Manhattan Congestion Pricing

Generally I favor fewer less complicated taxes. However, on tax I do favor is congestion pricing. Such a tax already exists in Central London and I support mayor Bloomberg's perhaps quixotic campaign to bring one to Manhattan. The plan is for a simple tax on all cars that drive south of 60th Street between 6 and 6 on weekdays. The congestion tax is a textbook Pigouvian Tax. The basic idea of Pigouvian taxes is that there are certain things that we do where we impose a small cost on everyone. Our own share of this cost is infentesimal and this has no effect on our own behavior. When everyone imposes small costs on everyone else the result adds up. But, since everyone only controls a very small marginal cost there is little incentive for them to modify their behavior.

When anyone drives they impose a negative externality on everyone else - Congestion (in addition to pollution). No one car (except for that damn Florida driver) is the cause of congestion, so individual drivers cannot control whether or not there is congestion. However, together they create it, and impose a a burden on all drivers - traffic jams. The best way to lower the amount of cars on the road is to increase the price of driving. In the short term people will drive less and in the long run housing will be built closer to places of employment. The result is fewer drivers on the road, and better conditions for those who drive. So, the tax also creates a benefit for society, and pays the government's bills. This is an efficient tax policy. In general taxes like this should be used for things like congestion and pollution, and be offset by reduction in less efficient tax policies.

If you agree with this, look into Greg Mankiw's Pigou Club.