Communism and the Market

The Economist reports that the city of Shanghai has been auctioning car license plates. The average auction price has recently been $6,900, truly remarkable considering average family income in China, and even in Shanghai. The number of plates given out in 2011 will be reduced further in an attempt to reduce gridlock and pollution (both of which my experience several years ago in Shanghai suggests are world-class).?This time, though, plates will be given away in a lottery. Why the substitution of a lottery for an auction? The State will be forgoing the auction revenue, which seems unfortunate.

The article also notes the spillover of the limit on license plates to the related market for new cars. This will shift the demand for new cars leftward, reducing upward price pressure in that market.


Brendon Treanor

China's government doesn't need cash - they need less pollution and crowd control in Shanghai. Your viewpoint unfortunately shows the expansive ignorance many Americans have about China.

The average Chinese income is pennies on the dollar because more than 3/4 of their billion people population still live in rural areas making $3.00 a day on the farm. The people that live in places like Shanghai, Beijing, and Xiam make salaries competitive in the global market place - and are increasingly turning into market influencing consumers buying BMWs and piling into the streets that cannot support the sheer volume of automobiles.

China's top priority - very unlike the USA's - is not to balance their budget, it's to provide a sustainable platform for their economic expansion. They've got more cash than they know what to do with, which is why they need to focus their attention more developing a sustainable infrastructure, and not on taxing consumers.

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Ian Bush

Why do we have license plates? What is the economic value to consumers?

MikeM

The People's Republic of China auctioning off license plates to its highest-bidding citizens. I can hear the rolling in Chairman Mao's grave from here.

Paulo

Depends. Auctions probably will give advantages for the richest. Isn't fair to the majorirty population who can't buy the license.
Why the richest may have the license and the rest of the people are not?

SDC

This puts the money in the hands of the people who win the lottery, and then can auction the license plates off themselves.

ChefL

Ironic that in 2010, GM sold more cars in China than it did in the US, and has been a significant part of GM's recovery.

Brian

I meditated on this for my state of Florida. Would restricting the number of plates via auction reduce the number of cars on the road? I think not, since most the carpetbaggers here would retain their NJ, NY or PA plates rather than get a FL plate. They do that now. It's strange to see a local business van with a Tampa phone number painted on the side but bearing a PA license. I suppose they can insure it cheaper in the Northern states, but that means that while they add to the wear and tear on the roads they don't contribute to the state of FL coffers.

Tony Burba

You have misread the Economist. The city of Shanghai has no plans to alter its auction system. The city of Beijing has just introduced a plate lottery, while previously having no limit system.

Eric

They need to limit the number of cars on the roads at a time rather than the number of cars registered. I would recommend tolls or fuel tax.

Jacob AG

@Brendon Treanor The municipality can limit traffic and pollution just as easily with an auction as with a lottery. What matters for pollution and traffic is how many plates are allowed, not how they are disbursed.

Daniel's question is: why would the authorities forgo the revenue? It's not like switching to a lottery will reduce traffic or pollution.

Now, the lottery system COULD reduce traffic and pollution IF the demand curve shifts so far left that there will be fewer cars on the road. But somehow I suspect that this will not be the case; the municipality clearly limits the number of cars allowed on the road, and the high prices for plates suggest that the shift would have to be pretty substantial before the limits became unnecessary.

Daniel, am I correct? Could you illustrate this with a graph?

Jacob AG

@eric The advantage of an auction (or a lottery) is that the municipality can control the exact number of cars on the road by deciding exactly how many plates to auction off (or give away). With a toll or a fuel tax you'll take some cars off the road, but you don't really know how many. You can use your models to try and estimate, but you don't really know.

It's the same difference between a cap-and-trade system and a carbon tax.

Herbert

I wonder if an auctioned plate is used more than a lottery plate. I would think so because the buyer has valued it higher. There are a lot of things on ebay that I would enter a free lottery for but not bid on.

I also think that this kind of a scheme will only lead to a black market for license plates and car rentals. If the market value for a plate is $7k, what is to stop somebody from entering the lottery and, if he or she wins the plate, essentially renting his car to somebody? This could have unintended consequences as unregulated car rentals spring up.