Traffic nerds alert! A congestion pricing caveat

The economic logic behind congestion pricing is pretty straight forward. Tolls paid by drivers spread demand more evenly throughout the day. With a price attached to their decisions, people will make better commuting choices — maybe leaving earlier or later –reducing delays. Yay, efficiency! London already has congestion pricing, and many economists recommend the same for US urban areas. But Philly Fed economist Jeffrey Brinkman offers a caveat in a recent paper:

However, once we consider business location decisions, the efficacy of this policy comes into question. The policy, by design, will make it more costly for people to travel into dense business districts, and workers will therefore require higher wages to do so. Paying these higher wages might not be worth it for businesses, and therefore, some businesses will leave the business district, reducing employment density. Given the strong evidence for agglomeration economies, or some proximity-related economies of scale, there will be some loss in production. Understood in this way, the efficiency of congestion pricing becomes ambiguous. This suggests that a better policy may be to reduce the costs associated with congestion rather than charge fees to discourage commuting into dense areas.

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