A California program to encourage hybrid cars has some unexpected consequences.
BY RICHARD B. MCKENZIE
Monday, February 19, 2007 12:01 a.m. EST
IRVINE, Calif.--In 2006, the California legislature authorized the state Department of Motor Vehicles to distribute 85,000 stickers to the owners of gasoline-electric hybrid cars. The stickers allow drivers to travel without passengers in all of the state's high occupancy vehicle (HOV) lanes, which were formerly restricted to cars with two or more passengers. A report determined that California's HOV lanes were operating only at two-thirds of their capacity and not easing congestion as much as they could; the idea was to stimulate demand for hybrids and thus reduce the emissions of greenhouse pollutants.
The sticker distribution did exactly what it was supposed to do. People wanted to shave time off their commute, and the stickers drove up demand for hybrids for the Toyota Prius and Honda Civic hybrid (the only cars that qualified for stickers), so much so that the small Prius has been selling for over $30,000, and until recently had waiting lists. The Civic hybrid has carried a dealer "added premium" to the manufacturer's suggested list price of as much as $4,000 (with the hybrid Civic total price nearly $7,500 higher than the quoted price of a non-hybrid Civic).
But it seems that the hybrid HOV program, rather than suppressing automobile use, did the exact opposite: The program was wildly popular, and the HOV lanes became clogged. Californians began talking about "Prius backlash."
Then at the end of January, the DMV ran out of stickers, leaving more than 800 new Prius and Civic hybrid owners, who may have been enticed to buy their hybrids at premium prices inflated by sticker advantage and who applied for the stickers, without the right to drive alone in the state's HOV lanes.
Now that there are no more stickers for distribution, what can be expected to happen in the California market for hybrids?
First, we should expect a drop in the demand for new hybrids at dealers, along with a drop in their negotiated sale prices. Buying a new hybrid Civic instead of a non-hybrid Civic has been difficult for even warm-hearted environmentalists to justify, since the hybrid would very likely have to be driven over 500,000 miles before the savings in gas (at current prices) could offset the added purchase price plus the cost of replacing the hybrid battery (most likely within 10 years), and the additional sales tax and interest cost on financed vehicles. However, those added car costs can be easily justified by a commuter who earns $40 an hour and who, with the stickers, can save an hour a day commuting to and from work. Such drivers can cover the added hybrid costs through lower commute costs within nine months.
Since the HOV-lane stickers stay with the hybrids, the demand for used hybrids can be expected to rise, along with their prices, perhaps dramatically, especially since Honda and Toyota can no longer accommodate the demand for reduced commute times with more cars.
The growing number of drivers with long commutes and high opportunity hourly earnings can be lead bidders for used hybrids. They can be expected to buy hybrids from owners who bought their hybrids for environmental reasons and from owners who have lower cost savings from using the HOV lanes, because they have lower wage rates or shorter commutes.
As a consequence of the used hybrid sales, we should expect the HOV lanes to become even more crowded (since the lanes will be dominated to a greater extent by people with longer commutes), which will, of course, undercut (albeit marginally) the value of the stickers and the price of used hybrids. Given the market value of stickers and the fact that the DMV appears to have distributed stickers that are far from counterfeit-proof, anecdotal evidence suggests a healthy black market for stickers, with the counterfeit stickers dampening the rise in the used prices of hybrids.
The impact of used hybrid sales on automobile pollution is more difficult to assess. On the one hand, the people who buy used hybrids to speed up their commutes will reduce pollution, since they will be driving the less-polluting hybrids and will spend less time on their commutes with their engines running. On the other hand, the more crowded HOV lanes will mean that other non-hybrid HOV-lane users will, because of the greater crowding, have longer commutes with their non-hybrid engines running all the while. The slowing of traffic in the HOV lanes can also lead to less carpooling.
Should hybrid owners with stickers be allowed to sell their stickers as separate items--that is, without selling their cars?
On first thought, it might seem that pollution would remain unchanged, since the stock of stickers and hybrids will remain at 85,000. However, you can bet current hybrid owners with stickers would love to be able to sell their stickers separate from their cars, since they would not then have the hassle of buying another car and since the demand for, and price of, their HOV-lane sticker advantage would be heightened by the added value commuters with Hummers (and all other large and small cars) would put on the stickers. Hummer dealers could also see an advantage in independent sticker sales since people could buy with the intent of going into the "used sticker" market to reduce their commute times.
If stickers could be sold independently of the hybrids, we might see another marginal increase in the crowding of the HOV lanes because of the likelihood that some of the used sticker buyers would have cars larger than the small Prius and Civics that would be replaced in the HOV lanes.
The impact of shifting to independent HOV-lane sticker sales on pollution is, again, problematic. If current Hummer owners move into the HOV lanes, they might pollute less, since they would have lower commute times; but, again, the added crowding could add to the pollution coming from all the non-hybrid cars using the HOV lanes. However, independent sticker sales could spur sales of cars and trucks larger than the current crop of hybrids.
It's an interesting case study of government intervention in the marketplace. Whether that intervention is justified is another question entirely.
Mr. McKenzie, a professor in the Merage School of Business at the University of California, is a co-author of "Microeconomics for MBAs: The Economic Way of Thinking for Managers" (Cambridge, 2006).
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