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Regulation of Road Accident Externalities when Insurance Companies have Market Power

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  • Maria Dementyeva

    (VU University Amsterdam)

  • Paul R. Koster

    (VU University Amsterdam)

  • Erik T. Verhoef

    (VU University Amsterdam)

Abstract

Accident externalities are among the most important external costs of road transport. We study the regulation of these when insurance companies have market power. Using analytical models, we compare a public-welfare maximizing monopoly with a private profit-maximizing monopoly, and markets where two or more firms compete. A central mechanism in the analysis is the accident externality that individual drivers impose on one another via their presence on the road. Insurance companies will internalize some of these externalities, depending on their degree of market power. We derive optimal insurance premiums, and "manipulable" taxes that take into account the response of the firm to the tax rule applied by the government. Furthermore, we study the taxation of road users under different assumptions on the market structure. We illustrate our analytical results with numerical examples, in order to better understand the determinants of the relative performance of different market structures.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 13-019/VIII.

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Date of creation: 18 Jan 2013
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Handle: RePEc:dgr:uvatin:20130019

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Web page: http://www.tinbergen.nl

Related research

Keywords: accident externalities; traffic regulation; safety; second-best; market power;

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  1. Boyer, M. & Dionne, G., 1985. "The Economics of Road Safety," Cahiers de recherche 8554, Universite de Montreal, Departement de sciences economiques.
  2. Eduardo Engel & Ronald Fischer & Alexander Galetovic, 1999. "Toll competition among congested roads," Documentos de Trabajo 54, Centro de Economía Aplicada, Universidad de Chile.
  3. Aaron S. Edlin & Pinar Karaca-Mandic, 2004. "The Accident Externality from Driving," Public Economics 0401003, EconWPA.
  4. Daniel, Joseph I, 1995. "Congestion Pricing and Capacity of Large Hub Airports: A Bottleneck Model with Stochastic Queues," Econometrica, Econometric Society, vol. 63(2), pages 327-70, March.
  5. Rubin, Paul H. & Shepherd, Joanna M., 2005. "Tort Reform and Accidental Deaths," Working paper 305, Regulation2point0.
  6. Jan K. Brueckner, 2002. "Airport Congestion When Carriers Have Market Power," American Economic Review, American Economic Association, vol. 92(5), pages 1357-1375, December.
  7. Jan K. Brueckner & Erik T. Verhoef, 2009. "Manipulable Congestion Tolls," Working Papers 080915, University of California-Irvine, Department of Economics.
  8. Ian W. H. Parry & Margaret Walls & Winston Harrington, 2007. "Automobile Externalities and Policies," Journal of Economic Literature, American Economic Association, vol. 45(2), pages 373-399, June.
  9. Verhoef, Erik T. & Rouwendal, Jan, 2004. "A behavioural model of traffic congestion: Endogenizing speed choice, traffic safety and time losses," Journal of Urban Economics, Elsevier, vol. 56(3), pages 408-434, November.
  10. Verhoef, Erik & Nijkamp, Peter & Rietveld, Piet, 1996. "Second-Best Congestion Pricing: The Case of an Untolled Alternative," Journal of Urban Economics, Elsevier, vol. 40(3), pages 279-302, November.
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