Wednesday, August 15, 2007

The Economics of Congestion Pricing

Bloomberg's traffic reduction plan has won federal grant money to the tune of $350 million (Daily News). Why they need a federal grant to charge more money is beyond me, but let us examine the logic of congestion pricing as a traffic reduction plan.

Bloomberg argues that a congested city will not attract business as well and this will hurt New York's economy. He therefore proposes a plan to charge tolls for cars and trucks entering the city to reduce the amount of traffic and make the city more appealing.

The catch is obvious: The only way the fee will reduce traffic is if its cost is higher than the cost of sitting in traffic! If people would rather shell out than sit in traffic, the city will be clogged anyway. And if the fee is high enough that it is worse than the traffic, then it will drive people (and business) away faster than grid-lock. So what gives?

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