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Why folks like Greg Mankiw must work harder June 13, 2007

Posted by Sharath Rao in America, CMU.
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Conversation overhead recently :

A : Did you hear about the plans to charge drivers who drive into Manhattan ( New York City ) ?

B : Yeah, they just want rich people to live in that city.

A : No surprise, after all Mayor Bloomberg is one of the richest guys in America and he just wants rich people in there.

A was a Carnegie Mellon Undergrad and B the bus driver.

Quoting from article that Mankiw points to here :

The Soviet approach to markets set prices at some controlled price, and then let shortages ensue. Under this system, millions wasted hours queuing and goods went to consumers with the time to stand on line rather than to consumers who valued the goods most. Today, you don’t need to go through the messy process of getting a visa to Cuba or North Korea to see the social costs of under-pricing. Right here in New York, we don’t charge anything for using a particularly valuable resource: car access to Manhattan streets. We ration the limited access to streets through time wasted in traffic. New York’s mean travel time to work was 40 minutes in the 2000 Census, almost 15 minutes more than the national average. We’ve set the price of driving at zero and inevitably too many people drive.

There are only two ways to make real headway against congestion in Manhattan: build more streets or get fewer people to drive. Knocking down high-rises to expand Third Avenue seems pretty stupid, so to fix congestion we have to reduce the amount of driving. There is plenty of scope for improving public transportation, but the most reliable means of reducing traffic is to charge people for the social costs of their driving. When anyone drives in a crowded street, they create an externality: One person’s driving slows down everybody else.The best way to handle this externality is to charge drivers a congestion charge that reflects the social costs of the congestion they create.

If Mankiw had his way, he would have the entire American public take EC 10 or its equivalent. ( EC 10 is the introductory economics course at Harvard. )

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