1. Tradable Priority Permits Prof. Charles R. Plott Dr. Joseph P. Cook

2. 2 Overview Problem Possible solutions Proposal –General –Proposed policy features Experimental Testbed Expected effects –What will be the relationship of prices? –What happens to profits? –What types of traffic benefit and what are hurt? Logic of the Expected Results

3. 3 The Problem to be Solved Lock outages, both scheduled and unscheduled, are one source of congestion leading to delay. –Greenup lock on the Ohio River: planned 18 day outage stretched to 52 days. –Lock 27 on the Mississippi River: auxiliary lock delayed by an average of 25 hours in the peak month. Delays caused by lock outages have significant costs: congestion on one lock costs $209 million annually (MARC 2000). Cargo choices are impacted by uncertainty as is competition with other modes of transportation. Location of potential demanders impacted by delay and uncertainty.

4. 4 Possible Solutions Lockage Fees –Panama Canal –Washington DC Metro System Scheduling and Priority –Air Traffic Control –Panama Canal Command and Control Regulations Tradable Permits –OTC NOx Budget Program –Los Angeles RECLAIM project

5. 5 Expected Effects – Traffic Types The risk of lock delay impacts the nature of the cargo and contracts transported through the river system. The first-come-first-served policy discourages high value contracts with fast delivery requirements. The introduction of a system of tradable priority permits changes the distribution of the types of contracts found in use. Contracting shifts to the more valuable types of contracts and fills the available capacity for such contracts. The priority permit system operates to maximize total profits of operators. TRADABLE PRIORITY PERMITS

6. 6 General Proposal System will be flexible to deal with unforeseen delays (e.g. weather, unplanned outages, etc.) System will reduce the costs of congestion System will reduce uncertainty

7. 7 Proposed Policy Features Tradable Priority Permits: –A permit will give to the holder the right to move ahead of all barges waiting for access to the lock and traveling in the same direction, up to the holder of a permit in the queue being exercised with equal rights. Features –Master Instrument and Two-week Permits –Marketable and Transferable –Priority in levels –Initial allocation could be based on historical usage –Permits will be numbered and recorded by the Corps –Lock masters and the Corps will be responsible for enforcement

8. 8 Experimental Test Bed In order to demonstrate the effects of the proposal, an experimental test bed was set up with the following parameters: –One lock –Nine lockages per day –Nine barge operators –Each barge operator owns five tug or tug/barge combinations –Each period represents 5 days –Twenty-two periods –First ten periods are under first-come-first-served rule, the rest are under the priority permit rule –Each operators boats arrive randomly at the lock

9. 9 Theoretical Prices

10. 10 Expected Effects Relationship of Prices –Graphs will show the markets for Priority 1, 2, and 3 permits. –Markets for Priority 4 and Priority 5 permits: Only three trades in the two markets in periods 11 through 22. What happens to profits? What types of traffic benefit and what types are hurt?

11. 11 Expected Effects - Prices

12. 12 Expected Effects - Prices

13. 13 Expected Effects - Prices

14. 14 Expected Effects - Profits

15. 15 Expected Effects - Profits

16. 16 Expected Effects - Profits

17. 17 Expected Effects - Profits

18. 18 Expected Effects – Traffic Types The risk of lock delay impacts the nature of the cargo and contracts transported through the river system. The first-come-first-served policy discourages high value contracts with fast delivery requirements. The introduction of a system of tradable priority permits changes the distribution of the types of contracts found in use. Contracting shifts to the more valuable types of contracts and fills the available capacity for such contracts. The priority permit system operates to maximize total profits of operators.