2019

Nudge Theory in Transport Economics

Anik Maity – A13558919003

Rishikant Pandey – A13558919004

Prateek Parashar – A13558919022

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Table of Contents
1. Introduction .................................................................................................................................... 3
2. Economic Schools of thought.......................................................................................................... 3
 Classical economic views ............................................................................................................ 3
 Neoclassical model...................................................................................................................... 3
3. Behavioural economics ................................................................................................................... 3
 Availability heuristic .................................................................................................................... 3
 Framing – .................................................................................................................................... 3
 Anchoring effect – ....................................................................................................................... 4
4. Biases .............................................................................................................................................. 4
 Willingness to pay ....................................................................................................................... 4
 Search.......................................................................................................................................... 4
 Quality ......................................................................................................................................... 4
5. Nudge & its Key Principles .............................................................................................................. 5
 Incentives .................................................................................................................................... 6
 Understand mappings ................................................................................................................. 6
 Defaults ....................................................................................................................................... 6
 Give Feedback ............................................................................................................................. 6
 Expect Error................................................................................................................................. 6
 Structure Complex Choices ......................................................................................................... 6
6. Indian Scenario of Transport Sector ............................................................................................... 7
7. Application of Nudges in Public Policies in India & Scope in Transport Sector ............................ 13
8. Conclusion ..................................................................................................................................... 15
9. References .................................................................................................................................... 16

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Table of Figures
Figure 1 : Behavioural biases depending upon how they affect choice ................................................. 4
Figure 2:The Nudge Continuum .............................................................................................................. 5
Figure 3:TRANSFORMING INDIA’S MOBILITY .......................................................................................... 7
Figure 4:Indexed Estimated Growth of Travel Demand ......................................................................... 8
Figure 5:Heat Map of Air Pollution ......................................................................................................... 8
Figure 6:Pollution Level in Major Indian Cities (PM 2.5 Level) ............................................................... 9
Figure 7: PM 2.5 Level Increase in Major Countries (1990-2015) .......................................................... 9
Figure 8: Cost of Congestion for Top Indian Cities ................................................................................ 10
Figure 9: Traffic Index-Peak Hour Congestion (% additional time to travel in peak hours) ................. 10
Figure 10: Urban Freight Cost compared to Long distance Transport Cost.......................................... 11
Figure 11: No. of Buses per 1000 Population across countries & Indian States ................................... 11
Figure 12: Share of non-motorized Transport in cities as % of Overall Modal Trips ............................ 12
Figure 13:EV Sales and Penetration across the World.......................................................................... 12
Figure 14: From Minimal Influence to Coercion ................................................................................... 13
Figure 15:Influence Spectrum of Policies in India ................................................................................. 13
Figure 16:Principles of Behavioural Economics .................................................................................... 14
Figure 17: Behavioural Principles to Overcome Cognitive Biases......................................................... 14

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1. Introduction
Transport demand in India has increased about eight times since 1980. It is the highest growth
than any other Asian economy. Significant health and welfare losses, wastage of fuel, high level
economic losses, low average speed of vehicles due to congestion, higher carbon footprint are
main drawbacks in the urban transportation of India. (NITI AAYOG, 2018)Govt. policies play a
major role in changing the behaviour of the transportation medium. How the different Govt.
policies act as intervention in the choice architecture of the system and motivate for undertaking
more sustainable choices as a mode of transport is our objective. That can be achievable if more
public transport facilities are encouraged rather than private mode with the help of fundamentals
from behavioural economics.

2. Economic Schools of thought

Economics is a social science that deals with the people and how they organize themselves to
meet their needs as well as enhance wellbeing of individual.

Classical economic views – It consists of Adam Smith’s concept of invisible hand – people
act in their self interest and promote general welfare. His emphasis was on the desire of
people to have self-respect and respecting others i.e. “Moral Sentiment” plays a major role in
promoting public interest.
Neoclassical model – It encompasses with the interaction of firms and households in
perfectly competitive market. Objective of the firm is profit maximization and that of
household is utility maximization. Neoclassical model is basically based on the axiom of
rationality which signifies that every individual is aware of the choices available and selecting
that derives maximum utility to them. (Neva Goodwin, 2019)

3. Behavioural economics
There is development of recent economic theory that explored human behaviour on the decision
making that go beyond axioms of neoclassical model. It deals with the part of microeconomics
which studies about the procedure of decision making by individuals and firms. Instead of making
assumptions, behavioural economics relies on the scientific experiments being conducted and
analysing the outcome of it. There are three key terms that play major role in behavioural
economics developed by Daniel Kahneman–

Availability heuristic – People tend to impart more weightage on the easily available
information called as availability heuristic. Example – due to negative review in one video
about a course of a college by a student people are highly influenced by it though
hundreds of other students are appreciating the course.
Framing – The way of representing decision to people can effect on their choices and this
effect is known as framing. Example – a gas station advertises of giving discount of 5 cents
per gallon for paying through cash. At another fuel station it advertises of surcharging 5
cents per gallon at the same rate. Experimental result shows that response of the
consumer is favourable for the advertisement of apparent discount.

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 Anchoring effect – It’s a kind of similar to framing, in which people rely on the
information that directly doesn’t necessarily related to the point that helps in making out
a decision. Example – a company showcased the cost of a bread maker as $279 in the
catalogue. After some time, company launched a deluxe model for $429. There was very
less demand of the deluxe model, but the sales of the previous model were almost
doubled, as it seemed of relative bargain. (Neva Goodwin, 2019)

4. Biases
Through deceptive tables psychologist Roger Shepherd has depicted the bias in the choices of the
consumers. Cognitive system (Automatic & Reflective) has its effect in the systematic biases in the
way that we may think. (Richard H. Thaler, 2008) Consumer choice may be biased from rational
behaviour in three different dimensions –

Willingness to pay – willingness to pay too much for a consumption of good.

Search – due to not searching in rational way, consumers don’t find the cheapest or best
suited product.
Quality – consumers sometimes end up with purchase that is ill-suited to their needs or
of inferior quality.

Misperception of Misjudgement of
desired quantities price

Willingness
Search Biases
to pay
Reference point & Inertia
loss aversion

Misperception of Misjudgement of
desired attributes quality

Quality Biases

Figure 1 : Behavioural biases depending upon how they affect choice

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 Willingness to pay and Reference Point effects – “A consumer’s WTP may be affected through
reference point effects, that is, the consumer’s valuation of a good can depend on the status quo,
past experiences, recently sampled products, or expectations. Wherever the reference point
comes from, a deviation to something worse than the reference point is felt to a greater extent
than a deviation to something better. It is this loss aversion that renders reference points
significant.” Example – if a consumer’s reference price for a product is $5, then price of $6 may
cause more psychological harm than the enjoyment of the same product at a price level $4.

Willingness to pay and Misperception of future desired quantities – Consumers may pay more
due to their misperception that in future they will consume more.

Search and Inertia – Consumers may be hindered by idiosyncratic inertia i.e. subjectively high
search costs.

Search and Misjudgement of prices – It arises due to engaging in thorough search leading to
misjudge of prices that sellers quote.

Quality and Misperception of Desired product attributes – Consumers sometimes misperceive

difference in quality of products they need.

Quality and Misjudgement of vertical quality – There are higher and lower quality products.
Consumers may misjudge in choosing the quality of product they inspect and inadvertently buy a
poor one. (Office of Fair Trading, 2011)

So, we can’t totally rely on the rationality of gaining information as it is not without bias. (Govt. of
India, 2019)

5. Nudge & its Key Principles

Figure 2:The Nudge Continuum

Source: https://behavioralscientist.org/cartoons/the-nudge-continuum/
(Lazarovic, 2018)

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“A nudge is any aspect of the choice architecture that alters people’s behaviour in a predictable
way without forbidding any options or significantly changing their economic incentives.” (Richard
H. Thaler, 2008)
Nudges are neither mandates, nor laws or rules or commandments. It is a gentle push towards a
right direction. Example – keeping fruits at the eye level in the supermarket tends people in the
direction of living healthier is a nudge. The mnemonics being used in the choice architecture is
nudges and comprises of six principles –

Incentives-Providing right incentives to the right people for adopting good decisions. For
Governments, it would benefit population with vested interest.
Understand mappings – It looks insight of the consequences of decision pathways. One
approach is “RECAP: Record, Evaluate, and Compare Alternative Prices”. Example – in the
mobile market, Govt. should regulate so that operators should disclose all hidden fees
rather than regulating amount of charges.
Defaults – People often opt for default decision if they are lazy to take any decision. Policy
makers may ensure that the default option would benefit most of the public.
Give Feedback – The way of improving the performance of the person is providing
feedback. Example – shutter click in digital camera makes sure that the photography is
being captured.
Expect Error – Human commits mistakes. Design must be prepared in a fashion so that
people are warned before it turns out into a disastrous situation.
Structure Complex Choices – When choices are more abundant, people try to simplify
them. A good choice architecture makes the ways to make this more obvious for people.
Example – instead of stating the colour code providing colour shades helps people to make
choice in better way.

“By allowing people some freedom while egging them towards a more beneficial option when
the need arises, nudges help to improve how the world functions in many different areas. This can
be achieved without going to the extremes of complete freedom or complete paternalism.”
(Richard H. Thaler, 2008)

“Paternalism is the interference of a state or an individual with another person, against their will,
and defended or motivated by a claim that the person interfered with will be better off or
protected from harm. The issue of paternalism arises with respect to restrictions by the law such
as anti-drug legislation, the compulsory wearing of seatbelts, and in medical contexts by the
withholding of relevant information concerning a patient’s condition by physicians. At the
theoretical level it raises questions of how persons should be treated when they are less than fully
rational.” (Philosophy, 2017)

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6. Indian Scenario of Transport Sector
Transport demand in India has increased about 8 times since 1980. It is the highest growth than
any other Asian economy. This demand paved few challenges to be addressed as follows:

Significant health and welfare losses (around 7.7% of India’s GDP as estimated by world
bank).
Now India’s major cities are being ranked amongst one of the most congested cities of the
world.
Avg. Speeds of vehicles as low as 17 km/h are being reported in some metropolitan cities.

Due to increased level in congestion following effects came into role:

Reduced productivity.
Wastage of fuel.
High- level estimated Economic loss (about 22 billion USD annually) for top 4 metros of
the country.

Several steps taken by government as a remedy to the problems:

The Pradhan Mantri Gram Sadak Yojana (PMGSY)- for rural areas.
The national Urban Transport Policy.
The National Electric Mobility Mission Plan 2020.

To accomplish these objectives, actions were based on following four pillars:

Connect Bharat,
Optimize travel Footprint,
Promote seamless, co-operative transport, and
Adopt green modes and technologies.

Figure 3:TRANSFORMING INDIA’S MOBILITY

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Increasing rate of growth of population and wealth has led to form a significant amount of
strain in the transportation infrastructure over a past few decades. The population of the
country has nearly become double since 1980. As shown by the graph above the estimated
growth India was not only unpredictable but also highly volatile.

Figure 4:Indexed Estimated Growth of Travel Demand

Increasing population has raised the demand of the vehicles which in turn has led to significant
amount of increase in air pollution. According to a study done by WHO, the top 14 most
polluted cities of the world are from India alone, which has significantly affected the life
quality and raised the risk of several severe diseases. In addition to these effects urban
pollution has caused noticable economic impact on cities, which are backbone of indian
economy. According to world bank the welfare losses has been currently estimateed around
7.7% of GDP. India is facing the bad situation with respect to air polltion as shown in Fig. 4.
and the effect of this pollution on economy can increse exponentially if not brought down
significantly.”

Figure 5:Heat Map of Air Pollution

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 Figure 6:Pollution Level in Major Indian Cities (PM 2.5 Level)

India’s PM2.5 level is continuosly increasing whereas most of the other contries have stablized
notably (Fig. D), around 70-80% of this PM2.5 consist of vehicular polltion, road dust, industrial
activity, construction activity, and domestic activity. Therfore, this problem should be
approched by several different angles but signifcantly vehicular pollution as it contributes the
most (around 30-35%).

Figure 7: PM 2.5 Level Increase in Major Countries (1990-2015)

Deriving market cities will play significant role in the World economy. Cities play important
role in driving groth of indian economy too, providing about 60-65% of indian GDP and 45-
50% of consumtion. As stated by WEF study – “the number of Million-plus urban
agglomerations have increased from 35 (2001)” (AAYOG, 2018). This number is assumed to
be increase up to 87 by 2030.
Major cities are facing the dance of the problems aroused by increased population.
The major cities are consistently being ranked as one of the world’s top congested cities

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leading to fall of avg. speed of vehicles. Bengaluru, India’s IT capital has marked as low avg.
speed of vehicles as 17km/hr and in Delhi the avg. speed of 13 arterial roads is around 27
km/hr (50-60% lower than the designed speed).
The cost of congestion leads to following:
Reduced productivity
Fuel waste
Accidents

The cost of congestion in Delhi, Mumbai, Kolkata and Bengaluru together is over USD 22 bn
yearly. Delhi alone cost around over USD 10 bn per year (Fig. 7). The traffic index peak hour
congestion is represented by Fig. 8.”

Figure 8: Cost of Congestion for Top Indian Cities

Figure 9: Traffic Index-Peak Hour Congestion (% additional time to travel in peak hours)

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 The Congetion also tend to effect the speed of freight which is also one of the problem
contributing to loss of economy. The logistics need good network of transport and rapid
mobility to work efficiently and effectively but congestion behaves as a barrier in achieving
that. The data of relatively high freight costs VS long distance transport cost is represented in
the Fig. H. helps to show that the urban Freight cost the travel within the city is over twice
as expensive as intercity distances travelled by freight.

Figure 10: Urban Freight Cost compared to Long distance Transport Cost

Challenges in Indian Public Transport System:

In India there are 1.2 buses per 1000 persons, which is very much less than the national benchmark
and it is also not spread evenly through states for example 3.9 in Karnataka vs 0.02 in Bihar. Out
of 458 cities of India only 63 consisting of population over 100,000 citizens have formal city bus
system, in theses 63 cities only 15 cities have a bus or rail-based mass rapid transit system.
Fig. 10 represent the twin dilemma of pollution and congestion. To avoid congestion and pollution,
the well-connected and efficient public transport network are the top requirements, and India
needs to improve these factors significantly.

Figure 11: No. of Buses per 1000 Population across countries & Indian States

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The non-motorized transport (NMT) benefits in both the economic and environmental aspects
in addition to last-mile connectivity to the desired location from and to public transit systems
specifically in the urban areas having high density and low income. However, India lacks
significantly in terms of use of non-motorized transport (as shown in the Fig. 11). The usage
of NMT has become as low as 4% over the last decade.
The use of NMT has direct positive impacts on pollution, congestion and health of the citizens.
Therefore, it provides the healthy and traditional solution to the new age problems related to
health and transport.

Figure 12: Share of non-motorized Transport in cities as % of Overall Modal Trips

Other than non-motorized transport, the green technologies (such as EVs) also help to lower
the pollution. In this context, it would be crucial for India to initiate the growth of emission-
free technologies to tackle these problems. Green mobility technologies have notably
developed over the past few decades and the its acceptance across many countries tells its
success itself as shown in Fig. 12. (NITI AAYOG, 2018)

Figure 13:EV Sales and Penetration across the World

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7. Application of Nudges in Public Policies in India & Scope in Transport
Sector
Public policies affect and influence people to act in more desirable ways socially, conserve natural
resources, respect human rights & foster proper incentives. Public policies consist of a broad
spectrum of how they influence the consumer behavior. There are two extremities i.e. Laissez
faire & mandatory public policies. Laissez faire is leaving individuals to achieve the outcomes that
is desirable on own. Public policy forces people to act in a socially prudent way. Between these
two is “incentivize good behavior or disincentivize bad behavior.” Without interrupting into the
freedom of the individuals, nudge steers towards more desirable behavior and it lies somewhat
between Laissez faire and Incentivize.

Laissez
Nudge Incentivize Mandate
faire

Figure 14: From Minimal Influence to Coercion

In India, influence spectrum several policies to change the consumer behaviour is as depicted in
the figure.

Figure 15:Influence Spectrum of Policies in India

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Public policy must employ seven key principles of behavioural economics as follows.

Figure 16:Principles of Behavioural Economics

Figure 17: Behavioural Principles to Overcome Cognitive Biases

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 In Transport sector, “National Electric Mobility Mission Plan 2020 (NEMMP)” was conceived in
order to promote, adopt & achieve the target of reaching 60-70 lakhs of EVs by 2020. In major
cities of India there is impetus of promotion of good quality public transport majorly through
metro services. Norway, where there is highest percentage of EVs, provided several incentives to
EV buyers and disincentives to the user of conventional vehicles. Exemption of VAT, tax incentives
on purchase of EVs, free parking, waiver of toll tax are acting as nudges in the choice architecture
of the consumer behaviour.

8. Conclusion
In Indian context there is lot of scope of the research on Nudge Theory in Transport sector to
reduce carbon footprint and adopt sustainable green mode of vehicles. By adopting good policies,
which will act as nudge to the behaviour of consumers i.e. choosing the mode of transport,
purchasing pattern of vehicles may be changed to a better pollution free country.

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9. References
AAYOG, N., 2018. TRANSFORMING INDIA’S MOBILITY A PERSPECTIVE, s.l.: NITI Aayog & The Boston
Consulting Group.

Govt. of India, M. o. F., 2019. Economic Survey 2018-19, New Delhi: Department of Economic
Affairs,Ministry of Finance, Govt. of India.

Lazarovic, S., 2018. [Online]

Available at: https://behavioralscientist.org/cartoons/the-nudge-continuum/
[Accessed 12 October 2019].

Neva Goodwin, J. H. J. N. P. J. R. B. R. &. M. T., 2019. Microeconomics in Context. Fourth ed.

s.l.:Routledge.

NITI AAYOG, T. B. C. G., 2018. [Online]

Available at: https://niti.gov.in/writereaddata/files/document_publication/BCG.pdf
[Accessed 09 Oct 2019].

Office of Fair Trading, S. H. J. Z., 2011. Consumer Behavioural Biases in Competition, London: s.n.

Philosophy, S. E. o., 2017. [Online]

Available at: https://plato.stanford.edu/entries/paternalism/
[Accessed 13 October 2019].

Richard H. Thaler, C. R. S., 2008. Nudge - Improving Decisions about Health, Wealth, and Happiness.
s.l.:Yale University Press.

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