The debate over what is called congestion pricing – charging a fee for the use of the city streets in high traffic areas during rush hour – is set to heat up, as the business group known as the Partnership for New York City gets set to release what its president, Kathryn Wylde, calls a study on the problem, which she says is having a “multi-billion dollar negative impact on the economy.”

Mrs. Wylde said the partnership hasn’t endorsed congestion pricing, but, “It’s something we need to figure out how to solve.” She said the partnership is looking at different models in cities around the world, including user fees, increasing the costs of on-street parking, and having more regulations on trucks. “Ultimately, what we are trying to do is frame the decision – not have a tolling of the bridges discussion. We are trying to get away from this as a tax.”

Following is an article, commissioned by The New York Sun, from the Glimp Professor of Economics at Harvard and Director of the Taubman Center for State and Local Government.

A Congestion Charge for Manhattan

The Soviet approach to markets set prices at some controlled price, and then let shortages ensue. Under this system, millions wasted hours queuing and goods went to consumers with the time to stand on line rather than to consumers who valued the goods most. Today, you don’t need to go through the messy process of getting a visa to Cuba or North Korea to see the social costs of under-pricing. Right here in New York, we don’t charge anything for using a particularly valuable resource: car access to Manhattan streets. We ration the limited access to streets through time wasted in traffic. New York’s mean travel time to work was 40 minutes in the 2000 Census, almost 15 minutes more than the national average. We’ve set the price of driving at zero and inevitably too many people drive.

There are only two ways to make real headway against congestion in Manhattan: build more streets or get fewer people to drive. Knocking down high-rises to expand Third Avenue seems pretty stupid, so to fix congestion we have to reduce the amount of driving. There is plenty of scope for improving public transportation, but the most reliable means of reducing traffic is to charge people for the social costs of their driving. When anyone drives in a crowded street, they create an externality: One person’s driving slows down everybody else.The best way to handle this externality is to charge drivers a congestion charge that reflects the social costs of the congestion they create.

New York should follow London and charge drivers for driving in the city during peak hours. London’s congestion charge system, introduced on February 17, 2003, requires drivers to pay eight pounds before they enter a congestion charging zone during peak hours. The zone is eight square miles in the heart of London.

Drivers pay either online or at one of many payment facilities. The system is enforced with a network of fixed and mobile cameras that take snapshots of license plates. Individuals who are caught driving without paying are fined 100 pounds. The fine system is computerized, and it is both reliable and inexpensive to operate.

According to London’s “Third Annual Monitoring Report,” the number of cars entering the charging zone during peak hours fell by 33% after the congestion charge. As traffic fell, speeds rose. Before the congestion charge, the average traffic delay was 3.7 minutes per mile during morning rush hour and four minutes per miles during the afternoon rush hour. After the congestion charge, delays per mile fell to 2.4 minutes per mile in the morning and 2.6 minutes per mile in the evening. Overall, there was a 30% decrease in time wasted in traffic delays.

Some critics of congestion charges argue that they are unfair to low income people, but in London, lower-income bus travelers were the charge’s biggest beneficiaries. Bus riders didn’t have to pay the charge and their travel times plummeted. As the time cost of bus travel fell, the number of bus passengers during morning hours increased by 38% (some of this is due to improved bus service provision). Like London, New York has many more people who commute by public transportation than by car, and New York’s many bus travelers would particularly benefit from a congestion charge reducing their commute times.

One worry about congestion charging is that traffic might increase on the edge of the charging zone; this was a problem when Singapore introduced congestion charging in the 1970s. But good implementation reduces this danger. In London, traffic congestion was stable or declined in the area surrounding the congestion charging zone.

New York’s economic edge lies in enabling smart, productive people to interact with each other quickly. The financial district thrives as a center of information flows and this information is carried by people traveling to meet each other. Traffic congestion strikes at the heart of the city’s comparative advantage. In a world where time is ever more valuable, New York can’t afford to fall behind London in traffic management any more than it can afford to fall behind in pricing derivatives.

How would a New York City congestion charge work? First, the city needs to define a congestion charging zone. I suggest Manhattan south of 59th street. This compact area includes the city’s economic core and would be easy to monitor. Since this area includes all of the downtown entryways into the city, the congestion fee could even substitute for bridge and tunnel fees for all of the river crossings south of 59th street. Getting rid of lines at these tolls would save more time.

The amount of the congestion charge should equal the congestion costs created by each driver and determining this number requires more study. I suspect that the right charge is around $20. Buses, taxis, and ambulances would be exempt. A discount for people who live south of 59th street might also be politically prudent. It would be easy to exempt vehicles belonging to the handicapped or other groups for humanitarian reasons.

The best enforcement plan today is probably to copy the London system and use fines based on photos of license plates. Fines need to be set so that the probability of getting caught cheating times the penalty is significantly higher than the cost of paying the congestion charge. If there are enough cameras to catch a cheating driver 20% of the time, the fine would have to be above $100. In the future, enforcement will become far easier with improvements in global positioning technology.

The fees could be used to improve public transportation, as was done in London, or to better New York City public schools, but there is also case for just giving the money back to New York taxpayers as a tax rebate. The point of a congestion charge is not to raise government revenue. It isn’t a tax and giving the money back will help stop the government from increasing the charge to raise revenues. A congestion charge is a price for using a scarce resource and if New Yorkers get that price back, then they will reap the benefits of a congestion charge without (on average) paying more.

If done right, a congestion charge can reduce travel times for Manhattan drivers so that many car travelers will benefit, despite the charge, because the time they save is worth more than the cash cost of the congestion charge. The current ration-by-congestion system seems designed for those drivers who like spending time sitting in traffic watching pedestrians speed by. A congestion charge – like any price – will ensure that the streets are used less and more efficiently. Congestion charging will make the city more competitive by reducing the time wasted in traffic. New Yorkers’ time is too valuable to be wasted by an unwillingness to charge drivers for the congestion they cause.