I just read that the external social cost of having another driver in California — due to accidents and not even citing congestion — ranges from $1,725 to $3,239 a year.
The number seems high to me (I couldn’t spot any problem in the paper), but I learned a new argument for market failure.
An externality arises from the difference between the average and marginal costs of accidents. Each driver pays, on average, half the cost of an accident involving two people. But in Coasean terms, the "marginal product" of either driver was to cause the full accident (this seems to ignore that on some days, certain drivers will crash with someone else, virtually no matter what, but of course this does not cover every case either).
So should you go drive in Idaho instead? Or can the argument be flipped to create a comparable uninternalized benefit from driving? When you drive to someone or somewhere else, you will bring some consumer surplus or producer surplus to the other person. Or is the "complementarity of the match" more potent on the downside, with accidents?
That is all from Aaron Edlin and Pinar Karaca-Mandic, in the October 2006 Journal of Political Economy. The authors also claim that an optimal Pigouvian tax on driving could raise $66 billion in the state of California, more than the other state taxes put together.
Here is an earlier version of the paper. Guest blogger Eric Helland also covered the Edlin, Kraca-Mandic paper before it was published. He suggested toll roads were the solution.
Biased argument. As congestion increases, speeds slow, and accidents become less costly. Thus Massachusetts has the highest accident rate in the country, but the lowest death rate from accidents. I would think it is unclear whether adding drivers has any externalities at all aside from congestion and delays.
the “marginal product” of either driver was to cause the full accident
No, the marginal product of one driver was to cause the full accident. Over time, that one driver will internalize the cost of his tendency to cause accidents by facing higher insurance costs. You only derive an externality if you assume that accidents are caused by happenstance rather than individual fault. As usual, externalities disappear when you introduce property rights and the corresponding duties – in this case, the duty to drive safely.
I see that my point has already been considered by the authors:
I won’t look up those other papers and try to refute them, but I have to say I’m skeptical. The authors do make the argument directly themselves:
An easy counter to this: assuming that increased density does mean increased risk of causing an accident or of being in an accident that is not your fault, drivers will choose to take trips along routes with known densities and thus known risks, and by doing so their insurance premiums and/or born accident risk will increase or decrease accordingly. The relevant question is not whether an additional driver on a route adds risk to everyone else in excess of their own costs – the relevant question is whether or not individual drivers know what the risks of driving on a route will be. And they do. It’s no surprise to anyone that the same routes that were congested yesterday and congested last week are congested today.
Furthermore, it’s hard to take seriously a paper that outlines a framework for accident frequency by saying:
That seems a lot like assuming a spherical cow.
Tyler,
I am either missing something fundamental, or the whole idea of an insurance externality is a non-starter.
If the total insurance cost increase is $2500 for an increase from 1 million drivers to 1 million + 1, then, in the normal course of events, premiums for all drivers will increase by a quarter of a cent, as opposed to being attached to a single, unidentifiable marginal driver.
If the premiums are not increased, then the insurance companies will either see their underwriting profits reduced or their losses increased, a generally unstable state. There is no unpaid insurance externality.
Regards, Don
I think we should start by killing the economists. It seems that a vast number of otherwise sane people have been seduced by the social engineering possibilities available with Pigouvian taxes.
Save the world by taxing humanity to death!
Social costs from more people in California? This can not be true. More than 100% of the population growth in California is from immigration (Americans are net leaving). This means that immigration has negative externalities. Not exactly PC thinking. The broad point is that population growth has strong negative externalities associated with it that the Open Borders crowd refuses to admit. California is now one of the poorest states in the US. The accident costs mentioned here may or may not be correct. However, the direction is clear.
josh: since the required technology consists of paving equipment and toll booths, I’d say we’re pretty much there now.
“An externality “is a cost or benefit arising from an economic transaction that falls on a third party and that is not taken into account by those who undertake the transaction.”
In crowded conditions every member of the crowd imposes a cost(c) on every other member. The n+1 member costs the crowd nc but they cost him nc. There is no thrid party involved where where the cost is not taken into account. The cost of accidents are only a special case. Would we have the government impose a Pigouvian tax every time we got into a line at a movie theater or went to sold out rock concert?
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