The economics of Delhi’s odd-even policy

Delhi’s unique experiment of having odd-even numbered vehicles off the roads on alternate days to combat high levels of air pollution has ignited a debate on the merits and efficacy of the policy.

A recent Indian Express article, co-authored by US-based scholars Michael Greenstone, Santosh Harish, Anant Sudarshan and Rohini Pande, argued that the odd-even policy did help in reducing pollution levels.

The authors used pollution data from Delhi and areas around Delhi in the National Capital Region, where the odd-even pilot scheme wasn’t in force, to show that “particulates pollution declined by 18 per cent” due to the scheme. The impact was greater during the day (the scheme was operational between 8am and 8pm) than during the night, they found. However, they cautioned that the scheme may not be enough to bring down pollution levels meaningfully over the long run.

One of the biggest criticisms of the odd-even scheme was rooted in the fact that it interfered with people’s freedom to choose their mode of transport. Economists typically assume that people are rational enough to decide what is good for themselves, and nudges, in the form of inducements rather than blanket bans, are enough to get them to behave in a fashion that leads to desirable social outcomes. However, a discussion paper of the economics department of the University of Oxford published last year shows that there is good reason to believe that individuals, when left free, do not make the best commuting choices.

The paper is based on the database of daily commuters in London, where most of the transport is provided by one company and where it is possible to track individual movements across different modes of transport. The authors have used an unanticipated event (or an external shock)—a strike in the Tube—to study whether it led to any changes in commuter behaviour even after the strike ended. In case commuters did not go back to the Tube, it would mean that they have discovered a better way of reaching their destination than their usual mode of transport. Given that such choices were available even before the external shock (Tube strike) forced commuters to explore other ways, such an outcome can be inferred as proof that individual freedom might not guarantee optimal choices. According to the paper, a significant number of commuters who were forced to explore new routes during the strike were less likely to return to their pre-strike routes even after the strike ended.

According to the authors, this shows that commuters were averse to experimenting with travelling options which could produce more optimal situations for them. They discovered their findings to be consistent with historical evidence where external shocks have triggered innovation.

While economists typically frown upon unintended consequences of public policies, this paper seems to suggest that sometimes the unintended consequence may, in fact, be better for many individuals, and even for society as a whole—something that we should keep in mind while judging the odd-even policy too.

It is worth investigating, for instance, how many people have discarded their usual mode of transport in Delhi after the odd-even experience. Although the findings may appear to challenge conventional economic wisdom on the rationality of actors, the researchers point to earlier research in Economics which shows that individuals might stop short of searching for the most optimal outcomes after they have found results which are satisfactory to them.

The concept of “satisficing” behaviour was popularized by Nobel Prize-winning economist Herbert Simon, who argued in a 1959 paper that economic agents might be displaying “satisficing” rather than maximizing behaviour.

The term “satisficing” is rooted in a combination of two words—satisfy and suffice.

Simon argued that instead of trying to find the maximum point of satisfaction (or utility), as suggested by economic theory, economic agents try to attain what might be a satisfactory level of benefits for them. For example, a company may try to position itself at a level of profit or market share which in its management’s view is satisfactory.

Simon, who was also a political scientist, sociologist, psychologist and computer scientist, invoked psychological theories of acts stemming from drives, and terminating when the drive is satisfied, to buttress his claims.

Another research that the authors cite is by Michael Porter, a professor at Harvard Business School, who challenged the conventional notion that environmental regulations would lower the profitability of firms by bringing additional constraints into their production decisions. If correctly designed, such regulations could trigger innovations and lead to greater profits and hence overall efficiency, argued Porter.

One of the apparent gains of the odd-even policy in Delhi seems to be a reduction in congestion that not only would have reduced pollution levels, but also lowered commuting time for many people. Economic theory, however, can be used to argue that laws of the market can produce an equilibrium where the “disutility” from commuting time can be offset by people’s ability to have a better house or job. The theory can be extended to argue that even if a person is losing due to greater travel time, other members in his/her household might be better off due to more earnings or the experience of living in a better house. Economic agents would adjust either of the two to arrive at an equilibrium in the world of textbook economics.

A 2008 paper by Swiss economists Alois Stutzer and Bruno S. Frey uses data to show that such equilibria might not exist in reality. In a detailed empirical exercise, Stutzer and Frey show that longer travel time necessarily meant lower well-being levels for not just the individual undertaking the travel but also his/her family members. While the authors attribute this “commuting paradox” to several factors, it only underlines the fact that reduction in travel time can enhance economic benefits both at the macro and micro level.

Despite its positive features, the odd-even scheme may not be adequate to tackle pollution in the national capital. Summarizing the research on pollution-control measures across the world, a useful article by Kaustuva Barik in the Economic and Political Weekly points to three kinds of policy measures that can be used to reduce vehicle usage: moral suasion, command-and-control measures and economic incentives. Moral suasion, as the name suggests, include public awareness campaigns to use public transport or carpooling. Command-and-control involves methods such as the odd-even policy. Economic incentives include methods such as imposing a congestion tax, higher taxes on a second car, subsidizing public transport, etc.

Barik cites research which shows that while command-and-control methods might yield dividends initially, their gains are likely to taper off in the long run. The return of high pollution in Delhi after the Supreme Court made compressed natural gas mandatory for public transport vehicles is one such example. Beijing, which also has an odd-even policy in place, has witnessed a significant rise in people buying another car with a different registration number to escape the ban, thus diluting the initial reduction in congestion.

Greenstone and his co-authors make a similar point. They argue that a similar policy in Mexico City ended up encouraging households to buy second cars that are old and polluting. The researchers point to the examples of Singapore and London, which have used congestion pricing (in which drivers are charged for using the roads at certain places and times), to reduce both peak congestion and pollution levels, as worthy of emulation.

Barik argues that using economic incentives, such as a congestion tax, would yield double dividends in terms of reducing traffic as well as generating additional revenue, which could be used to augment public transport. A tax of Rs1,000 per month on cars and Rs500 per month on two-wheelers (taking into account just vehicles registered in Delhi) can generate a tax of more than Rs6,700 crore, according to Barik’s calculations. Such funds can be used to revamp the city’s public transport infrastructure, and ensure last-mile connectivity for daily commuters, reducing the demand for cars in the city.

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