New York mayor Michael Bloomberg has proposed 3-year pilot congestion pricing program for drivers using the busiest parts of Manhattan during the busiest times (link), as part of his PlaNYC proposal package aimed at creating “A Greener, Greater New York.” The congestion pricing scheme, which would charge cars $8 and trucks $21 a day, is ironically the most controversial proposal in PlaNYC; of the proposals in PlaNYC, congestion pricing is the most clearly economically sound proposal.
Economists have long noted that road congestion is caused by the fact that drivers to not bear all of the costs of their decision to be on the road. Consider a highway through a city. When there are a small number of drivers using it, it is faster than driving on side streets, but each additional car driving on the highway slows down the other cars on the highway a small bit. Unfortunately, the costs, mostly in the form of time used in driving, that each driver experiences as a result of their decision to use the highway do not reflect the costs to other drivers, so as long as the highway is faster than using side streets, commuters will choose to drive on the highway over driving on the side streets. The result is that if there are a large number of people who want to drive somewhere, the driving on the highway will be almost as slow as driving on side streets, which is not what we would like. There is a equilibrium point, however, where the highway is still faster than taking side streets, but the net benefit to an extra driver on the road would be slightly less than the costs to the drivers already on the road. This is the state that congestion pricing tries to achieve. Charging additional drivers for the costs they impose on drivers already on the road allows drivers to make decisions that are good for everyone.
Such congestion charging already takes place in other cities around the world; Singapore, London and Melbourne and many other cities practice some form of congestion pricing. The systems vary in implementation a lot, but most if not all have shown marked improvements in road usage. The Singapore uses one of the more advanced systems (link), and more flexible systems based on GPS are being developed (link).
NYC is fortunate to have a mayor interested in good economic policy, even if it is initially unpopular.
Update: Here is a small summary of road pricing in different cities around the world.