Sunday, April 20, 2008

Negative Externalities & Congestion Pricing By Insurance Rates

While Randal O'Toole keeps trying to wedge his foot in the door before it shuts, the evidence against the autopia of Futurama gets worse. The New York Times blog goes into detail:
Which of these externalities is the most costly to U.S. society? According to current estimates, carbon emissions from driving impose a societal cost of about $20 billion a year. That sounds like an awful lot until you consider congestion: a Texas Transportation Institute study found that wasted fuel and lost productivity due to congestion cost us $78 billion a year. The damage to people and property from auto accidents, meanwhile, is by far the worst.

In a 2006 paper, the economists Aaron Edlin and Pinar Karaca-Mandic argued that accidents impose a true unpaid cost of about $220 billion a year. (And that’s even though the accident rate has fallen significantly over the past 10 years, from 2.72 accidents per million miles driven to 1.98 per million; overall miles driven, however, keep rising.) So, with roughly three trillion miles driven each year producing more than $300 billion in externality costs, drivers should probably be taxed at least an extra 10 cents per mile if we want them to pay the full societal cost of their driving.
Basically they are setting up an argument for Pay as You Go Insurance or PAY D. Man would I love this type of pricing. First off, I only drive once a week. I really don't even need to drive that but it can be a bit hard on some days to get to my Gramma's house out in the East Bay. But driving about 40 miles a week is much less than the 90 I used to run in college. And it should cost me less than it does now. But the bad economic balance is not lost on the authors of this article:
This brings us to automobile insurance. While economists may argue that gas is poorly priced, that imbalance can’t compare with how poorly insurance is priced. Imagine that Arthur and Zelda live in the same city and occupy the same insurance risk pool but that Arthur drives 30,000 miles a year while Zelda drives just 3,000. Under the current system, Zelda probably pays the same amount for insurance as Arthur.
Is this perhaps a way to get to the mileage tax as well? Everyone has to get car insurance, so what if the mileage was reported to the government like capital gains and sent to you in a 1099 type format. Then it becomes part of your tax return. This could also be coupled with your income quite nicely and lower income folks could get tax breaks. It could possibly make pricing more progressive and might also be a way to recover the true cost of driving, or perhaps provide more incentives to reduce VMT, walk, and use transit. This one market based tool has the possibility of reshaping our urban landscape, likely for the better.

1 comment:

arcady said...

The biggest benefit by far of PAYD is the psychological effect it will have on drivers. Back in the era of cheap gas, the perceived marginal cost of making an extra car trip was basically zero: people figure that they've paid for the car, so they might as well use it. With gas prices rising, the perceived marginal cost is getting higher, and PAYD insurance would make it higher still. At some point, people will start to do the math and figure out that the direct immediate cost of driving is higher than, say, taking the train. The only downside is that people who drive less will be somewhat more likely to own a car, since insurance will be cheaper for them, but that's a problem best dealt with in other ways, like realistic pricing of residential parking.