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In the 1950s, future Nobel Prize-winning economist William Vickrey proposed that the New York subway system increase subway fares during high-use periods and reduce fares during low-use periods. He also recommended that transit authorities impose tolls on people who use roads based on the time of day. Vickrey argued that charging different prices during different times would induce travelers to shift their schedules to times when roads were less crowded. People would also substitute into other forms of transportation, such as public transit, biking and carpooling. Both would reduce congestion.
Vickrey’s proposal became known as congestion pricing. Though governments today simplify Vickrey’s proposals, congestion pricing is used in Singapore, Stockholm and London. Congestion is a classic example of what economists call an external cost. Efficient charges for the use of a network subject to congestion take into account the impact a person’s trip has on other network users. It is often thought that government intervention is required to set efficient congestion prices. Sometimes, that might be true, but other times, the government might not be politically able to do so. Sometimes, it might be unnecessary.
A recent New York City plan would have charged cars $15 a day to enter the center of Manhattan. Critics expressed concern that higher prices affect low-income people who can’t afford it, especially suburbanites who don’t have easy access to mass transit and rely on cars for their daily commute. People just outside the areas with congestion pricing express concern that they’d see more traffic congestion.
However, including provisions to reduce the impact on low-income drivers, such as discounts and vouchers, is not difficult. Likewise, most low-income people in New York don’t own cars. Proponents point out that the Manhattan plan would reduce congestion, reduce air pollution, and raise over $1 billion a year, which could be used to expand mass transit options and help fund low-income vouchers.
Nevertheless, Gov. Kathy Hochul stopped it. In 1958, Nelson Rockefeller was elected governor of New York by assuring voters that he would freeze subway fares. Ends up, charging people for what used to be free or raising the price of a public service is never politically popular. Government administration of pricing is no panacea for dealing with external costs in a democratic society. Sometimes, for-profit firms have a clear financial incentive to impose congestion pricing. Examples include electric utilities charging more for electricity during peak hours and discounting it during slack times, and airlines raising fares at peak times.•
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Bohanon and Horowitz are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.
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