Dynamic Pricing: A More Efficient Way to Allocate Public Goods

You're probably familiar with dynamic pricing as it's applied to the shifting cost of individual seats on an airplane, but a market-based approach to better match fixed supplies to fluctuations in demand is slowly catching on in the public sector too, reports Laura Tam. "Sometimes called demand-based pricing or real-time pricing, this is a more efficient way of allocating publicly provided or regulated goods," says Tam, "especially those that are subject to wide fluctuations in demand over a short period of time, such as within an hour or a day. By judging people's willingness to pay for a publicly provided service - such as electricity, road space or parking - demand-based pricing enables a more nimble match-up of supply and demand than has previously been possible. "

With the potential for public benefits in economic efficiency, development of revenue streams, and limiting of environmental impacts, technology is finally making dynamic pricing a possibility for public agencies. According to Tam, "[a] combination of new sensory and computing technologies, two-way communications and devices that both create and analyze large volumes of data can now measure and communicate real-time demand. This information can be used to automate price signals for resources, such as at smart parking meters. In some cases, it can also be used to remotely trigger a certain action, such as powering down preselected devices during periods of peak electricity demand."

Such pricing models are not without their challenges, however, including the potential for higher prices to have a bigger impact on people with lower incomes. As such, says Tam, "[a]ny demand-based pricing scheme for public goods must be designed to mitigate disproportionate impacts as much as possible, especially with goods that were previously 'free.'"