Why are highway speed limits really justified? An equilibrium speed choice analysis

Speed externalities – the impacts that a driver’s speed choice imposes on others – are usually quoted to justify highway speed regulation in the form of maximum speed limits. However, speed externalities could already be internalized if a pre-existing policy were in place that is related to speed, questioning the traditional rationale supporting speed limits. Given the relationship between speed and fuel consumption and the omnipresence of fuel taxes around the world, it comes as a surprise that pre-existing taxes on motor fuel are completely missing in the debate on the general appropriateness of speed regulation. In this paper we develop an economic equilibrium model of highway speed choice accounting for (i) a market failure – speeding externalities capturing the fact that drivers do not internalize the adverse consequences of speeding on other highway users and the society as a whole; (ii) a famous speed related behavioral anomaly – causing adverse effects drivers impose on themselves by falsely predicting the time saving potential of speed; (iii) a pre-existing fuel tax – closing the wedge between the privately and socially optimal speed. The latter creates a ‘government feedback effect’ reflecting the positive feedback effect of speed on fuel tax revenue and so the broader beneficial fiscal impacts of speed choice ignored by drivers. Numerical computations for Germany indicate a dominant ‘government feedback effect’ ((iii) outweighs (i)) for mean speeds up to around 120 km/h presuming fully variable travel time budgets and beyond that speed level when drivers put (some of the) travel time savings from speeding into more highway traveling. This implies that speed externalities are largely internalized and that the externality rationale in favor of speed regulation does not apply to the majority of drivers. Nevertheless, a moderate speed limit on German highways of 130 km/h would probably not compromise economic efficiency, at least as long as the share of diesel cars is significant. Generally, when drivers are subject to lack of rationality leading to excess speeding, (iii) is not able to outweigh (i). Then, speed limits remain highly warranted provided that appropriate “nudging” is not available. The numerical finding is likely to hold for a large number of European countries too but probably not for North American countries where fuel taxes are considerably lower.