The injustice of positional goods

July 15 JDN 2458315

At Disneyland, you can now buy a special pass that will let you skip ahead in line. On several airlines including American, Delta, Spirit, and Southwest, you can pay extra to be allowed to board before other passengers (which has been particularly salient for me on the many flights I’ve been taking this summer). This is only an extreme form of a long-standing phenomenon: Since the beginning of commercial ship and train travel, there have been first-class and second-class tickets.

I don’t have any formal survey data on the matter, but just about everyone I have spoken to about such policies is at least vaguely uncomfortable with them, if not totally outraged. The exception is other economists, who typically don’t express any concern whatsoever. “People are willing to pay for this service because they value it,” they say; “so what’s the problem?”

On this one, I think the economists are wrong and everyone else is right. There is something different about this sort of service.

Part of the difference between first-class and second-class is in actual quality of services that actually incur additional costs (I hate to break it to you, but legroom on an aircraft is just such an example; every inch of legroom on each seat is another row of seats they can’t have, which is another $2000 or so they don’t get in revenue on each and every flight). But part of it is something else, something that costs the company literally nothing.

This makes early boarding a clearer example. What are you buying when you pay for early boarding? On most airlines, it’s not even a better seat; your seat is pre-assigned (Southwest is an exception). We could say you are paying for extra time, but that’s not really even true; the plane leaves at the same time for everyone. From your perspective, you are paying for convenience; you get to settle in on the plane, maybe get started working or whatever, before everyone else. Maybe you’d rather wait on the plane than wait in the airport (though frankly I’m not sure why; the airport has restaurants and comfortable restrooms).

What you are really buying is position. Early boarding is a positional good. Every person who gets bumped forward in the queue is someone else who is bumped backward. The net benefit for all customers as a whole is precisely zero, as is the cost for the company to provide it—and yet, it still has a positive price! This is impressive economic alchemy: The airline has managed to take something with zero marginal cost and zero marginal benefit, and still make money off of it. They have transmuted the lead of something costless and worthless into the gold of profit.

They achieve this by pitting customers against one another. In a post awhile back I talked about rent-seeking, such as lobbying and advertising. Usually it’s the corporations doing the rent-seeking, but early boarding and queue-jumping are examples of corporations intentionally generating a circumstances where they can obtain revenue from the rent-seeking of others.

To be fair, there might be some welfare gains to be had from auctioning off order in a queue. Some people have genuinely higher costs of time than others (a cardiac surgeon’s time is particularly important, for example), and an auction could potentially order people who have very high cost of time first.

But this argument is much weaker than it may at first appear, because people also have very different marginal utility of wealth, and indeed I think the correlation between your willingness to pay for time and your total wealth is considerably higher than the correlation between your willingness-to-pay for time and your actual real cost in terms of pain and suffering.

This is a more general problem, as I’ve discussed in previous posts; but I think it’s especially acute in the case of time, because real cost of time doesn’t actually vary all that much between most people. The reason poor people take buses and rich people take limousines isn’t because poor people don’t care about their time; it’s because they can’t afford limousines. A cardiac surgeon and an economist could very well have the same salary and the same willingness-to-pay for time, but people rarely die when an economist turns up an hour late. (It’s not that our work isn’t important—actually a good development economist can save far more lives than any cardiac surgeon—but it’s not nearly so urgent.) Also, consider the fact that teachers and social workers generally contribute a good deal more to society than derivatives traders (and thus, from a social welfare perspective, their time should be considered more valuable), but they are far less likely to pay for first-class seats. In fact, a first-come, first-served method actually seems better than an auction from a social welfare perspective: If your time is really important to you, you’re more likely to go out of your way to check in as soon as you can. That costly signal provides a sorting mechanism which relies directly upon real costs of time, rather than indirectly via monetary willingness-to-pay.

And of course when it comes to Disneyland, this argument utterly fails; I see little reason to think that a cardiac surgeon’s vacation time is substantially more valuable to society. (Don’t get me wrong; surgeons need and deserve vacation time—but if they get too much, their performance actually suffers!) So maybe paying for a place in queue isn’t completely rent-seeking, but it’s pretty close.

That is why paying for positional goods feels unjust to most people: Because it is. Charging a price for positional goods is a means of extracting profit from customers without providing any (net) real service. It’s a way of applying price discrimination without even having much monopoly power. If another airline doesn’t let you pay to skip ahead in the queue, you have a slightly lower expected wait time on that other airline, but any revenue they lose from charging a bit less for economy tickets can be easily made up by charging more for the front of the line.

For example, if the first 10% of the line on airline A is decided by selling spots, while airline B chooses at random, and the average time waiting in line to board is 30 minutes, the expected wait times are as follows. Fly airline A and don’t buy a spot: 16.5 minutes. Fly airline A and buy a spot: 1.5 minutes. Fly airline B: 15 minutes. Those 10% are paying for, on average, 13.5 minutes; but you’re only gaining 1.5 minutes. Of course, there are more people waiting that extra 1.5 minutes than saving those 13.5 minutes (9 times as many, in fact). If the per-minute willingness-to-pay were exactly the same, the airline would break even; but they know of course that the willingness-to-pay of that top 10% is considerably higher than that of most of the bottom 90%. If they have any market power at all (which they generally do, by being the only airline serving certain routes, offering loyalty benefits, etc.), they can squeeze out even more profit.

They may even sometimes go out of their way to make life miserable for those who don’t pay extra, increasing the incentive to pay extra. This requires some market power to pull off, but as I said, they often have that. Most airlines don’t offer power outlets at every seat, for example. This is not a serious question of installation cost or even power consumption. We’re talking about a few hundred dollars on an aircraft that costs hundreds of millions of dollars, or a few kilowatts from a system that can generate over one hundred megawatts (of course most of it is used for propulsion, but adding an alternator that would generate an extra few kilowatts of electrical power would still not be difficult or expensive). This is a way of making life worse for the economy-class passengers so they have a stronger incentive to pay for upgraded tickets.

It’s not always easy to tell what is a positional good: First-class seats are ambiguous, for example. But I think a good heuristic is to ask, “Could everyone benefit from this?” If the answer is “No, even in principle”, then you are definitely dealing with a positional good. Not everyone can be first in line at Disneyland. Not everyone can board the plane first. In theory at least, everyone could be provided the same legroom and meal service as a first-class ticket (it would be expensive, but not impossible), so that is at least in part not a positional good.

The “pay-to-win” effect of some video game downloadable content (DLC) is also a positional good, which we can see by the above heuristic: If everyone pays to have the best gun in the game, there’s no point in having the best gun in the game. This is why gamers are rightfully outraged by “pay-to-win” effects, but typically have no objection to paying for DLC that provides them with extra game content (such as new characters, locations, or missions) or cosmetic upgrades (hats, decorations, and “skins”). Personally I tend to think that most DLC is overpriced, and succeeds at being so due to a kind of monopoly power (Mass Effect DLC doesn’t work on Skyrim or vice-versa) but I certainly don’t object to the basic idea of charging additional money for additional content. The reason we object to “pay-to-win” is not that winning the game is so important; it’s that this business model is so obviously a form of rent extraction. (It’s interesting that gamers in China don’t seem to be as bothered by “pay-to-win” as gamers in the US; this runs counter to the standard narrative that American people are competitive capitalists and Chinese people are collectivist socialists, don’t you think?)

There may be some circumstances in which we have no choice but to allow corporations to charge prices for positional goods—especially if we can’t tell whether we are dealing with a positional good or not. But it would not be very difficult to draft legislation that would at least reduce such business practices: We could simply use my “Could everyone benefit?” heuristic. If a business charges money for something that even in principle they could not possibly provide all of their customers, they are charging a price for a positional good, and should be penalized. The benefits of such a policy would be relatively small, but the costs would be even smaller. If we are really concerned about letting cardiac surgeons board aircraft faster (we should really be concerned about deboarding faster—and especially faster security screening!), we could make such a rule that applies to particular classes of high-urgency professions; we don’t need to allow airlines to extract millions of dollars in rent by pitting their customers against each other.

What will we do without air travel?

August 6, JDN 2457972

Air travel is incredibly carbon-intensive. Just one round-trip trans-Atlantic flight produces about 1 ton of carbon emissions per passenger. To keep global warming below 2 K, personal carbon emissions will need to be reduced to less than 1.5 tons per person per year by 2050. This means that simply flying from New York to London and back twice in a year would be enough to exceed the total carbon emissions each person can afford if we are to prevent catastrophic global climate change.

Currently about 12% of US transportation-based carbon emissions are attributable to aircraft; that may not sound like a lot, but consider this. Of the almost 5 trillion passenger-miles traveled by Americans each year, only 600 billion are by air, while 60,000 are by public transit. That leaves 4.4 trillion passenger-miles traveled by car. About 60% of US transportation emissions are due to cars, while 88% of US transportation is by car. About 12% of US transportation emissions are due to airplanes, while 12% of US passenger-miles are traveled by airplane. This means that cars produce about 2/3 as much carbon per passenger-mile, even though we tend to fill up airplanes to the brim and most Americans drive alone most of the time.

Moreover, we know how to reduce emissions from cars. We can use hybrid vehicles, we can carpool more, or best of all we can switch to entirely electric vehicles charged off a grid that is driven by solar and nuclear power. It is theoretically possible to make personal emissions from car travel zero. (Though making car manufacturing truly carbon-neutral may not be feasible; electric cars actually produce somewhat more carbon in their production, though not enough to actually make them worse than conventional cars.)

We have basically no idea how to reduce emissions from air travel. Jet engines are already about as efficient as we know how to make them. There are some tweaks to taxi and takeoff procedure that would help a little bit (chiefly, towing the aircraft to the runway instead of taking them there on their own power; also, taking off from longer runways that require lower throttle to achieve takeoff speed). But there’s basically nothing we can do to reduce the carbon emissions of a cruising airliner at altitude. Even very optimistic estimates involving new high-tech alloys, wing-morphing technology, and dramatically improved turbofan engines only promise to reduce emissions by about 30%.

This is something that affects me quite directly; air travel is a major source of my personal carbon footprint, but also the best way I have to visit family back home.
Using the EPA’s handy carbon footprint calculator, I estimate that everything else I do in my entire life produces about 10 tons of carbon emissions per year. (This is actually pretty good, given the US average of 22 tons per person per year. It helps that I’m vegetarian, I drive a fuel-efficient car, and I live in Southern California.)

Using the ICAO’s even more handy carbon footprint calculator for air travel, I estimate that I produce about 0.2 tons for every round-trip economy-class transcontinental flight from California to Michigan. But that doesn’t account for the fact that higher-altitude emissions are more dangerous. If you adjust for this, the net effect is as if I had produced a full half-ton of carbon for each round-trip flight. Therefore, just four round-trip flights per year increases my total carbon footprint by 20%—and again, by itself exceeds what my carbon emissions need to be reduced to by the year 2050.

With this in mind, most ecologists agree that air travel as we know it is simply not sustainable.

The question then becomes: What do we do without it?

One option would be to simply take all the travel we currently do in airplanes, and stop it. For me this would mean no more trips from California to Michigan, except perhaps occasional long road trips for moving and staying for long periods.

This is unappealing, though it is also not as harmful as you might imagine; most of the world’s population has never flown in an airplane. Our estimates of exactly what proportion of people have flown are very poor, but our best guesses are that about 6% of the world’s population flies in any given year, and about 40% has ever flown in their entire life. Statistically, most of my readers are middle-class Americans, and we’re accustomed to flying; about 80% of Americans have flown on an airplane at least once, and about 1/3 of Americans fly at least once a year. But we’re weird (indeed, WEIRD, White, Educated, Industrialized, Rich, and Democratic); most people in the world fly on airplanes rarely, if ever.

Moreover, air travel has only been widely available to the general population, even in the US, for about the last 60 years. Passenger-miles on airplanes in the US have increased by a factor of 20 since just 1960, while car passenger-miles have only tripled and population has only doubled. Most of the human race through most of history has only dreamed of air travel, and managed to survive just fine without it.

It certainly would not mean needing to stop all long-distance travel, though long-distance travel would be substantially curtailed. It would no longer be possible to travel across the country for a one-week stay; you’d have to plan for four or five days of travel in each direction. Traveling from the US to Europe takes about a week by sea, each way. That means planning your trip much further in advance, and taking off a lot more time from work to do it.

Fortunately, trade is actually not that all that dependent on aircraft. The vast majority of shipping is done by sea vessel already, as container ships are simply far more efficient. Shipping by container ship produces only about 2% as much carbon per ton-kilometer as shipping by aircraft. “Slow-steaming”, the use of more ships at lower speeds to conserve fuel, is already widespread, and carbon taxes would further incentivize it. So we need not fear giving up globalized trade simply because we gave up airplanes.

But we can do better than that. We don’t need to give up the chance to travel across the country in a weekend. The answer is high-speed rail.

A typical airliner cruises at about 500 miles per hour. Can trains match that? Not quite, but close. Spain already has an existing commercial high-speed rail line, the AVE, which goes from Madrid to Barcelona at a cruising speed of 190 miles per hour. This is far from the limits of the technology. The fastest train ever built is the L0 series, a Japanese maglev which can maintain a top speed of 375 miles per hour.

This means that if we put our minds to it, we could build a rail line crossing the United States, say from Los Angeles to New York via Chicago, averaging at least 300 miles per hour. That’s a distance of 2800 miles by road (rail should be comparable); so the whole trip should take about 9 and a half hours. This is slower than a flight (unless you have a long layover), but could still make it there and back in the same weekend.

How much would such a rail system cost? Official estimates of the cost of maglev line are about $100 million per mile. This could probably be brought down by technological development and economies of scale, but let’s go with it for now. This means that my proposed LA-NY line would cost $280 billion.

That’s not a small amount of money, to be sure. It’s about the annual cost of ending world hunger forever. It’s almost half the US military budget. It’s about one-third of Obama’s stimulus plan in 2009. It’s about one-fourth Trump’s proposed infrastructure plan (that will probably never happen).

In other words, it’s a large project, but well within the capacity of a nation as wealthy as the United States.

Add in another 500 miles to upgrade the (already-successful) Acela corridor line on the East Coast, and another 800 miles to make the proposed California High-Speed Rail from LA to SF a maglev line, and you’ve increased the cost to $410 billion.
$410 billion is about 2 years of revenue for all US airlines. These lines could replace a large proportion of all US air traffic. So if the maglev system simply charged as much as a plane ticket and carried the same number of passengers, it would pay for itself in a few years. Realistically it would probably be a bit cheaper and carry fewer people, so the true payoff period might be more like 10 years. That is a perfectly reasonable payoff period for a major infrastructure project.

Compare this to our existing rail network, which is pitiful. There are Amtrak lines from California to Chicago; one is the Texas Eagle of 2700 miles, comparable to my proposed LA-NY maglev; the other is the California Zephyr of 2400 miles. Each of them completes one trip in about two and a half daysso a week-long trip is unviable and a weekend trip is mathematically impossible. Over 60 hours on each train, instead of the proposed 9.5 for the same distance. The operating speed is only about 55 miles per hour when we now have technology that could do 300. The Acela Express is our fastest train line with a top speed of 150 miles per hour and average end-to-end speed of 72 miles per hour; and (not coincidentally I think) it is by far the most profitable train line in the United States.

And best of all, the entire rail system could be carbon-neutral. Making the train itself run without carbon emissions is simple; you just run it off nuclear power plants and solar farms. The emissions from the construction and manufacturing would have to be offset, but most of them would be one-time emissions, precisely the sort of thing that it does make sense to offset with reforestation. Realistically some emissions would continue during the processes of repair and maintenance, but these would be far, far less than what the airplanes were producing—indeed, not much more than the emissions from a comparable length of interstate highway.

Let me emphasize, this is all existing technology. Unlike those optimistic forecasts about advanced new aircraft alloys and morphing wings, I’m not talking about inventing anything new here. This is something other countries have already built (albeit on a much smaller scale). I’m using official cost estimates. Nothing about this plan should be infeasible.

Why are we not doing this? We’re choosing not to. Our government has decided to spend on other things instead. Most Americans are quite complacent about climate change, though at least most Americans do believe in it now.

What about transcontinental travel? There we may have no choice but to give up our weekend visits. Sea vessels simply can’t be built as fast as airplanes. Even experimental high-speed Navy ships can’t far exceed 50 knots, which is about 57 miles per hour—highway speed, not airplane speed. A typical container vessel slow-steams at about 12 knots—14 miles per hour.

But how many people travel across the ocean anyway? As I’ve already established, Americans fly more than almost anyone else in the world; but of the 900 million passengers carried in flights in, through, or out of the US, only 200 million were international Some 64% of Americans have never left the United States—never even to Canada or Mexico! Even if we cut off all overseas commercial flights completely, we are affecting a remarkably small proportion of the world’s population.

And of course I wouldn’t actually suggest banning air travel. We should be taxing air travel, in proportion to its effect on global warming; and those funds ought to get us pretty far in paying for the up-front cost of the maglev network.

What can you do as an individual? Ay, there’s the rub. Not much, unfortunately. You can of course support candidates and political campaigns for high-speed rail. You can take fewer flights yourself. But until this infrastructure is built, those of us who live far from our ancestral home will face the stark tradeoff between increasing our carbon footprint and never getting to see our families.