[null, {"document_url": "http://www.rff.org/blog/2008/pay-you-drive-auto-insurance-weekly-policy-commentary-december-15-2008", "unformatted_src": "/files/sharepoint/PublishingImages/Publications/Weekly_Policy_Commentary/traffic-jam.jpg", "src": "https://www.rff.org/files/sharepoint/PublishingImages/Publications/Weekly_Policy_Commentary/traffic-jam.jpg", "formatted_filename": "traffic jam"}, null]

Automobile use in the United States is underpriced as motorists do not pay for the full costs of pollution, congestion, and traffic accidents when deciding how much to drive. However, there is intense opposition to gasoline taxes, peak-period congestion fees, and other policies that would reduce these externalities by raising the costs of driving. This week, Jason Bordoff and Pascal Noel discuss pay-as-you-drive insurance, which offers a novel approach for reducing automobile use, without raising the private costs of vehicle ownership and use for the majority of drivers. Under the current lump-sum pricing structure for auto insurance, drivers who are similar in other respects—age, gender, location, driving safety record—pay nearly the same premiums if they drive 5,000 or 50,000 miles a year, even though the likelihood of being in­volved in a collision increases with each mile driven. Hardly an efficient approach, to put it mildly.

Just as an all-you-can-eat restaurant encourages more eating, all-you-can-drive insurance pricing encourages more driving because drivers don’t face the marginal insurance cost for each mile driven. The extra driving that results imposes significant costs on society: more accidents, congestion, carbon emissions, local pollution, and dependence on oil.

Moreover, the current structure is inequitable. It forces low-mileage drivers to subsidize the accident cost of high-mileage drivers in each risk class, even though the former are responsible for fewer accidents. This problem is particularly disturbing given that low-income people tend to drive less on average.

The government could also offer a tax credit for each new mileage-based policy that an insurance company writes. We recommend a $100 tax credit, which would cover the cost of most technological devices that could easily measure and transmit mileage data. The tax credit could be phased out, once roughly five million vehicles (two percent) are signed up, after which point PAYD is expected to take off on its own. To address the development costs, the government could increase the funding available to PAYD pilot programs.

While we believe that PAYD would be a significant improvement, it is not an adequate policy response to driving related harms all by itself. It does not force drivers to internalize the external social costs of the congestion, accidents, pollution, and oil dependence they cause. It simply corrects a failure with the way that auto insurance is priced today and the inefficient and inequitable consequences of that pricing structure.

Ideally, PAYD would be complemented with other policies, such as carbon pricing and a congestion charge, which directly target the driving-related social harms. But many of these other policies raise the cost of driving, which is politically challenging, especially in these tough economic times. The promise of PAYD is that it can achieve some of the benefits of these user fees by creating incentives to reduce driving without raising the cost of driving in aggregate, and indeed lowering it for the majority of drivers. What is good for drivers, in this case, is also good for society.



Sign up for notifications of new blog posts.