The New York State assembly has used delaying tactics to defy New York City mayor Michael Bloomberg’s attempt to introduce congestion pricing in the city. Without a final plan in place by yesterday, New York has blown a chance to receive as much as $500m in federal funds to help implement Bloomberg’s plan.

The plan would charge passenger cars $8 a day and commercial vehicles $21 a day for the right to drive in Manhattan below 86th Street.

While the proposal seems dead for now, the odds are it will be back in its full glory before long. The reason is simple: congestion pricing is widely acknowledged by economists to be a smart way for a municipality to raise revenue while reducing pollution and commuting time.

More importantly, experience around the world shows that congestion pricing works just as economic theory suggests it should. Economists can be wrong about some things, but they have nailed this one.

The idea is not new. One early paper, by University of Birmingham economist AA Walters in the leading journal Econometrica, was published in 1961.

The logic is that when individuals pull on to a highway, they increase the amount of traffic. At a certain point, the greater traffic imposes costs on everyone else as congested roads increase travel time. If entry onto the road is free, the motorist will ignore his effect on others when deciding where to drive.

Congestion has a number of additional negative effects.

When there are more cars on the road, accidents become more likely. Longer travel time increases the amount of pollution released by vehicles.

Again, if a motorist is not forced to internalise these costs, he will spend too much time on the road and society as a whole will be worse off.

The solution is not complicated: planners can estimate the cost to society of a motorist driving onto a congested road and charge accordingly. When congestion is heavy, the cost will be high. The reverse also will be true, prompting motorists to adjust their driving patterns to avoid the costs and so roads will be emptier.

Singapore adopted this economist’s dream system early. In 1975, the government introduced a S$3-a-day ( R14) tax on cars entering the business district. Other cities, such as London and Stockholm, have followed. In each case, the systems have been quite successful. In London, a £5 ( R70) charge was imposed in 2003. This was increased to £8 in 2005.

A paper by Oxford economist Georgina Santos and Cambridge economist Gordon Fraser reviewed the London programme and found that it had numerous positive effects.

The number of vehicles in the affected area dropped about 18%, traffic speed increased about 21% and the number of passengers using buses during peak commuting hours increased a whopping 37%.

In New York, commuters sorely need the kind of help such a charge can give.

In a 2004 survey by the US Census Bureau, the average travel time to work for New Yorkers was an exasperating 38 minutes, the nation’s worst. The outer boroughs accounted for four of the five worst commuter counties in the country.

The mayor’s office says the city loses $13bn a year through costs associated with traffic and congestion.

Congestion pricing is about the only policy one can conceive of that would help with this problem. To be certain, there are a number of concerns, though.

First, an ideal system would change prices continuously, depending on how congested roads are.

If almost everybody in Manhattan is out of town some week in August, it ought to be cheap to drive downtown.

Such a plan is not hard to implement with today’s technology. One pilot programme in San Diego used time-varying congestion prices way back in 1996. A study of that programme found that drivers were willing to pay $30 an hour to avoid jams. Second, congestion prices are much harder to pay for low- income individuals.

Some of the revenue from the taxes should clearly be used to make it easier for those who choose not to drive to be able to use public transportation.

As such, Bloomberg’s proposal promised significant funding for travel alternatives for those hurt by the tax.

These include the expansion of commuter rail and subway capacity, the creation of new express bus routes, a new East River ferry system, and the completion of his bicycle master plan.

The plan leaves some of the economic benefit on the table by failing to let prices vary as much as economists think they should. But it is much better than the status quo. US President George Bush should give New York State more time to qualify for federal funds, and New York City should get its economics straight and introduce congestion pricing as soon as possible.