New York’s Controversial Delay of Congestion Pricing

Just weeks before the plan was set to take effect, New York Governor Kathy Hochul announced an indefinite delay in implementing congestion pricing in Manhattan.

I wrote about this two summers ago, detailing the elaborate process Manhattan used to ensure the highest buy-in for its implementation, and the MTA even put up these congestion scanners all over the city… 

…but the governor has put it on hold. 

This decision significantly impacts transportation policy and urban planning in New York City and maybe beyond. 

I avoid writing about politics, but congestion pricing is one of my favorite topics, so I couldn’t pass on the opportunity to discuss it, and its political implications. 

Understanding Congestion Pricing

Congestion pricing involves charging drivers a fee to enter high-traffic areas during peak times. The system aims to reduce traffic congestion, lower pollution levels, and encourage the use of public transportation. 

The revenue generated from these fees is typically reinvested into the city’s transportation infrastructure, improving services and maintenance. 

The fundamental idea behind congestion pricing is to discourage excessive use of congested roads. The system has been successfully implemented in cities like London and Stockholm and has led to reduced traffic and improved air quality. 

The concept is not new as we can see from papers like “The Regulation of Queue Size by Levying Tolls,” written by P. Naor in 1969. The paper deals with systems where individuals decide whether to join a queue based on the costs and benefits of waiting, and its main result is that when individuals decide to join a congested system, they tend to opt for more congestion than a social planner would prescribe, mainly because individuals do not account for the externalities their actions impose on others. 

In such systems, there is an inherent value in obtaining a service but also a cost associated with waiting in line (or, in the context of congestion, time spent in traffic). The key points of Naor’s model are:

Individual Decision Making: Individuals decide whether to use a congested service (e.g., drive into Manhattan) based on their own cost of time and the perceived benefit. They don’t account for the additional delay they inflict on others.

Externalities: Each additional user of a congested system imposes a negative externality on all other users by increasing the overall wait time (or travel time, in our case).

Social Planner’s Perspective: A social planner who considers the total costs and benefits to all users would aim to reduce overall congestion to improve welfare. This could be achieved by limiting the number of users through a pricing mechanism.

The paper doesn’t specifically refer to congestion pricing, but we can use it to understand the role of congestion pricing. Within the context of the paper, congestion pricing serves as a tool to internalize these externalities. By imposing a toll on drivers entering congested areas, the pricing mechanism discourages excessive use of the roadways, aligning individual decision-making with the social optimum. 

In that sense, congestion pricing brings three important aspects: 

Cost Internalization and Traffic Reduction: Drivers face the true cost of their decision, which now includes both their private cost and the external cost imposed on others. This leads to fewer cars on the road (reduced congestion), which leads to shorter travel times and less traffic-related stress for commuters.

Revenue Generation: The revenue from these tolls can be used to improve public transportation infrastructure by providing better alternatives to driving, which further reduce congestion.

Welfare Improvement: Ideally, congestion pricing would result in a system in which those who place the highest value on driving and are willing to pay the toll continue to drive, while others switch to alternative modes of transportation. This would optimize overall welfare by reducing delays and improving transportation efficiency.

While the paper doesn’t get into detail regarding these topics, we can identify other benefits from congestion pricing, such as:

Environmental Benefits: Fewer cars on the road mean lower emissions, contributing to better air quality and reduced greenhouse gas emissions. This is particularly important in densely populated urban areas where air pollution can significantly impact public health.

Encouragement of Public Transit Use: Congestion pricing makes driving in congested areas more expensive, incentivizing commuters to use public transportation. This shift can lead to increased investment and improvements in public transit systems.

So the benefits are clear. 

But…

Disadvantages of Congestion Pricing

In my previous article on the topic, we explored the complexities of congestion pricing, and showed how it may not be optimal or fair, and has several downsides:

Financial Burden on Commuters: Critics argue that congestion pricing is a regressive tax that disproportionately affects lower-income individuals who rely on driving for their daily commute into the city (since that’s where the jobs are and the public transportation network is vastly insufficient). In this case, imposing a fee doesn’t change the behavior, but further exacerbates the existing inequalities, rendering the practice unfair. 

Potential Economic Impact: There is concern that congestion pricing could deter people from visiting business districts, potentially harming local businesses that rely on foot traffic and customer visits. This is a significant consideration for cities still recovering from the economic impacts of the COVID-19 pandemic.

Implementation Challenges: Establishing a congestion pricing system requires significant investment in infrastructure, such as toll readers and administrative systems. Additionally, political and public resistance can be substantial, complicating the implementation process. As I mentioned above, New York has invested heavily in installing congestion scanners, albeit their ability to deal with the city’s complexity has yet to be tested. 

Risk of Unintended Consequences: Congestion pricing could lead to increased traffic in surrounding areas as drivers seek to avoid the fees, merely shifting the problem rather than solving it.

So while congestion pricing has challenges and criticisms, if implemented correctly, it can effectively reduce traffic, generate revenue for public transportation, and improve environmental conditions.

So, why is the governor of New York against it?

The Politics of Congestion Pricing

As mentioned above, congestion pricing aims to reduce traffic congestion and generate revenue for public transportation. However, its political feasibility and economic impact on various stakeholders, particularly property owners, are not trivial. 

In their research paper “How Congestion Pricing Reduces Property Values,” Amihai Glazer and Kurt Van Dender ask: What are the political and economic implications of congestion pricing, particularly its effect on property values and the distribution of costs and benefits among different stakeholders?

The paper has several interesting results on the economic impact:

Reduction in Property Values: Congestion tolls increase commuting costs, reducing the demand for housing within commuting distance of employment centers. This leads to declining aggregate property values, generating opposition from property owners.

Welfare Distribution: While congestion tolls can increase overall economic efficiency, they do not necessarily improve the welfare of all consumers. Some commuters bear higher costs without corresponding compensation, reducing utility for a subset of the population.

Revenue Generation vs. Property Value Loss: The study indicates that toll revenue may not always compensate for property value loss. This discrepancy is crucial in understanding the political opposition to congestion pricing.

The paper also discusses the political implications:

Opposition from Property Owners: The decline in property values due to increased commuting costs fosters strong opposition from homeowners, particularly those within commuting distance of central business districts.

And indeed: 

“The chorus of ‘No’s’ to congestion pricing is getting even louder, as a bi-partisan group of lawmakers from upstate New York are now honking their horns in opposition. ‘We need to stop this. We need to consider this side of the river. We’re not another country. We’re not another state,’ said Assemblyman Chris Eachus of the 99th District, which includes Orange and Rockland Counties.”

Redistribution Challenges: Effective redistribution of toll revenue to offset welfare losses is complex and may not be credible or efficient. This adds to the political resistance against congestion tolls. The idea of utilizing the funds to support the MTA is nice until you realize it’s one of the least well-managed organizations in New York (some may even say corrupt). Governor Hochul is a rational decision-maker, and the implications her decision aims to avoid are clear.

The potential decline in property values, the view that congestion pricing is just one more tax on those who cannot afford to live in Manhattan, and the political backlash from affected stakeholders, particularly in an election year, underscore the need for careful consideration.

Every System Lies within a Broader System

As I mentioned above, Naor's model illustrates that when individuals decide whether to join a congested system, they do so based on personal costs and benefits, ignoring the negative overall impact. This leads to system overuse and inefficiencies that can be mitigated through congestion pricing, which aims to internalize these externalities by imposing a fee on drivers, thereby aligning personal decision-making with the social optimum. 

However, this economic perspective operates within a broader political system, and the truth is that political realities often shape, accelerate, or constrain the implementation of economically efficient policies. The median voter, who in this case is likely to reside outside the urban core, perceives congestion pricing as a regressive tax that disproportionately impacts commuters. These voters bear the immediate cost of tolls without directly experiencing the benefits of reduced urban congestion and improved city infrastructure.

Governor Kathy Hochul’s decision to delay the implementation of congestion pricing in Manhattan highlights this political clash. Despite the economic rationale supporting congestion pricing, the political calculus—shaped by voter opposition and concerns over economic inequality and recovery—has stalled the initiative. 

London and Stockholm, which have successfully implemented the practice, have different political systems from the U.S., and their approaches to taxes are quite distinct. Nevertheless, in a recent referendum on whether to expand congestion charges in London, 66% voted against it! 

Bottom Line

The delay in implementing congestion pricing in New York highlights the balance between economic efficiency and political feasibility. While congestion pricing can theoretically enhance overall welfare and reduce traffic, its impact on property values and the uneven distribution of costs and benefits, present significant challenges.

While we don’t like political calculus, it is not clear that it is inferior in any way to economic calculus.

In the end, New York’s congestion pricing plan might just be the ultimate example of a gridlock that even its own tolls can’t clear.