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Is Pay-As-You-Drive Insurance a Better Way to Reduce Gasoline than Gasoline Taxes?

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  • Parry, Ian

    ()
    (Resources for the Future)

Abstract

Gasoline taxes are widely perceived as the most efficient instrument for reducing gasoline consumption because they exploit all behavioral responses for reducing fuel use, including reduced driving and improved fuel economy. At present, however, higher fuel taxes are viewed as a political nonstarter. Pay-as-you-drive (PAYD) auto insurance, which involves replacing existing lump-sum premiums with premiums that vary in proportion to miles driven, should be more practical, since they do not raise driving costs for the average motorist. We show that when impacts on a broad range of motor vehicle externalities are considered, PAYD also induces significantly higher welfare gains than comparable gasoline tax increases, for fuel reductions below 9%. The reason is that under PAYD, all of the reduction in fuel use, rather than just a fraction, comes from reduced driving; this produces a substantial additional efficiency gain because mileage-related external costs (especially congestion and accidents) are relatively large in magnitude.

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Bibliographic Info

Paper provided by Resources For the Future in its series Discussion Papers with number dp-05-15.

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Date of creation: 20 Apr 2005
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Handle: RePEc:rff:dpaper:dp-05-15

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Keywords: gasoline tax; pay-as-you-drive insurance; mileage tax; welfare effects; motor vehicle externality;

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References

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  1. Ian W. H. Parry & Kenneth A. Small, 2005. "Does Britain or the United States Have the Right Gasoline Tax?," American Economic Review, American Economic Association, vol. 95(4), pages 1276-1289, September.
  2. Aaron S. Edlin, 1999. "Per-Mile Premiums for Auto Insurance," NBER Working Papers 6934, National Bureau of Economic Research, Inc.
  3. Parry, Ian W. H., 2004. "Comparing alternative policies to reduce traffic accidents," Journal of Urban Economics, Elsevier, vol. 56(2), pages 346-368, September.
  4. Shirley, Chad & Winston, Clifford, 2004. "Firm inventory behavior and the returns from highway infrastructure investments," Journal of Urban Economics, Elsevier, vol. 55(2), pages 398-415, March.
  5. Parry, Ian & Fischer, Carolyn & Harrington, Winston, 2004. "Should Corporate Average Fuel Economy (CAFE) Standards Be Tightened?," Discussion Papers dp-04-53, Resources For the Future.
  6. Aaron S. Edlin & Pinar Karaca-Mandic, 2004. "The Accident Externality from Driving," Public Economics 0401003, EconWPA.
  7. Greene, David L., 1991. "A note on OPEC market power and oil prices," Energy Economics, Elsevier, vol. 13(2), pages 123-129, April.
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Cited by:
  1. Hultkrantz, Lars & Nilsson, Jan-Eric & Arvidsson, Sara, 2012. "Voluntary internalization of speeding externalities with vehicle insurance," Transportation Research Part A: Policy and Practice, Elsevier, vol. 46(6), pages 926-937.
  2. Michael Anderson & Maximilian Auffhammer, 2011. "Pounds that Kill: The External Costs of Vehicle Weight," NBER Working Papers 17170, National Bureau of Economic Research, Inc.
  3. Santos, Georgina & Behrendt, Hannah & Maconi, Laura & Shirvani, Tara & Teytelboym, Alexander, 2010. "Part I: Externalities and economic policies in road transport," Research in Transportation Economics, Elsevier, vol. 28(1), pages 2-45.
  4. André De Palma & Robin Lindsey, 2009. "Traffic Congestion Pricing Methods and Technologies," Working Papers hal-00414526, HAL.

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