Last November, the tension between locals and the Maribyrnong City Council (four kilometres west of Melbourne) over parking meters reached boiling point. Locals charged into a council meeting and assaulted two councillors. One councillor remarked “this is not Kazakhstan or the Taiwan Parliament, this is Australia”. A month after this tumultuous council meeting, the parking meters were suspended.

So why all the angst? No one doubts Maribyrnong’s right to install meters and charge for parking; under the Victorian Local Government Act 1989, the city councils have the right to raise revenue through fees and charges for compulsory and discretionary services. Nevertheless, local residents and retailers have campaigned their opposition towards parking meters publicly and strongly since installation earlier in 2015. Their opposition essentially centres on the negative impact of the meters on local retailers.

Are parking meters smart? Quite possibly not. As economists, we know that raising the price of a service, like parking, reduces demand for that service. So installing parking meters is likely to reduce the number of people willing to park in Maribyrnong. We also know that if the price is set equal to the marginal cost of providing parking services, even though this may deter some, it will result in efficient use of the parking spaces. There are two components to the marginal cost of parking: the direct costs of provision which are almost certainly zero (given that the costs of the meters themselves and of policing them are fixed); and the indirect cost to customers if parking becomes congested (e.g. having to drive around for 10 minutes to find a vacant spot).

Let us assume that there are no congestion costs. There were no reports that congestion was a problem in Maribyrnong (or that it was a problem that could not be sorted by placing and policing time limits on free parking). The marginal costs of parking are therefore zero. What now is the consequence of installing parking meters, which set a price higher than zero, whose sole purpose appears to be to raise revenue? Obviously, demand for parking is reduced below the level that is socially efficient. How large is the efficiency loss?

Parking is just one component of the demand chain (think supply chain, but comprising the stages a customer goes through in order to satisfy their demand for, say, goods from a local store, rather than the stages of supply to get goods into that store). Reducing demand for parking by setting a price above marginal cost has the knock-on effect of reducing demand for goods from local retailers. We say that parking and local retailing are demand complements. In a nut shell, if customers think the parking is too expensive, they will park and shop elsewhere. If the report of one of the councillors is to be believed, these knock on effects are substantial, with business occupancy rates having dropped to 35% to 40% since the meters were installed.^[1]

This is an example of a ‘vertical negative externality’. A negative externality arises when the actions of first and second parties (e.g. the implied parking contract between the car driver and the city council) imposes a cost on a third party (the local retailer) which is not taken into account in the original transaction. The most commonly used textbook example is the business that pollutes the environment without charge or penalty. The term ‘vertical externality’ refers to situations where the externality occurs at a different level in the supply chain, but it is equally applicable to demand complements.

You might say, of course, that the social cost of these inefficiencies is more than compensated for by the revenue that the council receives from the meters. That appears to be the judgement of the city council at the outset. But if the reported impact on retailers is accurate and solely attributable to the parking meters, as our pugilist appears to think, then this is very unlikely. As a general proposition it also appears unlikely. After all, shopping malls, which face similar demand complementarities between parking and retailing, almost without exception provide free parking even if it is time limited. That is, they offer free parking to maximise retail sales, and time limit the free parking to prevent congestion (by customers who have stopped shopping).

Even if it is the case, surely there are better ways of raising revenue that have a much smaller negative effect on local retailing. The council could simply raise rates on all its rate payers (or the charges for other services it provides where that does not simply give rise to different adverse consequences). But suppose the council wanted to confine its revenue raising narrowly to this parking/retail context. Follow the shopping mall ‘free parking’ model. Impose and enforce time limits on free parking to maximise retail demand. This stops spaces becoming clogged up by people who are no longer shopping, or whose shopping habits are unrelated to local parking charges (e.g. by people who work in the local stores or offices). Raise revenue from the retailers directly through rates or a tax, in much the same way that shopping malls cover the costs of providing parking through their lease charges.

Or how about a red button on each meter which triggers an hour of free parking, but for two hours insert some coins. Unless, of course, the mere sight of a meter is enough to deter the prospective shopper from parking!

[1] ABC News. 18 November 2015. Yarraville parking meters: punches thrown after council meeting becomes violent.