Aaron Edlin just sent me this article by Pinar Karaca-Mandic and himself from 2006:
We [Edlin and Karaca-Mandic] estimate auto accident externalities (more specifically insurance externalities) using panel data on state-average insurance premiums and loss costs. Externalities appear to be substantial in traffic-dense states: in California, for example, we find that the increase in traffic density from a typical additional driver increases total statewide insurance costs of other drivers by $1,725-$3,239 per year, depending on the model. High-traffic density states have large economically and statistically significant externalities in all specifications we check. In contrast, the accident externality per driver in low-traffic states appears quite small. On balance, accident externalities are so large that a correcting Pigouvian tax could raise $66 billion annually in California alone, more than all existing California state taxes during our study period, and over $220 billion per year nationally.
Interesting stuff. I don’t have it in me right now to check all these numbers, but the argument looks to be laid out clearly enough that the experts in the area can work it out. Also, it all seems to be about accidents to other cars; I’m not sure where they factor in the costs due to running over pedestrians.
I’d also make a few suggestions about the display of inferences, the usual recommendations: rescaling (a coefficient of .00042 for traffic density suggests that a transformation is in order), control of significant digits (6535.20 +/- 3779.90 is a bit of overkill, no?), and the rest. The “$1,725-$3,239 per year” thing is particularly silly, being right in the abstract and all.
At the end they give their policy recommendations:
The most administratively expedient Pigouvian tax would be a gasoline tax since states already have such taxes. And, importantly, gas taxes would bring the uninsured into the payment system. . . . Many political watchers will doubt, though, that Americans will accept any policy that substantially raises the cost of driving. Gasoline taxes, for example, remain quite low in the United States compared with Europe. Surprisingly, there is a potential second-best compromise . . . The body politic has accepted mandatory insurance, so why not also require insurance companies to quote premiums by the mile instead of per car per year? . . . This simple change in pricing structure could reduce driving substantially by moving a fixed cost to the margin without raising the overall cost of driving. . . . An extremely valuable aspect of a requirement of per mile premiums is that it takes advantage of the fact that current insurance premiums account for heterogeneity in risk. As a result, those in highly dense areas and those with poor driving records would face the highest per mile rates and would reduce driving the most, creating a doubly large reduction in accidents–exactly as a social planner would wish.
It’s an interesting idea: some costs are per-gallon and don’t depend much on where you live–here I’m thinking of the costs of cleaning up the pollution, securing the oil supply,etc.–and some costs are per-mile and depend on where you live and what kind of car you drive–paying for accidents, traffic cops, street paving, injuries, deaths, and so forth. I know just about nothing about tax policy, but my impression is that taxes are usually set based on some combination of willingness to pay and revenue needs, not directly based on the costs associated with the activity that is taxed. It seems like a good idea, though. I’d be interested to know how Edlin and Karaca-Mandic place the relative importance of costs from accidents compared to all these others. Also is there some suggestion that some large part of the tax structure could be redone based on costs of externalities?