Last month, New York Governor Andrew M. Cuomo and state lawmakers agreed on a plan to implement a sweeping new transportation policy in Manhattan: congestion pricing. New York will join other major cities around the world – including London (Congestion Charge), Stockholm (Congestion Tax), and Singapore (Electronic Road Pricing) – which have recently implemented a form of congestion pricing, but New York City will be the first American city to do it.

Congestion pricing is both a simple and somewhat radical idea: motorists will begin to pay to use a resource – roads – that had previously been free (at point of use). Congestion pricing schemes vary based upon the details of their implementation, but they have so far exhibited a few common characteristics: first, the fees are dynamic, and fluctuate based on traffic (i.e., motorists pay more during peak hours, and less at night and on the weekends); second, revenues raised through pricing have been reinvested into improving systemic transportation assets such as public transit; and third, success has been measured as a metric of reduced time in traffic, and reduced air pollution from transportation.

Congestion pricing is innovative in part because it has flipped the traditional transportation debate on its head. Instead of focusing on the supply side (i.e., building more road surface), congestion pricing forces us to think about the demand side (i.e., more efficiently using the roads we have). Research has shown that increasing supply merely serves to “induce” more demand, and does not, over time, solve the traffic problem. Induced demand is the simple economic idea that creating more of a cheaper resource encourages its consumption. In the highway context, therefore, adding road supply serves, over time, to generate more traffic in areas where supply has been added. Perhaps the most famous example of this can be found in Houston, where the Katy Freeway, which was widened in a $2.8 billion project to a record-setting 26 lanes to address traffic, has actually experienced increased congestion. As the economist Anthony Downs stated in his Law of Peak-Hour Expressway Congestion, on urban expressways, peak-hour traffic congestion rises to meet maximum capacity. Traffic, on the other hand, serves as a natural traffic equilibrium: people opt to use alternative routes when the “cost” of traffic becomes too high.

Other sectors of the economy have experimented with demand-side pricing for a long time. For example, in the electricity sector, regulators have encouraged innovation in time-of-use (TOU) pricing, which allows utilities to curb demand at peak hours by pricing electricity in accordance with demand. And some entrepreneurs have used TOU pricing to generate greater energy efficiency and demand response opportunities through behavioral demand response programs. Congestion pricing for vehicle traffic promises to create a similar market for efficiency – and to raise revenues for public transit in the process.

In New York, a number of program design features have been outlined, and some remain unresolved. The proposed congestion pricing zone will be in Manhattan, below 60th Street. Based on the state’s goal to raise $1 billion per year from traffic fees, drivers will likely pay between $12 and $14 for cars, and around $25 for trucks during peak hours; fees will be less on nights and weekends. And some drivers may receive credits for tolls entering the city from elsewhere. Not everyone will have to pay, and the process of determining exemptions (for example, for people living inside the congestion zone, or for low-income New Yorkers) will occupy much of the implementation debate in the coming years. And the fees will likely be assessed using existing technology (e.g., E-ZPass) and infrastructure, and through new cameras and sensors throughout the City.

In London, analysis has shown that its congestion charge has reduced traffic by 30% and improved air quality (17% reduction in NOx emissions, 24% reduction in PM10 emissions, and 3% reduction in carbon emissions). The program has been so successful in reducing emissions that policymakers in London are now doubling down on their congestion pricing scheme with an extra pollution charge for vehicles out of emissions standards compliance in the London Ultra Low Emission Zone (vehicles that meet certain emissions standards are entitled to a discount under the program). Results in Stockholm and Singapore have shown similar benefits, and in Stockholm, public opinion polling has shown that the program has become very popular.

This is perhaps why, even before New York City formally begins its program, other major American cities are considering following suit. Los Angeles recently concluded a study indicating that a $4 fee to enter a 4.3 square-mile areas during weekday rush hour could reduce traffic by more than 20%. And San Francisco is investing half a million dollars into a study on downtown congestion pricing, which will inform a plan to implement congestion pricing through road tolls. Californians have raised some concerns that road pricing could have regressive economic impacts for low-income motorists who drive long distances to reach their place of employment. But some studies have shown that, through discounts and exemptions, congestion pricing policies can work to protect and even help low-income drivers.