Congestion Pricing? Economics, Theory, Reality

27 snips

Mar 29, 2025

Guest

Scott Duke Kominers

Guest

Michael Ostrovsky

In this engaging discussion, Michael Ostrovsky, a Stanford Economics Professor specializing in congestion pricing, and Scott Kominers, a Harvard Business School Professor and market design expert, explore the intricacies of congestion pricing and its recent implementation in New York. They delve into the historical context, the economic theories behind congestion charges, and the political challenges these initiatives face. The conversation also highlights technological alternatives and their implications for urban delivery systems and crypto networks, blending economic theory with practical realities.

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INSIGHT

Congestion as Externality

Traffic congestion is a negative externality, similar to pollution, where individual actions negatively impact others.
Economist Pigou proposed taxes to internalize these externalities, aligning individual actions with optimal social outcomes.

INSIGHT

Vickrey's Refinement

William Vickrey refined Pigou's ideas, applying them specifically to traffic and considering time-dependent externalities.
Congestion pricing, as a Pigouvian tax, aims to make drivers internalize the costs they impose on others.

ADVICE

Cordon Pricing Inefficiencies

Cordon pricing, charging a flat fee to enter a zone, isn't effective for vehicles making multiple trips within the zone.
Consider charging per trip or mile for taxis, Ubers, and delivery vehicles to accurately reflect their externalities.

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with @mostrovs @skominers @rhhackett

Welcome to web3 with a16z. I’m your host Robert Hackett, and today we’re talking about congestion pricing — an area of mechanism design that’s aimed at alleviating something everyone hates: traffic.

Now you may have heard this term recently since New York adopted its own version of congestion pricing at the beginning of the year. This is the first program of its kind in the U.S. — and it’s got supporters and detractors. We’ll talk about that, and we’re also going to talk about much more.

In the first part of today’s episode we’ll trace the history of the economic ideas that got us here. In the middle, we’ll dig deeper into the details of putting congestion pricing into practice, plus technological alternatives. And in the final part, we’ll explore parallels to — and implications for — crypto networks.

Our guests are Michael Ostrovsky, a Stanford Economics Professor who specializes in this area and who has done research on congestion pricing in New York. We’re also joined by a16z crypto Research Partner Scott Kominers, who is a Professor of Business Administration at Harvard Business School where he teaches market design and entrepreneurship.

Timestamps:

(0:00) introduction

(1:51) NYC proposal history

(3:38) economic theory of congestion pricing

(9:15) implementation: challenges and solutions

(26:00) technological alternatives and drones

(29:49) overnight delivery and other possibilities

(35:20) carpooling and how to encourage it

(39:34) congestion pricing and crypto

(47:59) lessons for blockchains

Resources:

Michael Ostrovsky's paper on congestion pricing in New York City (from before the launch, foreseeing its issues): https://web.stanford.edu/~ost/papers/nyc.pdf
Michael Ostrovsky's thread that went viral on X shortly after the debut of congestion pricing in New York, discussing the post-launch evidence, his team's data collection efforts, and the link between observed data and predictions in the above paper: https://x.com/mostrovs/status/1876798157595476420
Two of Ostrovsky's earlier theoretical papers on the topic: (1) https://web.stanford.edu/~ost/papers/complementarity.pdf, (2) https://web.stanford.edu/~ost/papers/sdc.pdf
Economist William Vickrey's influential paper on congestion pricing: Vickrey, W. S. (1969). Congestion theory and transport investment. American Economic Review 59 (2), 251–260. https://matthewturner.org/ec2410/readings/Vickrey_AER_1969.pdf

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