NYC Congestion Pricing — What, Why, and How

Traffic in New York City (Source: Curbed NY)

Background

New York City (NYC) is planning to implement its congestion pricing plan by 2022 thereby becoming the first American city ever to implement a congestion tax. The aim of this tax is to reduce traffic-related problems such as congestion, and gridlocks in the Manhattan Central Business District region.

Traffic-related issues have always prevailed in NYC especially in the Central Business District(CBD) where it is observed most. Since the early 1970s, the NYC city planning agencies have been trying to solve these issues. However, the downtown surcharge on ridesharing companies and taxis is the only proposal that came into implementation in January 2019.

The first proposal for New York City congestion pricing came up in 2007 from a proposal by Mayor Michael Bloomberg. However, the proposal never came to vote. Nearly after 15 years, we can expect to see a full-fledged congestion pricing scheme that may change the history of NYC. According to the proposed scheme, drivers entering the lower Manhattan area, south of 60th street will pay a congestion tax. Currently, the fee is unknown, but it can be expected to be something similar to the downtown surcharge implemented for Transportation Network Companies(TNCs)and taxi medallions. The current tax rate is $2.75 per trip for ridesharing companies such as Uber, Lyft, etc., and $2.50 per trip for a taxi. For shared trips, the surcharge is reduced to $0.75 per trip.

Before I dive into the science behind the congestion pricing policy, I want to touch on the concept of externalities that is important for the discussion.

What is an Externality?

In economics, an externality is the cost or benefit that is imposed by one or several parties on a third party who did not agree to incur that cost or benefit. (Source: Wikipedia)

‘Externality’, is one of the most widely used terms in economics. Arthur Pigou devised this concept of externality in the late 1920s. Externality could be both positive or negative and occurs during the production or consumption of goods or services. In some cases, both positive and negative externalities occur at the same time as a bundle. For example, people who do not pay for fireworks can enjoy the spectacular view (positive externality)of it but at the same time, the pollution from fireworks has harmful effects on them(negative externality). Pollution is the most common example of an externality because it affects not only its consumers, but other human beings, flora, fauna, and future generations of all these species. Therefore externalities are an example of market failure, meaning a net loss in economic value (or not Pareto Optimal).

If negative externalities are so bad, why not reduce the production or consumption of the goods and services? Because “Individuals and Firms operate for profit” and externalities are external to the market dynamics. Often, to address the negative externalities, firms or individuals have to spend additional effort or money. In production, firms have to spend money on Research & Development, use alternative materials, techniques to make products that are environmentally friendly. In return, for consumers, buying a product that has better environmental quality will become expensive.

“Internalize the Externalities”, is perhaps the buzz statement many of us have come across. What this statement means is to somehow make externalities part of the market so that competitive market equilibrium is reached addressing the externalities. Economist Arthur Pigou indeed proposed the same and said that tax (a.k.a Pigouvian Tax) could be a way in which externalities could be internalized. The Government imposes these taxes on individuals and firms to alter the demand and supply.

What is Congestion Pricing?

Do you feel traffic congestion only occurs during peak time? Do you feel frustrated staying in traffic for hours to reach your work?

Traffic congestion is a problem that is becoming common among many densely populated cities worldwide. A direct consequence of congestion is the increase in travel time or wait time in traffic that can be translated to a loss in Revenue. Transportation is one of the leading causes of Green House Gas(GHG) emissions. More recent studies quantified the effect of congestion and gridlocks on vehicular pollution. An empirical study showed 50% higher emissions for congested traffic when compared to free-flow traffic traveling at the same speed. The not so evident consequence of congestion is mental health issues. Studies found that commuting delays induce stress and affect the ability of individuals to recover their health and wellbeing after work.

The basic idea of congestion pricing is to therefore reduce the traffic demand and ease the traffic, thereby tackling the negative side-effects and externalities. While congestion pricing exists for both public and private transport, it is most often used in the context of automobiles (private transport). It is usually implemented in two ways; tolling and downtown pricing. Tolling is adding a toll or fee to a particular highway in order to reduce congestion during peak time. The High Occupancy Tolling(HOT) is very prevalent in the US, where part or whole of the highway is available free of use for vehicles with high occupancy and the rest pay a toll. Downtown pricing comes under the broad category of Area Pricing, where an access fee/toll has to be paid in order to enter a specific zone (usually Downtown or Central Business District) within the city. So far, the downtown congestion pricing has been implemented in 5 major cities globally. They are Singapore, Stockholm, London, Gothenberg, and Oslo.

Tolling Implementation

Examples of Tolling in the US (2013)- Source: Bloomberg

The most common way Tolling or HOT is implemented by using transponders placed in-vehicle, which deducts the toll automatically when the vehicle passes through one of these tolled roads. Sometimes Variable Pricing is implemented where the toll price is increased during the peak times and vice versa and decreased during off-peak times. The change in the price is communicated with the passenger using Variable Message Sign(VMS) boards (as shown in Figure). When tolling is implemented only on part of the facility, HOT lanes are lane-separated or barrier-separated.

Interstate - 30 (I-30), Dallas, TX — Source: The Dallas Morning News

Downtown Congestion Pricing Implementation

Stockholm Congestion Zone — Source: Maps Stockholm
London Congestion Fee Zone.Source: The Conversation

Area Pricing is harder to implement than tolling and is highly influenced by the geography of the location where it is being implemented. Stockholm is one city where the geography of the city adds to its advantage (see Figure). The city did a 6-month trial in 2006 and implemented the pricing fully in 2007. Having few entry points into the city, implementing the pricing can be achieved efficiently. Currently, the city uses Unmanned Electronic Tolling stations at every control point (toll enforcement point).

In London, the pricing is much harder to implement as there are multiple access points to the city. The first congestion charge was placed in 2003. The city of London uses surveillance cameras at multiple locations inside the city’s Congestion Charging Zone. The cameras recognize the license plate and charge the users accordingly for the appropriate toll.

NYC Congestion Fee Zone. Source: Regional Plan Association

In New York City, the Congestion Zone is small in the area when compared to cities like London or Stockholm. Tunnels and bridges entering the zone act as good control points. However, having control points at 60th Street is difficult as it stretches over 2.0 miles in length. Surveillance or Traffic cameras could be a viable option to detect vehicles and identify users with license plates similar to London. Alternatively, in-vehicle GPS devices can be used to locate vehicles that enter the congestion zone.

Does Tolling or Downtown Pricing actually help?

The acceptance of congestion pricing drops steeply before its implmentation and regains after the implementation. But why?

As expressed in the earlier discussion, individuals or firms are oblivious to externalities. The problem of externalities becomes even harder when it is difficult to quantify the externalities or the externalities take a long course to show up. Such is the case with pollution and global warming, where quantifying at a microscopic or macroscopic level is difficult and the effect of these emissions taken a long course of time(sometimes not in one's lifetime). Therefore, some external intervention in the form of policy is essential. Congestion pricing is indeed that intervention that often governments seek as it is easy and has been proven to be efficient. Besides congestion pricing, alternative fuels, demand management by other means such as staggered work hours, and lane or road expansion are often sought, all of which may be harder or impossible at times especially at a city level.

A common myth is that adding new roads will solve the congestion problem. While this may be true in most cases, it may not be always. In 1968, mathematician Dietrich Braess postulated a paradox scenario where adding a new road deteriorates individual travel time even if the travel time on the new lane is zero! This phenomenon occurs due to the selfish routing of individuals who each want to minimize their own travel time. We all use Maps that provide us the shortest time route. Have a look at this blog post that goes into greater detail about the setup and reasoning. Ok, we can avoid building such roads, but what do we do with the existing ones? Is demolishing or blocking them the only option? Turns out tolling is an alternative option. Adding toll on some of the road links will improve the travel time for all and also generate revenue. Turns out there are not one but many tolling schemes that can achieve this (Pareto Improving). It is one of the reasons why choosing the right tolling scheme is difficult.

Acceptance of Congestion Pricing

Public Acceptance for Stockholm Congestion Pricing — Source: FHWA

Surprisingly, the acceptance and public opinion about the congestion pricing changes dramatically after the implementation of the pricing scheme. As human beings, we tend to estimate the value of something in the long-term differently than that in the short-term. Behavioral Economics is a relatively new field of science that tries to document these behavioral traits. Confirming with the theory that human beings care about things in the short-term more than the long-term is observed with congestion pricing too. As the time for the implementation shortens, the price or tax ‘affect’ supersedes that of benefit from the implementation. Therefore, the acceptance decreases up until the implementation and rises thereafter as the benefits of the policy start to become evident. Besides the bias, usually, the tax system is complicated and requires additional effort or transaction costs in terms of understanding the variable pricing, purchasing devices, etc just before the implementation. A global study in European cities documented the acceptance a year before and a year after the implementation of congestion pricing. The acceptance varies significantly as shown in the Figure below.

Acceptance of Congestion Pricing Globally- Source: NPR News

There is an additional factor that surprises policymakers too. The demand decreases more than what they expect. Part of the reason is behavioral again. Studies show that humans in general are tax-averse, i.e. they dislike the idea of paying taxes more than the benefits they obtain from it. Also, another intriguing phenomenon kicks in, called Zero Price Effect. First documented by Shampanier and Dan Ariely, the zero price is a special price where people perceive only benefits and no costs associated with the transactions. Often, they tend to overvalue the benefit and undermine the cost for this reason. Implementing tolls removes this extra benefit associated with the zero price vanishes. Therefore people view loss more than expected, translating to a decline in demand more than expected. The decrease in demand leads to improved speeds and the same roads will be able to serve a greater number of vehicles in the same amount of time. As speeds improve, the net emissions decrease, solving the problem of externality as well.

Discussion

Often implementing a tax is the only plausible option to tackle negative externalities. However, coming up with the exact tax rate and the exemptions is difficult. Downtown congestion pricing is often more debated than Tolling because when Tolling is implemented, there is an alternate route that is available without tolls. However, in the case of Downtown pricing, it is not the case. Entry into the Congestion Zone from any entry point is tolled. This brings up equity concerns especially when tolls are high and the tolled area is large or important to different demographic groups.

Implementing area-wide pricing seemed far from reality 20 years ago because of technological and budget constraints. In fact, loss in revenue was one of the main concerns in London. However, it has become a lot easier to implement with the advancements in technology and the prices of electronic devices dropping steadily. Using revenue generated in the form of tax from this pricing policy can be used to supplement transit-oriented development as transit development is usually expensive and operates on subsidies.

While it is not sure what the exact pricing scheme of the NYC Congestion Plan is, an improvement in the level of congestion can be expected. Some researchers argue that although demand decreases initially, an induced demand will be created because of the improvement of the roads over the course of a few years. Then pricing should be increased in order to address the then demand, making it a vicious cycle. In London and Stockholm as well, the congestion charges were increased after the first implementation. With very few cities that have Downtown congestion pricing implemented, it is not possible to generalize the effects of it. However, the pricing if implemented correctly would “Internalize the Externalities” and ease traffic congestion. The success or failure of the NYC Congestion Plan would surely affect other cities in the US and globally to implement Congestion Pricing.

Thanks for reading! Feel free to drop a comment.

References

  • Lehe, Lewis. “Downtown congestion pricing in practice.” Transportation Research Part C: Emerging Technologies 100 (2019): 200–223.
  • Braess, Dietrich, Anna Nagurney, and Tina Wakolbinger. “On a paradox of traffic planning.” Transportation science 39, no. 4 (2005): 446–450.
  • Hearn, Donald W., and Motakuri V. Ramana. “Solving congestion toll pricing models.” In Equilibrium and advanced transportation modelling, pp. 109–124. Springer, Boston, MA, 1998.
  • Shampanier, Kristina, Nina Mazar, and Dan Ariely. “Zero as a special price: The true value of free products.” Marketing science 26, no. 6 (2007): 742–757.

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PhD Student interested in Transportation Economics

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Praneeth Devunuri

Praneeth Devunuri

PhD Student interested in Transportation Economics

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