New York City’s Metropolitan Transportation Authority (MTA) will make motorists driving into Manhattan’s central business district pay a congestion tax. Passenger cars will pay $15 and trucks will pay $24 to $36 and the tax will bring in $1 billion annually. —Bloomberg, December 7, 2023.
Some Data
The MTA’s “Congestion Pricing will unlock a better New York” says:
- 700,000 vehicles enter the Midtown Manhattan zone every weekday.
- The average vehicle speed in Manhattan is 7.1 mph.
- The time sitting in gridlock is 117 hours per person per year.
- The value of time lost is $20 billion per year.
The MTA’s “Central Business District Tolling Program” says the toll will result in 100,000 fewer vehicles entering the Midtown Manhattan zone every weekday.
Why is New York City’s MTA making motorists driving into Manhattan’s central business district pay a congestion tax?
The MTA says too many vehicles are entering Manhattan’s central business district and the cost of congestion is high.
The aim of the congestion tax is to decrease the number of vehicles entering the midtown congestion-relief zone, increase the use of public transit and ride sharing, and make the use of scarce roads more efficient.
Are New York City’s roads too congested and inefficient?
The data provided by the MTA imply that New York City’s roads are too congested and road use is inefficient.
To see why, think about the use of scarce roads as a market for road use and make a model of this market.
The quantity in this market is the number of vehicles entering Manhattan each weekday. Demand and marginal social benefit (MSB) of road use is the willingness to pay and the congestion tax is the price. Supply and marginal social cost (MSC) of road use is the value of the time lost creeping at 7.1 MPH and sitting in gridlock.
One point on the demand curve is 700,000 vehicles per day at a congestion tax of zero. Another point on the demand curve is 600,000 vehicles per day at the congestion tax rate, that we’ll assume averages $15 per day. (The rates range from zero to $36.)
One point on the MSC curve is the value of time lost per vehicle per day when 700,000 vehicles enter, which is $110. ($110 per vehicle per day × 700,000 vehicles × 260 weekdays per year approximately equals $20 billion, the MTA’s estimate of the value of time lost per year.)
Figure 1 shows this market with two assumptions: (1) the demand and MSB curves are linear, and (2) at fewer than 425,000 vehicles per day, there is no congestion and the MSC of road use is zero, but as the number of vehicles exceeds 425,000 per day, the congestion cost increases sharply to reach $110 per vehicle per day at 700,000 vehicles per day.
With these assumptions, Manhattan’s road use is inefficiently congested and overused, and the shaded triangle shows the deadweight loss that arises.
Will the congestion tax make Manhattan’s road use efficient?
The tax will make road use in Manhattan more efficient but not efficient.
Figure 2 illustrates the outcome.
With a tax of $15 per day, the number of vehicles entering Manhattan decreases to 600,000 per day, the quantity demanded. At that quantity, the MSC of road use is $70 per vehicle per day, which exceeds MSB of $15 per vehicle per day. The shaded triangle shows the smaller deadweight loss.
What congestion fee would make road use efficient?
On the assumed MSB and MSC curves, Figure 3 shows that a congestion tax of $30 per day would achieve an efficient outcome.
Is the demand for Manhattan’s road use elastic or inelastic?
The answer depends on the price of a vehicle per day, which is the congestion tax.
At the midpoint of the demand curve, the price elasticity of demand is one: Demand is unit-elastic. At prices above the midpoint, demand is elastic; at prices below the midpoint, demand is inelastic.
With the congestion tax set at $15 per vehicle per day, the demand for Manhattan road use is inelastic.
Will the congestion-tax rate bring the maximum possible tax revenue?
The congestion tax of $15 per vehicle per day will not deliver maximum tax revenue.
The tax revenue is maximized at the midpoint of the demand curve, where the congestion tax is $52.50 per vehicle and the quantity is 350,000 vehicles per day. Figure 5 illustrates.
The maximum tax revenue is a bit more than $18 million per day when 350,000 vehicles per day pay $52.50 per vehicle. With an average congestion tax rate of $15 per vehicle, tax revenue is $9 million per day.
Now take a short quiz to ensure you understand what you just read.