Common Tragedies

Thoughts on Environmental Economics

New York City Counsel approves congestion pricing

Posted by Daniel Hall on April 1, 2008

New York City wants to move ahead with a congestion pricing plan. The plan now goes to the state legislature in Albany.

This plan to have a “cordon charge” for all drivers entering a specific zone in the city is much better than the current “no policy” alternative. It should reduce congestion and travel times, improve air quality, reduce CO2 emissions, and provide additional revenue for public transportation.

Still, a recent discussion paper from RFF scholars Elena Safirova, Sebastien Houde, and Winston Harrington suggests NYC could do much better by implementing some kind of comprehensive vehicle miles traveled (VMT) tax. Their analysis of various transportation policies for Washington, DC finds that the improvement in social welfare from a comprehensive “VMT tax” (set at the socially optimal level) would be an order of magnitude greater than the increase in welfare under an optimal “cordon charge” policy. This is largely because any cordon charge is going to affect less than 10% of vehicle miles traveled, whereas a comprehensive VMT tax affects them all.

Don’t get me wrong, this congestion pricing plan from NYC is a good idea, and should be implemented. It’s appropriate that we as a society start realizing more clearly that driving has external costs, and become more accustomed to paying for them. But the ultimate model we should be looking at involves a persistent marginal charge for every mile we drive. This could be implemented fairly easily alongside pay-as-you-drive insurance. (Maybe we could even have a meter in the car — ala taxicabs — that constantly displayed the charges we were racking up? Something for the behavioral economists to think about.)

It’s not a future that’s very likely in the near-term, but it’s where we should be headed.

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5 Responses to “New York City Counsel approves congestion pricing”

  1. [...] Tragedies’ Daniel Hall writes: Don’t get me wrong, this congestion pricing plan from NYC is a good idea, and should be [...]

  2. rdjonsson said

    Sure, it would be nice to have a (socially optimal) marginal cost pricing, but I think you are downplaying the methodological difficulties involved in determining that marginal cost too much. Who would, for instance, determine the value-of-time used to determine my price per VMT? One idea that has been floated (can’t think of a reference right now) is to construct some kind of auction, but I don’t know if that is technically feasible. Another issue is predictability (or the lack of perfect information, if you will). The drivers would not know what the price would be before the trip, because it is determined by the level of congestion. Of course, these things could be implemented as averages over the population, and over time, but that instead opens up a whole new can of worms in terms of equity effects.

    I basically agree with you that getting closer to charging the marginal costs is the way to go, but I am not so sure that it could be “implemented fairly easily”.

  3. David said

    Doesn’t a fuel tax approximate a VMT tax pretty closely?

  4. Daniel Hall said

    Rdjonsson:

    I don’t think you read the paper. The VMT tax studied is a flat per mile tax, so there are not any “methodological difficulties” in determining what it should be. This means that it is indeed less efficient than a true marginal cost pricing toll (referred to as a “Comprehensive Toll” in the paper) but notice the results in Table 3: the VMT tax is nearly as good from a social welfare standpoint as the true marginal cost pricing, and it is far, far better than the rest of the policies. I do not see why a flat per mile VMT tax could not indeed be “implemented fairly easily”.

    David:

    A fuel tax would equal a VMT tax if you held fuel efficiency constant, but of course in reality part of the effect of a fuel tax is to encourage drivers to shift to more efficient vehicles. The fact that the VMT tax works so well despite not encouraging such behavior can be more easily understood if you look at Table 1. The largest external costs of driving — congestion, accidents, and local air pollution — are either wholly or mostly correlated with VMT.

  5. rdjonsson said

    Indeed, after reading the paper (not just scanning it quickly…), I agree, the VMT tax would be fairly easy to implement. My mistake, I did not read through the descriptions of the policies enough. The equity concerns are still there, though, since the rate that maximises the total welfare could potentially lead to solution which people would deem unfair. I am not saying that cordons are necessarily any better, so I still basically agree with you: It is probably the way we should be headed.

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