Carfree and carlite people pay the costs of driving (Freakonomics)
04-21-08, 06:20 PM
#1
Sophomoric Member
Thread Starter
Carfree and carlite people pay the costs of driving (Freakonomics)
gz_ posted a link to a great article in the NY Times. I thought others would be interested so I'm posting it here. It's one of a series of articles about how people can reduce their carbon footprints. I haven't had time to read the other articles yet; maybe some of you will.
This one is about the externalities of driving--how other people pay some of the costs of driving, even if they drive very little themselves, or not at all. Obviously this will be of interest to most members of this subforum. The authors are STEPHEN J. DUBNER and STEVEN D. LEVITT, who wrote the book Freakonomics, a bestselling book about pop economics that was famous for the chapter about why crack dealers live with their moms. I read the book and enjoyed it. I enjoyed this article too. I think it gives some legitimacy to claims that people have made on this forum.
Here's a permalink to the article. I'll post the text in the first reply.
Read it if you're interested and let us know what you think.
This one is about the externalities of driving--how other people pay some of the costs of driving, even if they drive very little themselves, or not at all. Obviously this will be of interest to most members of this subforum. The authors are STEPHEN J. DUBNER and STEVEN D. LEVITT, who wrote the book Freakonomics, a bestselling book about pop economics that was famous for the chapter about why crack dealers live with their moms. I read the book and enjoyed it. I enjoyed this article too. I think it gives some legitimacy to claims that people have made on this forum.
Here's a permalink to the article. I'll post the text in the first reply.
Read it if you're interested and let us know what you think.
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04-21-08, 06:28 PM
#2
Sophomoric Member
Thread Starter
Here's the text to the article from nytimes.com
Americans drive too much. This isn’t a political or moral argument; it’s an economic one. How so?
Because there are all sorts of costs associated with driving that the actual driver doesn’t pay. Such a condition is known to economists as a negative externality: the behavior of Person A (we’ll call him Arthur) damages the welfare of Person Z (Zelda), but Zelda has no control over Arthur’s actions. If Arthur feels like driving an extra 50 miles today, he doesn’t need to ask Zelda; he just hops in the car and goes. And because Arthur doesn’t pay the true costs of his driving, he drives too much.
What are the negative externalities of driving? To name just three: congestion, carbon emissions and traffic accidents. Every time Arthur gets in a car, it becomes more likely that Zelda — and millions of others — will suffer in each of those areas.
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.
How can this be achieved? Higher tolls, especially variable tolls like congestion pricing, are one option. This seems to have worked well in London but was recently quashed in New York City, where the political hurdles proved too high.
A higher gas tax might also work. If a typical car gets 20 miles to the gallon, then the proper tax would be about $2 per gallon. But with the current high market price for gas and the political hysterics attached to it — well, good luck with that one.
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.
While some insurance companies do offer a small discount for driving less — usually based on self-reporting, which has an obvious shortcoming — U.S. auto insurance is generally an all-you-can-eat affair. Which means that the 27,000 more miles than Zelda that Arthur drives don’t cost him a penny, even as each mile produces externalities for everyone. It also means that low-mileage drivers like Zelda subsidize high-mileage drivers like Arthur.
Aaron Edlin first noticed this imbalance more than 15 years ago. “I was a graduate student at Stanford,” he says, “and I drove maybe 2,000 miles a year. But I paid roughly the same $1,000 as if I’d driven 10 times as much, which was a huge portion of my budget.” A few years later, Edlin was serving on the President’s Council of Economic Advisers when he floated an idea that economists had long found attractive: pay-as-you-drive (PAYD) insurance. It seemed like an obvious solution. Since no one expects to pay the same price for, say, a 60-minute massage as they pay for a 15-minute massage, why should people pay the same for insurance no matter how many miles they drove?
“The objection within the White House,” Edlin recalls, “was there wasn’t good academic research on the subject.”
Edlin and a few others, including Jason Bordoff and Pascal Noel at the Brookings Institution, have since done such research. It makes a compelling case that PAYD insurance would work well, reducing the carbon emissions, congestion and accident risk created by too much driving while leading drivers to pay the true cost of their mileage. Bordoff and Noel put the total social benefit at $52 billion a year.
The better news is that PAYD insurance is no longer just an academic exercise. G.M.A.C. has begun using OnStar technology to offer mileage discounts, and next month Progressive will roll out a comprehensive PAYD plan called MyRate. Progressive, the huge Ohio-based insurer that has long prided itself as an innovator, will first offer the plan in six states, having run a similar pilot in three other states. Drivers who sign up for MyRate will install a small wireless device in their cars that transmits to Progressive not just how many miles they drive but also when those miles are driven and, to some extent, how they are driven: the device measures the car’s speed every second, from which Progressive can derive acceleration and braking behavior. Which means that Progressive will not only be able to charge drivers for the actual miles they consume but will also better assess the true risk of each driver.
If PAYD is such a great idea, why has it taken so long? There are at least three reasons: the tracking technology has only recently become affordable; insurers were anxious about drivers’ privacy concerns; and there was a substantial risk for whichever company was first to offer PAYD on a large scale.
Participation in the MyRate program is voluntary, and that’s where the economics get interesting. As with most incentive changes, there will be winners and losers. The clearest winners are people like Zelda, who can drive the same distance they used to drive and pay less. What’s less obvious is whether Progressive will be a winner; there are, in fact, a couple of situations in which Progressive could lose out. If all MyRate accomplishes is to give Progressive’s low-mileage customers the rate cut they deserve, then Progressive is doing little more than lowering its own revenues. It could, of course, try to compensate by raising rates on all its high-mileage Arthurs, but then there’s nothing to stop Arthur from buying his insurance elsewhere. (Of course, losing its riskiest customers to other companies might also prove profitable for Progressive.)
If, however, Progressive can corner the Zelda market by stealing millions of Zeldas from other insurers, then it could make a killing by being the first to sell accurately priced insurance for low-mileage drivers. The bigger goal for society — and the wild card in this or any incentive shift — is to create real behavior change. And that is always easier said than done. But if Progressive’s PAYD insurance can induce some of its high-mileage customers to drive less and especially to drive more safely, resulting in smaller claims payouts for Progressive and fewer negative externalities for everyone, then it could truly be a win-win-win situation.
Except, perhaps, for Progressive’s rivals.
Stephen J. Dubner and Steven D. Levitt are the authors of “Freakonomics.” More information on the research behind this column is online at www.freakonomics.com.
Copyright 2008 The New York Times Company
April 20, 2008
Freakonomics
Not-So-Free Ride
By STEPHEN J. DUBNER and STEVEN D. LEVITT
The trouble with negative externalities
Freakonomics
Not-So-Free Ride
By STEPHEN J. DUBNER and STEVEN D. LEVITT
The trouble with negative externalities
Americans drive too much. This isn’t a political or moral argument; it’s an economic one. How so?
Because there are all sorts of costs associated with driving that the actual driver doesn’t pay. Such a condition is known to economists as a negative externality: the behavior of Person A (we’ll call him Arthur) damages the welfare of Person Z (Zelda), but Zelda has no control over Arthur’s actions. If Arthur feels like driving an extra 50 miles today, he doesn’t need to ask Zelda; he just hops in the car and goes. And because Arthur doesn’t pay the true costs of his driving, he drives too much.
What are the negative externalities of driving? To name just three: congestion, carbon emissions and traffic accidents. Every time Arthur gets in a car, it becomes more likely that Zelda — and millions of others — will suffer in each of those areas.
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.
How can this be achieved? Higher tolls, especially variable tolls like congestion pricing, are one option. This seems to have worked well in London but was recently quashed in New York City, where the political hurdles proved too high.
A higher gas tax might also work. If a typical car gets 20 miles to the gallon, then the proper tax would be about $2 per gallon. But with the current high market price for gas and the political hysterics attached to it — well, good luck with that one.
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.
While some insurance companies do offer a small discount for driving less — usually based on self-reporting, which has an obvious shortcoming — U.S. auto insurance is generally an all-you-can-eat affair. Which means that the 27,000 more miles than Zelda that Arthur drives don’t cost him a penny, even as each mile produces externalities for everyone. It also means that low-mileage drivers like Zelda subsidize high-mileage drivers like Arthur.
Aaron Edlin first noticed this imbalance more than 15 years ago. “I was a graduate student at Stanford,” he says, “and I drove maybe 2,000 miles a year. But I paid roughly the same $1,000 as if I’d driven 10 times as much, which was a huge portion of my budget.” A few years later, Edlin was serving on the President’s Council of Economic Advisers when he floated an idea that economists had long found attractive: pay-as-you-drive (PAYD) insurance. It seemed like an obvious solution. Since no one expects to pay the same price for, say, a 60-minute massage as they pay for a 15-minute massage, why should people pay the same for insurance no matter how many miles they drove?
“The objection within the White House,” Edlin recalls, “was there wasn’t good academic research on the subject.”
Edlin and a few others, including Jason Bordoff and Pascal Noel at the Brookings Institution, have since done such research. It makes a compelling case that PAYD insurance would work well, reducing the carbon emissions, congestion and accident risk created by too much driving while leading drivers to pay the true cost of their mileage. Bordoff and Noel put the total social benefit at $52 billion a year.
The better news is that PAYD insurance is no longer just an academic exercise. G.M.A.C. has begun using OnStar technology to offer mileage discounts, and next month Progressive will roll out a comprehensive PAYD plan called MyRate. Progressive, the huge Ohio-based insurer that has long prided itself as an innovator, will first offer the plan in six states, having run a similar pilot in three other states. Drivers who sign up for MyRate will install a small wireless device in their cars that transmits to Progressive not just how many miles they drive but also when those miles are driven and, to some extent, how they are driven: the device measures the car’s speed every second, from which Progressive can derive acceleration and braking behavior. Which means that Progressive will not only be able to charge drivers for the actual miles they consume but will also better assess the true risk of each driver.
If PAYD is such a great idea, why has it taken so long? There are at least three reasons: the tracking technology has only recently become affordable; insurers were anxious about drivers’ privacy concerns; and there was a substantial risk for whichever company was first to offer PAYD on a large scale.
Participation in the MyRate program is voluntary, and that’s where the economics get interesting. As with most incentive changes, there will be winners and losers. The clearest winners are people like Zelda, who can drive the same distance they used to drive and pay less. What’s less obvious is whether Progressive will be a winner; there are, in fact, a couple of situations in which Progressive could lose out. If all MyRate accomplishes is to give Progressive’s low-mileage customers the rate cut they deserve, then Progressive is doing little more than lowering its own revenues. It could, of course, try to compensate by raising rates on all its high-mileage Arthurs, but then there’s nothing to stop Arthur from buying his insurance elsewhere. (Of course, losing its riskiest customers to other companies might also prove profitable for Progressive.)
If, however, Progressive can corner the Zelda market by stealing millions of Zeldas from other insurers, then it could make a killing by being the first to sell accurately priced insurance for low-mileage drivers. The bigger goal for society — and the wild card in this or any incentive shift — is to create real behavior change. And that is always easier said than done. But if Progressive’s PAYD insurance can induce some of its high-mileage customers to drive less and especially to drive more safely, resulting in smaller claims payouts for Progressive and fewer negative externalities for everyone, then it could truly be a win-win-win situation.
Except, perhaps, for Progressive’s rivals.
Stephen J. Dubner and Steven D. Levitt are the authors of “Freakonomics.” More information on the research behind this column is online at www.freakonomics.com.
Copyright 2008 The New York Times Company
Last edited by Roody; 04-21-08 at 06:33 PM.
04-21-08, 07:44 PM
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With the tracking technology they could bump the insurance up for each speeding or stop sign running event too. Also, if they succeed in implanting RFID tags in us they can change the rate depending on the driver so the mileage put on by your teenage kid or 80 year old grandfather will cost more than the mileage put on by you. If the RFID is matched with a heart rate monitor car free people who bike around can get a health insurance reduction from exercising. If it is matched to a blood chemistry monitor we can get a health insurance reduction from abstaining from alcohol and tobacco. If the RIFID is matched to our televisions and heart rates we can get an income tax reduction for getting excited about the right commercials or shows or the right political candidates. If you get points for getting all happy at seeing a McCain advert and have to pay extra tax if you get all happy over a democrat- because its the democrats who run up the huge deficits right? To what future is this idea of behavior modification through monitoring and penalizing taking us? At first glance pay to play sounds fair but as the concept gets extended it gets creepy.
Didn't I just hear on the radio that McCain wants to eliminate the gas tax for the summer to encourage people to drive more? Won't that mean that they'll use more gas if they drive more miles and pollute more and drive the price of crude higher? Isn't that exactly opposite of the premise of this article that a social good would be for people to drive less? The authors need to get with the program, the authors state "Americans drive too much. This isn’t a political or moral argument; it’s an economic one. " right up front they're contradicting the world view of our next president and probably the current one too. It would be nice if we voters could have a choice in the fall one candidate saying "Vote for me - my world view is that Americans don't drive enough and I'll changes things so they can drive more." and the other candidate like the authors of the article -"Vote for me- my world view is that Americans who drive little or not at all are subsidizing those who drive a lot, I'll make it more fair." I think they all have the same goal of helping Americans drive more and screw the car free- they're losers anyway.
Didn't I just hear on the radio that McCain wants to eliminate the gas tax for the summer to encourage people to drive more? Won't that mean that they'll use more gas if they drive more miles and pollute more and drive the price of crude higher? Isn't that exactly opposite of the premise of this article that a social good would be for people to drive less? The authors need to get with the program, the authors state "Americans drive too much. This isn’t a political or moral argument; it’s an economic one. " right up front they're contradicting the world view of our next president and probably the current one too. It would be nice if we voters could have a choice in the fall one candidate saying "Vote for me - my world view is that Americans don't drive enough and I'll changes things so they can drive more." and the other candidate like the authors of the article -"Vote for me- my world view is that Americans who drive little or not at all are subsidizing those who drive a lot, I'll make it more fair." I think they all have the same goal of helping Americans drive more and screw the car free- they're losers anyway.
04-21-08, 08:32 PM
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Really annoying that Progressive had to take the pay-as-you-go insurance to the extreme by tracking ones speed, driving pattern, and all. That's a little too intrusive and they don't need that information. Just don't see why they can't treat car insurance like the electric or gas meter and check the odometer every month or so (which the gas and electric companies have been doing for a good half-century now.)
Regarding the gas-tax holiday, McCain lost my vote with that one. It's not about car-hate, it just shows bad policy at a very fundamental level. To actively encourage people to drive more after we know about global warming, Islamic terrorism, and epidemic obesity is infuriating.
Regarding the gas-tax holiday, McCain lost my vote with that one. It's not about car-hate, it just shows bad policy at a very fundamental level. To actively encourage people to drive more after we know about global warming, Islamic terrorism, and epidemic obesity is infuriating.
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04-21-08, 08:51 PM
#5
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Thread Starter
Most people don't realize that for a few years, private cars have had a "black box" in it that records data about driving habits. If I'm not mistaken, I think these black boxes also have GPS capabilities. I assume that's what the PAYD system would use.
It's interesting that we've talked a lot about carbon taxes, gas taxes, gas guzzler taxes, tolls, rationing and other means to get people to drive less, or pay a fairer share of the external costs of driving. But I don't think I've ever read anything on the forum (or elsewhere) about raising insurance to accomplish the same things. So far I have no problem with this idea, but maybe somebody will point out its drawbacks.
It's interesting that we've talked a lot about carbon taxes, gas taxes, gas guzzler taxes, tolls, rationing and other means to get people to drive less, or pay a fairer share of the external costs of driving. But I don't think I've ever read anything on the forum (or elsewhere) about raising insurance to accomplish the same things. So far I have no problem with this idea, but maybe somebody will point out its drawbacks.
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"Think Outside the Cage"
04-21-08, 10:03 PM
#6
Every lane is a bike lane
Most people don't realize that for a few years, private cars have had a "black box" in it that records data about driving habits. If I'm not mistaken, I think these black boxes also have GPS capabilities. I assume that's what the PAYD system would use.
It's interesting that we've talked a lot about carbon taxes, gas taxes, gas guzzler taxes, tolls, rationing and other means to get people to drive less, or pay a fairer share of the external costs of driving. But I don't think I've ever read anything on the forum (or elsewhere) about raising insurance to accomplish the same things. So far I have no problem with this idea, but maybe somebody will point out its drawbacks.
It's interesting that we've talked a lot about carbon taxes, gas taxes, gas guzzler taxes, tolls, rationing and other means to get people to drive less, or pay a fairer share of the external costs of driving. But I don't think I've ever read anything on the forum (or elsewhere) about raising insurance to accomplish the same things. So far I have no problem with this idea, but maybe somebody will point out its drawbacks.
The cold hard facts of this issue are that none of us live in a "user-pays" society. The only way to achieve that is to make every road in existence a toll road, which would be impractical. I use the same argument when I hear people spouting the old "cyclists don't pay rego fees" line. All you can do is make your own choices and pay whatever costs are attached to those and live with it. Whether I subsidise drivers or not, I'm still coming out in front with a margin of between $5,000 and $10,000. Frankly, if that doesn't convince people to give up their cars, nothing will, least of all arguments about "who pays for the road".
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I am clinically insane. I am proud of it.
That is all.
I am clinically insane. I am proud of it.
That is all.
04-26-08, 04:44 AM
#7
Senior Member
The costs of building and maintain roads in urban areas in cities and towns in Australia are borne by residents in each muncipality. That is, the rates/taxes levied against each property. Roads funding might be contributed to local government projects by State or Federal governments. State Governments were outlawed from raising excise on petrol some years ago under the Australian Constitution.
The bulk of Federal Government funding for roads infrastructure goes to the major arterial roads between significant cities (Highway 1). Fuel excise and GST on petroleum products used for motor vehicles (IIRC around 40 cents per litre) goes into the Federal Government's Consolidated Revenue from which funding for a large number of other communtiy infrastructure and social programs are drawn. Roads infrastructure funding has been allowed to wind down in recent years under the previous right-wing government.
I'm actually not too fussed about the cost of road infrastructure because, except for some freeways, the spending means ready-made places for me to ride my bicycles.
However, picking up from Roody's preamble, one of the things that really sticks in my craw is shopping at a supermarket chain that subsidises the fuel cost with discounts based on the size of their grocery bill. The discount can be up to 3.5 cents a litre (about 13 cents a gallon). The supermarket chains have bought up service stations and introduced their own branding to support this "promotion". It means that by shopping at those supermarkets and being car-ownership-free, I am subsidising increased use of motor vehicles and thereby increased fuel consumption.
In addition to that fuel subsidy promotion, supermarket chains spend inordinate amounts of money acquiring additional property and building car parks. We're subsidising the cost with loadings on the price of the goods we buy.
Fortunately, the supermarket chain that I use, with a store in a small country town, doesn't offer those fuel discount promotions and off-road parking. Although it's prices are a bit higher than the major chain store, I feel comfortable continuing to support it.
As to insurance, I cannot help but feel that insurance on housing and public liabillity cover (especially so here in Australia) contributes significantly to the losses sustained by motor vehicle insurance. I might be wrong, but... when the public liability insurance shakeout occurred in Australia in the early 2000s, in which many public and communty events went by the wayside when faced with five or six times increases in premiums, there seemed to be no effect on motor vehicle insurance premiums.
As ChrisL points out, however, the solace we can draw is that by not owning a motor vehicle, we are making quite huge savings each year that allow us to pursue other things that some people (car owners) just dream about). It all has to do with making choices.
04-26-08, 05:45 AM
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The supermarket gas discount idea you describe is used in some places in the US. Most supermarkets here offer free parking as a given. Fortunately, none of the grocery stores I shop at in Madison offer a gas discount. If they did, I'd probably think twice about spending money there.
04-26-08, 11:15 AM
#9
In the right lane
gz_ posted a link to a great article in the NY Times. I thought others would be interested so I'm posting it here. It's one of a series of articles about how people can reduce their carbon footprints. I haven't had time to read the other articles yet; maybe some of you will.
This one is about the externalities of driving--how other people pay some of the costs of driving, even if they drive very little themselves, or not at all. Obviously this will be of interest to most members of this subforum. The authors are STEPHEN J. DUBNER and STEVEN D. LEVITT, who wrote the book Freakonomics, a bestselling book about pop economics that was famous for the chapter about why crack dealers live with their moms. I read the book and enjoyed it. I enjoyed this article too. I think it gives some legitimacy to claims that people have made on this forum.
Here's a permalink to the article. I'll post the text in the first reply.
Read it if you're interested and let us know what you think.
This one is about the externalities of driving--how other people pay some of the costs of driving, even if they drive very little themselves, or not at all. Obviously this will be of interest to most members of this subforum. The authors are STEPHEN J. DUBNER and STEVEN D. LEVITT, who wrote the book Freakonomics, a bestselling book about pop economics that was famous for the chapter about why crack dealers live with their moms. I read the book and enjoyed it. I enjoyed this article too. I think it gives some legitimacy to claims that people have made on this forum.
Here's a permalink to the article. I'll post the text in the first reply.
Read it if you're interested and let us know what you think.
However, on the topic of links, I notice that the NY Times has a big section on reducing your carbon footprint called the Green Issue These topics should be great fodder for discussion here.
