Stuck in Traffic : Measuring Congestion Externalities with Negative Supply Shocks

Traffic congestion is one of the most challenging issues of urban agglomeration. Congestion costs are often higher than their socially optimal levels, and little is known about the key parameters needed to design optimal congestion policies. This paper addresses this issue by exploiting an exogenous reduction in for-hire vehicle supply in New York City. I estimate the effect of a vehicle on congestion and document substitution patterns to other transportation modes. A 9.1 percent reduction in the number of active vehicles decreases congestion by 0.46 minutes per mile. As vehicles leave the streets, for-hire trips decrease, resulting in increased waiting times and people switching to other transportation modes. Welfare increases for those who travel by vehicle because travel time is reduced. However, welfare decreases for those who face increased wait times or switch to a less-preferred transportation mode. A calibration exercise suggests daily net welfare gains between $0.5 and $1.0 million