Thursday, 30 July 2009

Economics for Dummies (and City Councillors)

As you may have heard the City Museum has somehow managed to put on a hugely popular exhibition of art by Banksy. Queues are reported to exist all day long and a two hour wait seems to be fairly typical. Entrance to the Banksy exhibition is 'free' - that is it is paid for by the tax payers of Bristol rather than the people actually 'enjoying' the show, many of whom are visitors from around the country. More than 350,000 people are expected to visit the Banksy exhibition by the time it closes at the end of August.

Cost Benefit Analysis (CBA) as applied to transport planning puts a value on people's time so that the cost of congestion (queueing) can be compared to the cost of investing in increased capacity. The value ascribed to your time is highly variable depending on whether or not it's working time and how you travel. As a mere cyclist my working time is valued at around £17 p.h. but a car driver's working time is valued at around £27 p.h. Why I don't know off hand, probably just a reflection of deep rooted prejudices.

Non-working time is more difficult to put a value on. How much would you expect to be paid to stand around for a couple of hours doing nothing much in Queen's Road - £5 p.h., £10 p.h., £20 p.h.? Let's say £10 p.h as a conservative figure for the sake of the argument, so that's £20 for the two hour wait. Multiply that by 350,000 and we get £7 million as the value of all the time spent queueing, or in CBA terms the cost to the economy of the congestion.

Now let's suppose that someone in Bristol City Council has a clue about economics (I know, it's just a wild hypothesis) and institutes an admission charge to the museum set at a level that will just eliminate queueing (perhaps incorporating a time slot booking system). Let's guess that an admission charge of £5 would have this effect. That would result in an income of £1.75 million to the City Museum (which in turn could mean Council Tax being reduced pro rata - one can dream).

Such an admission charge would save those otherwise queueing £7 million but cost them £1.75 million in admission charges so a net saving to them of £5.25 million. In addition we have a potential saving to Bristol's Council Tax payers of £1.75 million, so the total benefit to the economy will be around the £7 million worth of time saving. Some of the value saved might well be spent in other ways in Bristol. For example visitors who weren't standing in a queue for two hours might well visit shops or cafes instead, perhaps spending an average of say £5 per head in the process so putting another £1.75 million into the local economy.

That's a simplistic summary based on some fairly arbitrary figures (do suggest corrections or refinements to this model), but it gives a useful indication of the scale of waste (which we all ultimately have to fund) arising from the economic illiteracy of Bristol City Council. Headline - Council tax payers' subsidy of Banksy exhibition costs local economy over £7 million.


Anonymous said...

"As a mere cyclist my working time is valued at around £17 p.h"

but if you walk it's worth £24 p.h, so may I suggest you get off and push and thus increase your value to society?

The problem with CBAs is that they are often based on artificial values and thus downright silly (as the above illustrates)

I am about to leave to visit the Banksy event in the knowledge that I may have to queue for two hours; I calculate that the cost of admission (0) to this exhibition of art is worth the value of my time spent queuing. Therefore the value of my time spent queuing is zero.

350,000 X 0 = 0


BTW I have checked with my wife and she agrees with the calculation but the two kids (8 and 11) are quite keen to know where they can go to find somebody that will pay them £10 p h to stand around doing nothing....shall I give them your email?

Anonymous said...

Hi Chris,

I've only had time to read this once - and don't know much about economics - but can I check my understanding of what you are saying?

You say that the exhibition is costing Bristol taxpayers £7,000,000,000? And this is because thousands of people who wouldn't normally visit Bristol *have* visited Bristol and *their* time is worth a total of £7,000,000,000? I don't understand how *their* time costs *us* anything...

Or do you mean that the congestion caused by them queuing has cost Bristol £7,000,000,000?

Sorry - I genuinely don't understand the argument.


Anonymous said...

Would there still be 350,000 visitors if an admission charge was imposed?

Chris Hutt said...

First Anon,

Since you value your time at 0p I would be delighted to offer you employment at say £1 a day + reasonable travel expenses. You will be £1 better off and I will be better off to the extent of the value of your labour over and above £1 a day.

Second Anon,

The figure suggested is £7 million, not £7 billion. The £7 million figure is an estimate of the value of the time wasted queueing, i.e. 350,000 people each wasting 2 hours of their time worth on average £10 per hour.

This cost is born primarily by the people queueing. Many are not from Bristol so their loss is not immediately a loss to the local economy in Bristol but to a local economy elsewhere, but the negative experience of queueing is likely to have an adverse affect on their impression of Bristol and this may have knock-on effects.

It seems fairly obvious to me that the prospect of queueing for two hours is putting off a lot of potential visitors, including me. If the option of paying £5 entry was available I expect many more people would wish to visit the exhibition.

Third Anon,

The number of people visiting the exhibition is constrained by the capacity of the Museum. Demand exceeds supply and so we get queueing. If we substitute an admission charge for queueing to the extent that supply and demand balance then the number of visitors would remain the same if the supply remains static.

However the admission charges could provide funds to enable the supply to be expanded by extending opening hours and/or the duration of the exhibition. So it is possible that the number of people visiting the exhibition could be increased.

This would have further economic benefits for Bristol which cannot be realised while the exhibition is subsidised by the tax payer.

Anonymous said...

Banksy did the exhibition on the premise that there would be no entry fee.

If the Council had therefore charged a £5 entrance fee they would have been charging to not see a Banksy exhibition.

Would people be willing to pay £5 to not see a Banksy? Even more important would they be willing to queue 2 hours not to see a Banksy?

Given that Bristol regularly receives 7m visitors but only 350,000 are likely to visit Banksy that could indicate that there are well over 6m visitors who might queue for two hours and pay £5 not to see a Banksy.

So the CBA would give 6 million at £10 per hour for two hours = £120m. This is an enormous loss to the economy!

So, by putting on the Banksy exhibition (and thus stopping vast numbers of people queuing to not see a Banksy) the net result is economic costs of £7m (see Mr Hutt above for the details) but savings of £120m to the local economy.

The council should be congratulated and we should be thankful that we have economists to explain this for us!

Chris Hutt said...

Sorry Anon, but you haven't quite got the hang of this economics lark.

The basic premise is that people's time has value. Anything that causes that time to be wasted, like congestion or queuing, causes the value of that time to be lost, or wasted.

On that basis it is argued by some that congestion in Bristol costs us around £1 million a week due to the value of the time wasted. This is of a similar order to the value of time wasted in the Banksy Queues!

With traffic congestion the value of the wasted time is said to justify massive investments in increasing capacity with road widening and new roads since the benefit of time savings is claimed to be greater than the cost of the new infrastructure.

Chris Hutt said...

On the question of Banksy allegedly insisting that the exhibition is funded by the taxpayers of Bristol instead of the tourists from outside (thanks Banksy, now where did I put that paint gun?), if true then the Council's hands might be tied.

That wouldn't suprise me given Banksy's superficial, populist and facile world view. Why bother to understand the complexities when you can make a fortune out of peddling trite pastiches?

But those wasting 2 hours of their lives standing in queues in the rain courtesy of Banksy might like to reflect on why they are denied the option of paying some modest admission charge instead.

Anonymous said...

Hi Chris,

"The figure suggested is £7 million, not £7 billion"

Told you I knew very little about economics – and (excuse) I was rushing out of the house, so didn't get a chance to re-read before pressing post.

However, I can’t understand how this statement: "This cost is born primarily by the people queueing", can also mean this statement "Headline - Council tax payers' subsidy of Banksy exhibition costs local economy over £7 million"? Can you explain how these seemingly contradictory statements can co-exist?

"It seems fairly obvious to me that the prospect of queueing for two hours is putting off a lot of potential visitors, including me. If the option of paying £5 entry was available I expect many more people would wish to visit the exhibition"

It seems fairly obvious to me that the opposite is true – in the current economic climate a lot more people have spare time than spare cash (especially true for familes and carers, where a £5 per head entry fee soon stacks up).

I wonder which of our obvious truths is correct?


Chris Hutt said...

Hi Ben,

If the Museum wasn't receiving a subsidy from tax payers it would have to charge for admission instead.

If it charged for admission there would not be such queues and people would not waste so much time standing in line.

The value of the time wasted queuing is of course debatable and varies from individual to individual. It's much easier to appreciate if you are self-employed and charge by the hour, as I do. There is anecdotal evidence of people taking time off from work to go to the Banksy exhibition. The cost to them can be more easily quantified.

I have suggested an average value of £10 per hour. One could test this by inviting people to stand in a queue in Queens Road in return for £10 an hour and see if you get something like the same number as queue up for Banksy. Then offer £5 an hour and see what happens. I'd be surprised if you got a Banksy sized queue for less than £5 an hour and if you did it would not be the same cross-section of the population as you will find in the actual Banksy queue.

What I'm suggesting is that the entry charge should be set at whatever level enables the queuing to be eliminated, preferably in combination with a time slot booking system. Whether that level is £2 or £5 or £10 we can only determine by testing the market. One could have different charges for different days or times of days to reflect variations in demand, so week days afternoons might be cheaper than Saturday mornings.

The object of the exercise is to eliminate waste which I would have thought environmentalists and economists would agree with.

Anonymous said...

"Since you value your time at 0p I would be delighted to offer you employment at say £1 a day + reasonable travel expenses. You will be £1 better off and I will be better off to the extent of the value of your labour over and above £1 a day."

Except of course that you have read what you wanted to read instead of what I actually said.

What I said is that the value of my time spent queuing for me to see the Banksy exhibition is 0p.

If you want to pay me £1 a day plus travelling expenses for my queuing for my own entrance to the exhibition then I will accept the offer. My travelling expenses are £4 so that's £5 you owe me - I will be outside the exhibition in about 30 minutes, bring your cheque book as I suspect pretty much everybody else in the queue would accept the offer as well. I will indeed be better off as a result but am not sure how you benefit.

If you want to pay for me to do work for you , that has a different value and is considerably more than £1 per day. However, whatever daily rate we agree upon for me to work for you, still won't buy you any time today because today is "free time" to be spent with my family. Time that has a nominal value of nothing but is still beyond your price range.

Chris Hutt said...

So you value your "free" time at a higher rate than anyone is likely to pay to employ you. So let's say for the sake of argument £25+ p.h.? More if you like.

But the time you spend in the Banksy queue is part of your precious "free" time, and therefore worth say £50+ for the 2 hours. But elsewhere you insist that time has zero value.

Does that mean that standing in a queue in the Queens Road is as good a way of spending your "free" time as any other? If so perhaps should we regard the long queue as an integral part of the Banksy experience, a taste of what's in store if we let the opportunistic charlatans and the bureaucrats stitich us up? Now I think I understand.

On that basis we should stop worrying about traffic congestion too. It's just part of the authentic Bristol experience - shoddy expensive public transprt, unpleasant conditions for walking and cycling, cars everywhere jamming the place up - yes, let's embrace it all.

Anonymous said...

Hi Chris,

Thanks for the reply. I see what you are saying about reducing time wasted queuing by imposing a fee, therefore dampening demand. My concern about that position is that the imposition of a fee, by its very nature, excludes people from the activity who cannot afford the fee, but could decide to invest their time in order to access something which is free.

I'm afraid that, despite your further explaination, I still don't see how the notional cost of peoples time 'wasted' in a queue equates to a loss of £7,000,000 (that is the right number of noughts, yes?) for Bristol (and by extension you and I as taxpayers).


Anonymous said...

Oh, and isn't each individual making a decision about whether they think that the time is actually wasted if the object at the end of the queue is, in their opinion, worth the wait? Isn't this kind-of a market in action - just the market is time rather than cash?

Chris Hutt said...

Hi again Ben,

You are quite right about a market operating where time is the means of exchange instead of currency. Because the City Council will not apply the market value to the Banksy exhibition the demand, not being constrained by price, exceeds the supply (capacity and opening hours of the museum) and a time penalty emerges instead as the means of rationing the limited supply.

You could argue that this favours the time rich/cash poor over the cash rich/time poor. But is that a good thing? What about the time poor/cash poor like me? We are disadvantaged in relation to the time rich/cash rich like many retired people. Is that good?

The other thing about tax payer funded entry (usually misnamed "free" entry) is that we all end up paying for it anyway, whether we visit the exhibition or not. Is that good?

I am not willing to invest 2 hours in queuing because I value my time too highly (about £10 p.h. in that case, so I would in effect be paying £20 for admission), so unless queuing times decline I will not be able to visit the exhibition.

But if a modest entry fee were introduced, say £5, which avoided queuing then I probably would visit. Alternatively if the queuing time was just 30 minutes that would also cost £5 worth of my time so I would probably go for that equally.

In other words I would definitely prefer to pay £5 cash than queue for an hour (£10 worth of my time) and I would definitely prefer to queue for 30 minutes (£5 worth of my time) than pay £10.

I'm sure you and other readers could substitute your own figures to help identify how you value your own time.

On the question of who suffers the loss of £7 million (or whatever it is) worth of time, I think I was wrong to say this is a loss to the "local" economy. It is a loss to all the people queuing, many of whom are visitors to Bristol. It is therefore debatable whether their loss (of time) would be a cost to the Bristol economy or the local economies where they normally live.

However if these visitors were not coralled in a queue for 2 hours they would probably be enjoying other aspects of Bristol and more than likely spending money in the local economy. The queue prevents them from being economically active! We could go into that in more detail but it gets complicated, so let's not.

I realise that the concept "time = money" is a difficult one to come to terms with but if we don't we tend to make bad decisions (like the city council) and waste time because we undervalue it. As they say, life is short and it just consists of lots of units of time. Count what units remain to you some time, then divide what you think your life is worth by those units!

David Hembrow said...

It's got nothing at all to do with Banksy, but I thought it might amuse you to know that over here in this somewhat different place, I actually get paid to do my cycle commute.

My commute distance is 30.5 km each way, which at 19 cents per km equals Euro 5.80 twice per day. My best time so far is 47 minutes, so that's about 7.30 euros per hour. Much better than British minimum wage, though not even three quarters of the Dutch minimum.

Jane Hopkins said...

Phew - I'm so glad I gave economics a miss and did sociology and politics instead! But its made me laugh but, then, sociology students always found the economists funny. Now, please, Chris, don't go into a rant... Jane.

Chris Hutt said...

Me, rant? What would be the point with a sociologist?

Anonymous said...

An obvious solution would be to keep the entrance free for residents but to have a charge for visitors to the city as is common practice elsewhere. Even if Banksy didn't agree to the City Council keeping the profits, a local charity could benefit.

Chris Hutt said...

David Hembrow,

That's a very interesting point to pursue in the context of Cycling City.

As you know Cycling City have a target of doubling the amount of cycling in Bristol within 2.5 years (starting from last June?), but have so far done little to bring such a change about, partly because the timescale is so short.

So what about just paying people to cycle more? If we go with a rate similar to that being paid to David (say 20p/km) then someone riding a 10 km commute would earn £2, probably not enough to insentivise enough people. What about 50p a km? That could generate £5 a day for a 10 km commute, so well worth bothering with for most people.

The notional £23 million of Cycling City money could pay for 46 million kilometres of cycling @ 50p/km. If that was spread over the 260 working days of the final year of Cycling City (2011?) then that would pay for about 180,000 kms of cycling each working day. This would be equivalent to 18,000 cyclists doing 10 kms each day.

So the question is 'how does this compare to the amount of cycling currently taking place?'. If it's more than double existing levels it might be a goer. Anyone know?

Chris Hutt said...

Anon - "An obvious solution would be to keep the entrance free for residents but to have a charge for visitors to the city as is common practice elsewhere."

But there would still be long queues because of the tax-payer funded (not "free") admission for locals, so visitors might be further deterred. It's the visitors who are bringing wealth into our local economy from other local economies (which we are told is a 'good thing'). They use local transport, stay in local hotels and eat and drink in local cafes and restaurants. Shouldn't we be encouraging them rather than deterring them by making them stand in a queue for 2 hours in the rain?

May I suggest a better idea. Let's give everyone the option of either queuing for tax payer funded (not "free") admission or dodging the queue and paying say £5 for instant admission. The time rich/cash poor can take advantage of their assets and the time poor/cash rich can do likewise.

Everyone wins. If the queue is longer it won't matter to the people who opt to queue because, as they have testified here, they don't consider that queuing costs them anything anyway. Those who pay will (potentially) reduce the tax burden on the rest and be able to see the exhibition at a modest cost.

Tim M. said...

@Chris: I think you forgot the 'Humour' tag/label when posting this.

@Anonymous 12:40pm: hilarious, thank you :)

Chris Hutt said...

Humour? It's all deadly serious to me.

Believe it or not Tim similar economic arguments based on the value of time "saved" are used to justify vast amounts of public investment in transport infrastructure, including of course our local South Bristol Ring Road, BRT and bus showcase schemes.

Anonymous said...

"so unless queuing times decline I will not be able to visit the exhibition."
You can visit it you just choose not to. You could also do something productive in the time queuing - listen to music, read etc - or with a mobile device add to the phenomenal amount of your money / time spent blogging. VOT is notional anyway not real so most of your arguments are irrelvant to the vast majority of people.

"Cycling City money could pay for 46 million kilometres of cycling @ 50p/km = 18,000 cyclists doing 10 kms each day".

This wouldn't even pay for the existing cyclists in Bristol who no doubt would want a share of the cash under your scheme, and how many of them would continue to cycle after you withdrew the incentive in 2011? I wouldn't put that one to Jon Rogers just yet.


Jane Hopkins said...

Hey - it's stopped raining: time to cycle down the blood pressure for this fluffy, certainly fuzzy, relativist, non-economist sociologist. Jane

Chris Hutt said...

Benjy "VOT is notional anyway not real so most of your arguments are irrelvant to the vast majority of people."

Not sure what you mean by that Benjy. Time has a 'real' value to a particular person at a particular time and place, but that is very difficult to measure objectively, so the argument uses 'notional' values to illustrate the principle. That is perfectly valid. People can substitute their own personal values.

Agreed there are ways of salvaging some value from time otherwise wasted as you describe. A good example is drivers in traffic jams listening to the radio or music. Banning such in car entertainments might be a way of reducing congestion because it would increase the net cost of the time spent in congestion, making people less willing to pay that price.

Yes it's my choice not to stand in a queue for two hours as it would be my choice to pay £5 admission, except that I'm not allowed to exercise the second choice.

Anyway if queuing for 2 hours is such a small price to pay, as many of you seem to think, why did most of our councillors, MPs and other big-wigs dodge the queue with a special extended opening last Monday evening? Presumably they considered the price of 2 hours of their valuable time too high.

On the Cycling City issue, do you have a figure for the amount of cycling currently taking place, as you seem to imply?

Mark said...

Just come across this link to a Banksy competition online!

It gives free entry to a private viewing next Friday night. Not a bad way to beat the queue!