The idea of crowd pricing has been around for over 60 years, initially put forward in an article by William Vickrey, a future Nobel laureate from Columbia University. Yet, it hasn’t gained much traction until recently.
This past January, New York City took the lead as the first U.S. city to implement such a system.
The concept is straightforward. When I choose to drive during peak hours, it affects everyone else by slowing down traffic. In fact, New Yorkers collectively waste an average of 117 hours a year stuck in traffic.
Let’s say I’m just one of a million commuters. If my decision adds even 1/1000 of a second to another person’s commute, and if the value of their time is $32 per hour, that would equate to a congestion cost of about $8.89 imposed on other commuters. This helps explain the $9 charge that most commuters face during rush hour in New York City.
Crowd pricing has stirred political controversy, drawing criticism from both sides of the aisle. Economically, however, it makes sense. Congestion presents a classic example of negative externalities. If commuters aren’t held accountable for the extra costs they place on others, the number of commuters can surpass the capacity that society’s resources can appropriately handle.
If crowd pricing proves effective at easing congestion, the benefits could be significant, including a reduction in injuries and fatalities for drivers, cyclists, and pedestrians, along with decreased harmful emissions. Some commuters might even find that the time they save justifies the congestion fee, as those time savings could be worth more than the $9 charge.
Still, crowd pricing has its paradoxes. The higher fees meant to discourage driving can lead to heightened expectations of shorter commute times. This might explain why the shift in commuter behavior in New York has been modest; after the implementation, there was only a 6.3% reduction in traffic, which is about half of what Metropolitan Transportation Authorities anticipated. Additionally, research shows an average speed increase of only 8% post-implementation.
The demand for commuting, it turns out, is quite “inelastic,” meaning price changes don’t significantly impact how many people drive. A 10% increase in costs won’t really decrease demand by that same percentage. This insight has critical implications for policy, suggesting that while congestion pricing could increase tax revenue, it might not significantly alleviate traffic during peak hours.
This dilemma partly explains the strong pushback from the Trump administration. Transportation Secretary Sean Duffy voiced plans to revoke federal approval for the program, labeling it as unfair to working-class Americans and small business owners. Duffy asserted that access to New York City shouldn’t be limited to those who can afford it.
Despite potential efficiency gains, concerns around social equity linger. If the demand for commuting is more flexible among higher-income individuals, the benefits of congestion pricing may disproportionately favor them.
The average commute time in New York City is around 43 minutes, which is the longest in the nation. If crowd pricing cut those times by, say, half, the effective cost for commuters could drop over $25 per hour. However, a mere 10% reduction might only benefit those earning more than $125 per hour.
The criticism of crowd pricing spans both major parties. The administration argues that the policy is elitist, while some representatives, like Rep. Josh Gottheimer (D-N.J.), have highlighted the substantial tax revenue it generates, which they feel could better serve urban transportation needs. New Jersey’s governor has also pointed out that his constituents bear the brunt of commuting without seeing the tax benefits they deserve.
Right now, New York’s crowd pricing initiative is in effect, yet it contends with considerable political challenges. There’s skepticism about the long-term viability of an approach praised by economists but criticized by politicians. It does make one wonder why it took more than 50 years for this strategy to be utilized in the U.S.
