Large Elasticity at Introduction

Abstract For tolling in urban areas, the measured elasticity of demand with respect to money cost is much larger when tolls are introduced than when tolls are raised. This paper names this phenomenon “Large Elasticity at Introduction” (LEI). It has been observed in four of five cities with urban tolls: London, Singapore, Stockholm and Gothenburg. After describing these cities’ experiences, the paper discusses why LEI is surprising from a modeling perspective, and then discusses and formalizes three plausible explanations for LEI: (i) transaction costs; (ii) the “zero-price effect”; and (iii) the “price-sensitive users” theory proposed by Borjesson and Kristoffersson (2018).