on roads with electronic payments because they can? According to one economist, the answer is yes.

An MIT economist looked at tolls data over the last few decades and came to a startling conclusion: after the creation of electronic payment systems, such as EZ-Pass, on toll roads, the cost of tolls actually rose. It wasn’t instantaneous, but the economist’s argument is that the cost increased because we got used to not physically paying for the toll.

With a system like EZ-Pass, when a car passes a toll collection point, a transponder in the car connects with a reader at the checkpoint, and then automatically deducts the cost of the toll from the owner’s credit card. There’s no payment, no transfer of cash to seal the deal. And once we get used to paying this way, we probably don’t think about the tolls anymore. The computer system is taking care of it.

But, the argument goes, that will make it easier for governments to raise tolls and therefore revenue. If you’re not thinking about it, not physically engaged in the transaction, you won’t notice it, and therefore won’t complain about the increase. There are lots of examples where once an electronic payment system has been introduced, the tolls increased.

In the article, the director of the International Bridge, Tunnel and Turnpike Association suggests that setting tolls isn’t as simple as create an electronic system, wait a while and raise tolls. But the argument makes economic sense, and according to the MIT economist, other arguments aren’t supported by the evidence.

Given that last year over 55% of transactions were done by debit or credit card, consumers are beginning to notice transactions less and less. How long might it be before other prices begin to increase?

Discussion Questions:
1. If consumers do become more immune to price increases on toll roads such as described in the article summary, what happens to the shape of consumers’ indifference curves? Why?
2. Consider a budget consisting of toll costs and all other goods. What happens to the budget line when the cost of using toll roads increases? Draw a budget line indicating the effect of the toll increase.
3. Some have suggested that a toll road is, in fact, a tax on consumers. Is it a tax? Why or why not?
Multiple Choice/True False Questions:
1. True/False. After the introduction of an electronic payment system for tolls, our demand for the use of such roads becomes more elastic.

2. Which of the following are reasons why a toll might increase?
  1. Cost of needed repairs on the road.
  2. Reduce driving at peak times.
  3. To stimulate additional drivers on the road.
  4. A and B only
3. If a toll represents a tax on consumers of a particular stretch of road, what must be the underlying price of driving on a road?
  1. Zero
  2. Whatever the original toll was.
  3. The cost of fuel and car repairs.
  4. None of the above.
Source Leonhardt, David. “Technology Eases the Ride to Higher Tolls.” The New York Times, July 4, 2007.
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