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The 'least bad' option for fixing New York's traffic woes

Stanford economists Michael Ostrovsky and Frank Yang have some suggestions for improving the Big Apple's congestion pricing plan, which is set to launch in January 2025.

To live in New York City is to be forever serenaded by an orchestra of honking cars. The Big Apple currently tops the list of the world's most congested urban areas. In 2024, the city's transit authority estimated people lost an average of 117 hours sitting in traffic and that their cars rolled toward their destinations at a sluglike average of 7 miles per hour.

But on Jan. 5, 2025, New York will finally attempt to do something about its traffic catastrophe. On that day, the city will enact a congestion pricing plan years in the making—though the plan could still be blocked by lawsuits or the Trump administration. Private cars will pay a $9 toll to enter Manhattan south of 60th Street during peak hours (5 a.m. to 9 p.m. on weekdays and 9 a.m. to 9 p.m. on weekends).

Trucks and large tour buses will pay more. Taxis and rideshares will pay a smaller, per-trip fee. The revenue from the tolls will be invested in improving the city's beleaguered public transit system. The Metropolitan Transit Authority estimates the new plan will discourage at least 80,000 cars from driving into the busy city every day.

But Michael Ostrovsky and Frank Yang, Ph.D. '24, aren't so sure it will work out like that. "I think the city is on the right track," says Ostrovsky, a professor of economics at Stanford Graduate School of Business. He feels about congestion pricing the way Winston Churchill felt about democracy: "It's the least bad of all the possible solutions that we have." But he doesn't think the current plan will lead to the traffic reduction NYC wants because it doesn't treat all travelers equally.

In a new working paper, he and Yang suggest an alteration to the plan that would make the toll more equitable and more effective.

Ostrovsky and Yang, currently a postdoctoral fellow in economics at the University of Chicago, point out that a nurse driving to work from Queens to Manhattan would pay a $9 congestion surcharge under the plan. But a lawyer taking a cab from LaGuardia will pay a lot less, only 75 cents, even though both trips will cause the same amount of traffic.

"There is no good justification for that," Ostrovsky says.

Moreover, private cars make up only around 30% of traffic in the congestion area; taxis and rideshares make up more than 50%. So, while individual drivers would be heavily incentivized to take public transit or abandon their travel plans altogether, the majority of trips, those taking place by taxi, Uber, or Lyft, would be virtually unaffected by a small fee.

Another significant contributor to traffic in Manhattan are delivery vehicles, like UPS and Amazon trucks and private cars carrying Instacart orders. These could make multiple trips across town—causing a lot of traffic—while only paying the toll once.

"Under the current plan, they will pay essentially nothing for each trip because the fee is split across many, many deliveries," Ostrovsky says.

If delivery drivers enter the zone before peak hours, they will pay even less, even if they spend the day driving during peak times. (Under the current plan, vehicles first entering the congestion zone before 5 a.m. pay only 25% of the peak-time toll for the day.)

Suddenly, a toll that was supposed to incentivize everyone to drive less is being unfairly distributed and impacting some people much more than others, even if the amount of congestion they create per trip is the same.

For whom the tolls bill...Instead, Ostrovsky and Yang suggest that the city charge delivery vehicles, taxis, and ride-hailing services a fee based on distance traveled rather than a one-time toll. Because these vehicles already track their mileage, this would be relatively easy to implement, and the extra fees would make travelers think twice before hailing a cab or calling an Uber.

"Under our plan, this incentive to take public transportation or other modes will be applied uniformly across different groups of travelers," Ostrovsky says.

On the other hand, he also suggests that the city eliminate congestion surcharges for taxis, delivery vehicles, and ride-hailing services after 9 p.m., when there is much less traffic. It's just a small deviation from the current policy, but it could have a big impact.

The logic behind Ostrovsky and Yang's plan is based on an economic concept called Pigouvian taxation, in which the supply side or the demand side of a market pays a tax to mitigate the negative effects of its actions. For example, carbon taxes require companies to pay for the greenhouse gases they emit. Taxes on alcohol and cigarettes are meant to factor in the negative effects of the illnesses they cause.

Traffic is a particularly tricky problem to solve. There's a fixed supply of space on the road, so no matter how many cars demand a spot, the surface area doesn't adapt. "There's a fundamental mismatch between demand and supply," Ostrovsky says.

Every car trip imposes a small negative effect on the people around it. It slows down other drivers, creates noise, pollutes the air, and causes more risks to pedestrians and cyclists. "Multiply that small negativity by all the cars deciding to drive and all the people affected, and you get a meaningful negative impact," he says.

Taking a Pigouvian approach means charging all cars equally for their impact rather than simply imposing a one-time toll, which doesn't factor in the amount of driving and congestion a vehicle might cause.

Ostrovsky and Yang also suggest ways to compensate taxi drivers for their lost revenue due to lower demand caused by congestion tolls, while still encouraging people to take the train or the bus. Under their plan, taxi drivers, who must purchase medallions from the city to operate, would get an annual payment to reimburse them for the lost value of those permits.

Ultimately, their toll structure might nudge taxi and delivery drivers to move the bulk of their driving to other times. No tolls at night would incentivize taxis to be out late when people might be coming home from bars or clubs.

The researchers also suggest the city can use the additional revenue from congestion tolls to expand a pilot program that helps businesses shift their deliveries to off-peak hours. The goal is to compensate the people hurt by congestion pricing while maintaining the same incentives to cut down on driving during peak hours. "We really want to make sure these higher tolls only apply when it's necessary," Ostrovsky says.

Still, Ostrovsky thinks New York City is moving in the right direction. He is quick to point out that he and Yang were able to calculate their solution so clearly because the city keeps detailed data on traffic and car trips and makes it freely accessible. And he views the initial rollout of congestion pricing in January as a great first step.

Once the dust settles on this initial rollout, if the amount of traffic in Manhattan due to taxis, deliveries, and ride services indeed does not subside, Ostrovsky hopes that the city will turn to his and Yang's solution.

Provided by Stanford University