Steven Levitt and Stephen Dubner, authors of of the best-seller “Freakonomics,” have applied economic reasoning to all manner of social and public policy issues, from crime to drugs, parenting to sumo wrestling. Now they have turned their sights upon transportation.
“Americans drive too much,” Levitt and Dubner proclaim on their blog. “This isn’t a political or moral argument; it’s an economic one.”
The cost to motorists of driving does not incorporate significant externalities, such as traffic congestion, carbon emissions and traffic accidents. While Global Warming and greenhouses gases get all the attention these days, the social cost of CO2 emissions amounts to a modest $20 billion yearly in the United States, the authors say. Congestion costs significantly more: $78 billion a year. But the biggy is traffic accidents, which runs up the tab by $220 billion a year.
The authors are big fans of congestion tolls, which allocate scarce roadway capacity, as well as the gasoline tax. (Gee, they sound just like Bacon’s Rebellion!) But they acknowledge that “political hysterics” are not conducive to either solution. But there may be a way to rationally allocate the costs of driving by reforming the market for automobile insurance, Levitt and Dubner suggest.
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.
Crediting other economists for the idea, Levitt and Dubner advocate “Pay As You Drive” insurance: All other things being equal, the more miles you drive, the greater risk you have of getting into an accident, and the more insurance you should pay.
PAYD insurance programs are entering the marketplace but it is too early to determine if insurance companies like Progressive Insurance will make money. If all they do is give discounts to their own low-mileage customers while their high-mileage customers seek cheaper insurance elsewhere, they’ll lose business. On the other hand, such policies may succeed in luring low-mileage customers from other insurers. Society has a vested interest in seeing PAYD succeed. Write Levitt and Dubner:
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.
Insurance is regulated by state government. The General Assembly should take the lead in studying the feasibility of introducing PAYD insurance in Virginia. Politically, PAYD should be less controversial than tolls and gasoline taxes — it’s hard to make the argument with a straight face that people who drive more shouldn’t also pay more insurance — so we can hope that legislators might be willing to tackle it.
All things considered, PAYD is one of the best ideas I’ve heard in a long time. (Hat tip to Jonathan Mallard for pointing me to the Freakonomics blog.)