Monday, November 13, 2006

Traffic accident externalities

In preparing classes on traffic congestion externalities in recent years I have touched on some other important externalities associated with driving. One very expensive externality is provision of free parking which is equivalent to a subsidy of 22 cents per mile for a US motorist taking the average journey to work. Another important cost is The Accident Externality from Driving, nicely analyzed by Aaron Edlin and Pinar Karaca-Mandic (EM), for US drivers, in the October 2006 Journal of Political Economy.

When two cars crash, although only one party may be negligent in causing the accident, the accident would not have occurred if either driver had not traveled. In this latter sense therefore both cause the accident. Motorists however pay (on average) only the average cost of the accident not the marginal cost so there is a substantial auto accident externality when one drives. Motorists pay too little for driving and hence drive too far.

EM estimate auto accident externalities using panel data on state average insurance premiums and loss costs. These external costs are substantial in traffic dense states – not immediately obvious since one might expect accident rates to be more serious under non-congested conditions where speeds are higher. Well, that seems not to be so – in low traffic density states the accident externality is low.

In California an increase in traffic density due to a single extra driver raises total statewide insurance costs by $1725-$3239 depending on the car model. A Pigovian tax to internalize this externality would raise $66 billion annually in California - more than all state taxes combined. A national corrective tax would raise $220 billion.

While building more roads to reduce congestion would reduce the externality this proves to be cost ineffective because of the vast expenditures involved - even with moderate congestion the external costs are quite high. While various Pigovian tax bases might deal with the problem the most sensible base would be to tax car insurance premiums – this is heterogeneous reflecting the accident and skill experience of drivers. EM estimate the required Californian tax would be 200-400% of the premium which the authors recognize will not work politically. Their suggestion instead is to leave overall driving costs the same but to increase the marginal cost of driving with insurance premiums rising with distance traveled as ‘per-mile’ premiums. People would then have an incentive to cut their insurance costs by reducing their driving which is the outcome sought. Per-mile premiums are fair since they impose lower charges on those (like women) who drive less.

The proposal is discussed over at Marginal Revolution. One difficulty is that the chance of having an accident dependents on when you travel as well as how far you travel. If I drive across Melbourne at 3-00 am I will encounter few cars and the probability of an accident is low. The best solution then is to seek congestion pricing of travel in a city and to add to tolls a charge that reflects the contemporaneous accident externality. This modifies a position I have long held in an inessential way.

The important point is to note that such a charge would be quite high. To put things differently we are all making far too many journeys by car because we are paying far too little to travel.

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