Over the weekend, The New York Times dug into the negative externalities of driving. They identified three main areas in which drivers impose a societal cost that they don't pay for: Carbon emissions, congestion, and accidents. "According to current estimates," says The Times, "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."The authors want to redress this with pay-per-mile car insurance, an idea that also made the rounds in the last issue of Democracy. For now, the problem in car insurance is that it's priced with little regard to how much you drive. To dramatize the case, The Times imagines two drivers, Arthur, who logs 30,000 miles a year, and Zelda, who drives 3,000. "[T]he 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...[but] 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 question is how you move towards such a system. Currently, low-mileage drivers subsidize high-mileage drivers. Progressive, for one, is rolling out a pay-per-mile scheme, and it's a pretty good bet that only low-mileage drivers will sign up. This might make the project unprofitable. Or it might spur to throw their lot in with low-mileage drivers, raising rates on the high-mileage drivers or off-loading them onto other insurers. This in turn might force the other insurers to move to pay-as-you-drive schemes. It's essentially the same risk shifting that happens in the individual health insurance market, where insurers price their product to advantage healthy enrollees and keep trying to drive out sick people. The difference is that we actually want to discourage driving, or at least make people pay for it, while we don't want to keep folks from getting necessary health care. This is that rare devious insurance cost shifting scheme that I actually like!(Image used under a Creative Commons license from Neo Porcupine.) PAY AS YOU DRIVE INSURANCE.
Over the weekend, The New York Times dug into the negative externalities of driving. They identified three main areas in which drivers impose a societal cost that they don't pay for: Carbon emissions, congestion, and accidents. "According to current estimates," says The Times, "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."The authors want to redress this with pay-per-mile car insurance, an idea that also made the rounds in the last issue of Democracy. For now, the problem in car insurance is that it's priced with little regard to how much you drive. To dramatize the case, The Times imagines two drivers, Arthur, who logs 30,000 miles a year, and Zelda, who drives 3,000. "[T]he 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...[but] 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 question is how you move towards such a system. Currently, low-mileage drivers subsidize high-mileage drivers. Progressive, for one, is rolling out a pay-per-mile scheme, and it's a pretty good bet that only low-mileage drivers will sign up. This might make the project unprofitable. Or it might spur to throw their lot in with low-mileage drivers, raising rates on the high-mileage drivers or off-loading them onto other insurers. This in turn might force the other insurers to move to pay-as-you-drive schemes. It's essentially the same risk shifting that happens in the individual health insurance market, where insurers price their product to advantage healthy enrollees and keep trying to drive out sick people. The difference is that we actually want to discourage driving, or at least make people pay for it, while we don't want to keep folks from getting necessary health care. This is that rare devious insurance cost shifting scheme that I actually like!(Image used under a Creative Commons license from Neo Porcupine.) 
