Tag: Congestion pricing

Solved Problem: Congestion Pricing and the Price Elasticity of Demand

Supports: Microeconomics and Economics, Chapter 6, and Essentials of Economics, Chapter 7, Section 7.5-7.7

ChatGTP-4o image of cars in the Lincoln Tunnel, which connects New Jersey with midtown Manhattan.

In January 2025, New York City began enforcing congestion pricing in the borough of Manhattan south of 60th Street—the congestion relief zone. The Metropolitan Transportation Authority (MTA) in New York collects a toll from a vehicle entering that zone either automatically using the vehicle’s E-ZPass transponder or by reading the vehicle’s license plate and mailing a bill to the vehicle’s owner. Nobel Laureate William Vickrey of Columbia University first proposed congestion pricing in the 1950s as a way to deal with the negative externalities from traffic congestion. Congestion pricing acts as a Pigovian tax that internalizes the external costs drivers generate by using streets in congested areas. (We discuss Pigovian taxes in Microeconomics and Economics, Chapter 5, Section 5.3, and in Essentials of Economics, Chapter 4, Section 4.3.)

The New York City congestion toll is somewhat complex, varying according to the type of vehicle and how the vehicle enters the area in which the toll applies. The congestion toll fora car entering Manhattan through the Lincoln Tunnel on a weekday between 5 am and 9 pm is $6.00 on top of the existing toll of $16.06. In January 2025, the volume of cars driving through the Lincoln Tunnel declined by 8 percent during the weekday hours of 5 am to 9 pm. According to an article in Crain’s New York Business, the number of vehicles entering the congestion relief zone compared with the same month in the previous year declined by 8 percent in January, 12 percent in February, and 13 percent in March.

  1. From the information given, can we determine the price elasticity of demand for entering Manhattan by driving though the Lincoln Tunnel during weekdays from 5am to 9am? Briefly explain.
  2. Suppose someone makes the following claim: “Because the quantity of cars using the Lincoln Tunnel has declined by 8 percent, we know that the MTA must have collected less revenue from cars using the tunnel than before the congestion toll was imposed.” Briefly explain whether you agree.
  3. Is the pattern of increasing percentage declines in vehicle traffic in the congestion relief zone each month from January to March what we would expect? Be sure your answer refers to concepts related to the price elasticity of demand.

Step 1: Review the chapter material. This problem is about the price elasticity of demand, so you may want to review Chapter 6, Sections 6.1-6.4. 

Step 2: Answer part (a) by explaining whether from the information given we can determine the price elasticity of demand for entering Manhattan by driving through the Lincoln Tunnel. We do have sufficient information to determine the price elasticity, provided that nothing else that would affect the demand for driving through the Lincoln Tunnel changed during January. We’re told the percentage change in the quantity demand, so we need only to calculate the percentage change in the price to determine the price elasticity. The change in the price is the $6 congestion toll. The average of the price before and the price after the toll is imposed is ($16.06 + $22.06) = $19.06. Therefore, the percentage change in the price is ($6/$19.06) × 100 = 31.5 percent. The price elasticity of demand is equal to the percentage change in quantity dmanded divided by the percentage change in price: –6%/31.5% = –0.3. Because this value is less than 1 in absolute value, we can conclude that the demand for driving through the Lincoln Tunnel is price inelastic.

Step 3: Answer part (b) by explaining whether because the quantity of cars driving through the Lincoln Tunnel has declined the MTA must have collected less revenue from cars using the tunnel. As shown in Section 6.3 of the textbook, total revenue received will fall after a price increase only if demand is price elastic. In this case, demand is price inelastic, so the total revenue the MTA collects from cars using the Lincoln Tunnel will rise, not fall.

Step 3: Answer part (c) by explaining whether the pattern of increasing percentage declines in vehicle traffic in the congestion relief zone is one we would expect. In Section 6.2, we see that the passage of time is one of the determinants of the price elasticity of demand. The more time that passes, the more price elastic the demand for a product becomes. In other words, the longer the time that people have to adjust to the congestion toll—by, for instance, taking a bus rather than driving through the Lincoln Tunnel in a car—the more likely it is that people will decide not to drive into the congestion relief zone. So, it is not surprising that the number of vehicles entering the congestion relief zone declined by a greater percentage each month from January to March.

Solved Problem: Do Firms Always Raise Their Prices When Their Costs Go Up?

Supports: Microeconomics and Economics, Chapter 12,  and Essentials of Economics, Chapter 9.

The entrance to the Lincoln Tunnel, which connects New Jersey to Midtown Manhattan. (Photo from the Associated Press via the New York Times.)

This spring, New York City will begin charging an additional fee—referred to as a congestion price or congestion toll—on vehicles entering the borough of Manhattan below 60th Street. The purpose of the fee is to reduce the congestion and pollution that additional vehicles cause when driving in that part of the city. (Note that the fee can be thought of as Pigovian tax because it is intended to address a negative externality caused by driving a vehicle. We discuss Pigovian taxes in Microeconomics and Economics, Chapter 5, Section 5.3, and in Essentials of Economics, Chapter 4, Section 4.5.)

Trans-Bridge Lines operates buses between the Lehigh Valley in Pennsylvania and Manhattan. The firm will have to pay a fee of $24 each time one of its buses enters Manhattan. An article in the (Allentown, PA) Morning Call quotes the president of Trans-Bridge Lines as objecting to the fee: “It doesn’t make sense and punishes bus operators who are part of the solution to the congestion problem.” However, the article also notes that “Trans-Bridge is not considering fare increases at this time.”

If Trans-Bridge’s cost of providing bus service between the Lehigh Valley and Manhattan increases by $24 per bus, shouldn’t the firm raise the price it charges passengers? Does the failure of Trans-Bride to raise ticket prices following the enactment of the fee mean that the firm isn’t its maximizing profit? Briefly explain. 

Solving the Problem

Step 1:  Review the chapter material.This problem is about what costs firms take into account when determining the profit-maximizing price to charge in the short run, so you may want to review Microeconomics or Economics, Chapter 12, Section 12.2, “How a Firm Maximizes Profit in a Perfectly Competitive Market” (Essentials of Economics, Chapter 9, Section 9.2)

Step 2: Answer the two questions by explaining what type of cost the $24 fee is and whether the fee should affect the profit-maximizine price Trans-Bridge Lines should charge passengers for a ticket on a bus going to Manhattan. The fee is a flat $24 per bus and, so, it doesn’t change with the number of passengers on a bus. Therefore, the fee is a fixed cost to Trans-Bridge. Trans-Bridge should set the price of a ticket so that the last ticket sold on a bus increases the firm’s marginal cost and marginal revenue by the same amount. Because the $24 fee doesn’t change the marginal cost (or the marginal revenue) to the firm of transporting another passenger, the fee doesn’t change the firm’s profit-maximizing price. The answer to the first question in the problem is that an increase (or decrease) in a firm’s fixed cost won’t cause the firm to change its profit-maximizing price in the short run. The answer to the second question follows from the answer to the first question: That Trans-Bridge isn’t raising the price of a ticket following the enactment of the doesn’t mean that the firm isn’t maximizing profit.

Extra credit: Note that in the answer we refer to Trans-Bridge’s decision in the short run. It’s possible that the $24 fee will cause Trans-Bridge to suffer an economic loss on at least some of the bus trips it offers during different times during the day. As we discuss in Microeconomics and Economics, Chapter 12, Section 12.4 (Essentials of Economics, Chapter 9, Section 9.4), in that case, Trans-Bridge will continue to offer those bus trips in the short run, but, if nothing else changes, it will stop offering the trips in the long run.