What next after odd-even?

The verdict on whether disallowing odd and even number-plated cars from plying on alternative days had any effect on pollution and congestion in New Delhi is out. A study conducted by Energy Policy Institute of Chicago (EPIC) of the University of Chicago and Evidence of Policy Design (EPD) of Harvard University shows that the Odd-Even policy managed to bring an overall reduction in air pollution concentration by 10-13%.

The Odd-Even scheme has been successful in providing the buy-in of the stakeholders. Citizens participated in the pilot with enthusiasm, and the government now has their attention and will to tackle the problem.

But the idea of banning half the cars on any particular day relies on people voluntarily taking on the inconvenience and is therefore myopic and bereft of rationality. Ultimately, people will come up with novel ways to cheat the system, like they did in Mexico City after a similar programme was launched: citizens simply started keeping two cars instead of one, and pollution increased in the long run. Mexico City's 'Hoy No Circula' scheme has been in place since 1989 and consequently, people's incentives to cheat the system have also been anchored firmly.

A similar plan in Beijing, on the other hand, was recorded as a success mainly because it only lasted for 2 months. (That, and the Chinese penchant for adhering to government imposed discipline.) The temporary nature did not incentivise people enough to want to cheat the system, very similar to New Delhi's phenomenal response to the 15-day policy.

A permanent and a more efficient solution will be one where the costs of using a car in the city are also reflective of the supply and demand dynamics of road space along with other costs. Currently, the cost of using a car only includes the cost of buying, maintaining and fuelling it. As more and more people buy cars, the demand for road space increases, while the supply is capped at the maximum carrying capacity of the roads of the city. This resultant scarcity of road space does not translate into higher costs. Until air pollution and traffic delays due to congestion don't get internalized in people's budgets as additional costs of owning a car, the free usage of road space will create an 'externality'.

Ronald H. Coase, a professor of law who accidentally discovered one of the most fundamental ideas of economic logic, for which he was awarded the Nobel Memorial Prize in Economics in 1991, has produced extensive research on internalizing such externalities. In his 1960 thesis, "The Problem of Social Cost," he showed that the best solution to resolving any externality might not be to regulate it out of existence (like the Odd-Even scheme), but to assign property rights so that the affected parties can bargain amongst themselves for those rights and achieve an economically efficient solution.

For example, consider a particular stretch of road which can be used by two parties: pedestrians and cars. Suppose now that the rights of using this road lie with the pedestrians. Not wanting exclusive usage of the road, they sell some rights to car owners after negotiations. The car owners pay the pedestrians for the rights and cars are allowed to ply on the road for a fixed number of hours of the day. Ultimately, through bargaining the two parties reach the optimal cars-to-pedestrians levels for the road, an outcome that would also occur through similar bargaining if the car owners had all the rights. Notwithstanding who pays whom, the act of assigning rights and the subsequent bargaining enables internalizing the costs of using the road and leads to an optimal outcome.

On the other hand, if nobody had rights on the road, it would be used extensively by both the parties without due consideration for the other, leading to an externality and the least favourable outcome, also known as the tragedy of the commons.

To solve Delhi's congestion and pollution externalities, the government must become the de factor owner of road space rights, and sell them to citizens at a price. This could be in the form of a congestion tax for using the road, a higher parking fee or a carbon tax on petrol and diesel.

The idea of congestion charging has been running successfully in cities like London, Singapore and Stockholm, where the government owns the rights on roads in particular areas, and taxes their use by cars, trucks and other transport facilities at different prices. In central London, for example, cars pay a price of £8 to drive in the 22 sq. km. region which suffered from severe congestion before such a scheme was introduced. The London system uses overhead cameras to recognize license plates, and charges are applied to the appropriate account. This scheme, which was launched in 2003, has managed to bring down congestion levels by 30% and pollution by 20%. Moreover, the scheme generates revenues twice the cost of operations, enough for undertaking significant investments in improving public transport, pedestrian- and cycles-only lanes and other urban infrastructure.

Similarly, regulated pricing of street-side and dedicated parking spaces by the government can also help internalize the cost of congestion in car owners' budgets. A blanket carbon tax on petrol and diesel will also achieve the same outcome.

It would take a significant amount of research in experimenting with each of these ideas, but the effort will be worth it. Myopic measures like the Odd-Even scheme, which infringe on individual freedom cannot be sustainable permanently. The government would be wise in using the positive response of citizens to put in place market-based solutions, which create disincentives for car owners, and which have worked successfully in other cities around the world.