WHAT is it worth to take someone else’s speeding points? The conviction of Chris Huhne and Vicky Pryce for lying over swapping points has brought the matter into sharp focus. The practice of selling points is illegal, and should be condemned. But it also raises interesting topics in economics.
It turns out that there is a market for speeding points. The Daily Telegraph recently discovered that some prisoners are willing to take other people’s points at a going prison rate of roughly £200 for three. By the time they get out, the penalty will often have expired. But this is by no means the extent of it. This year, a man was jailed for advertising on Facebook for a volunteer to take his penalty points for £250.
But how does this market work? How is the price decided? Like many questions in science, the ones which seem easy to ask are often the hardest to answer. Vernon Smith, economics Nobel Prize winner in 2002, noted as much in his acceptance speech when he stated that “we do not understand why markets work as they do”.
The basic textbooks give a pat answer to how price is set. It is a simple matter of supply and demand. Price is where supply equals demand. But the market for points is more complicated. There is a lack of transparency about other transactions, for example. It is not prudent to enquire too extensively about what the going rate might be. Further, there is no institutional setting to regulate the conduct of the market to balance supply and demand. Transactions can take place at what textbooks would regard as non-equilibrium prices.
Leading economists wrestled with these problems at the turn of the nineteenth century, when economic theory was first formalised. Alfred Marshall founded the economics department at Cambridge around 1900. His contemporary, Francis Ysidro Edgeworth, believed that there was inherent uncertainty about the outcome of the interplay between supply and demand. In any given situation, there would be a range of potential outcomes for price. Marshall simply assumed the problem away, and his ideas have dominated economics ever since.
Interest in these problems has been revived in the twenty-first century. In many financial markets, for example, prices are set by a formal set of rules known as a continuous double auction. But it seems that, for reasons we do not yet fully understand, this process generates some of the key features of changes in asset prices like “fat tails” – the fact that very large price changes, while rare, are much more frequent than financial regulators believed before the crash.
Increasingly, the world is full of complex products and services. Naive supply and demand analysis can only take us so far in understanding how their prices are set. Institutional structures, price setting mechanisms, information flows, all these need adding to the mix. The market for speeding points illustrates key aspects of our modern world.
Paul Ormerod is an economist at Volterra Partners, a director of the think-tank Synthesis and author of Positive Linking: How Networks Can Revolutionise the World.