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

  • Ian W. H. Parry

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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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/000282805774670482
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 95 (2005)
Issue (Month): 2 (May)
Pages: 288-293

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Handle: RePEc:aea:aecrev:v:95:y:2005:i:2:p:288-293
Note: DOI: 10.1257/000282805774670482
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  1. Aaron S. Edlin, 1999. "Per-Mile Premiums for Auto Insurance," NBER Working Papers 6934, National Bureau of Economic Research, Inc.
  2. Greene, David L., 1991. "A note on OPEC market power and oil prices," Energy Economics, Elsevier, vol. 13(2), pages 123-129, April.
  3. 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.
  4. Parry, Ian, 2003. "Comparing Alternative Policies to Reduce Traffic Accidents," Discussion Papers dp-03-07, Resources For the Future.
  5. Aaron S. Edlin & Pinar Karaca-Mandic, 2004. "The Accident Externality from Driving," Public Economics 0401003, EconWPA.
  6. 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.
  7. 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.
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