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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 W.H.

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.

Suggested Citation

  • Parry, Ian W.H., 2005. "Is Pay-As-You-Drive Insurance a Better Way to Reduce Gasoline than Gasoline Taxes?," Discussion Papers 10465, Resources for the Future.
  • Handle: RePEc:ags:rffdps:10465
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    File URL: http://ageconsearch.umn.edu/record/10465/files/dp050015.pdf
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    References listed on IDEAS

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    1. Greene, David L., 1991. "A note on OPEC market power and oil prices," Energy Economics, Elsevier, vol. 13(2), pages 123-129, April.
    2. 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.
    3. Aaron S. Edlin & Pinar Karaca-Mandic, 2006. "The Accident Externality from Driving," Journal of Political Economy, University of Chicago Press, vol. 114(5), pages 931-955, October.
    4. Parry, Ian W. H., 2004. "Comparing alternative policies to reduce traffic accidents," Journal of Urban Economics, Elsevier, vol. 56(2), pages 346-368, September.
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    Cited by:

    1. André De Palma & Robin Lindsey, 2009. "Traffic Congestion Pricing Methods and Technologies," Working Papers hal-00414526, HAL.
    2. Robin Lindsey, 2010. "Reforming Road User Charges: A Research Challenge For Regional Science," Journal of Regional Science, Wiley Blackwell, vol. 50(1), pages 471-492.
    3. Kromer, Matthew A. & Bandivadekar, Anup & Evans, Christopher, 2010. "Long-term greenhouse gas emission and petroleum reduction goals: Evolutionary pathways for the light-duty vehicle sector," Energy, Elsevier, vol. 35(1), pages 387-397.
    4. Greenberg, Allen, 2010. "Applying Behavioral Economics Concepts in Designing Usage-Based Car Insurance Products," 51st Annual Transportation Research Forum, Arlington, Virginia, March 11-13, 2010 207274, Transportation Research Forum.
    5. Imke Reimers & Benjamin R. Shiller, 2018. "Proprietary Data, Competition, and Consumer Effort: An Application to Telematics in Auto Insurance," Working Papers 119, Brandeis University, Department of Economics and International Businesss School.
    6. Imke Reimers & Benjamin R. Shiller, 2018. "Welfare Implications of Proprietary Data Collection: An Application to Telematics in Auto Insurance," Working Papers 119R, Brandeis University, Department of Economics and International Businesss School, revised May 2018.
    7. 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.
    8. Michael L. Anderson & Maximilian Auffhammer, 2014. "Pounds That Kill: The External Costs of Vehicle Weight," Review of Economic Studies, Oxford University Press, vol. 81(2), pages 535-571.
    9. 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.
    10. David Anthoff & Robert Hahn, 2010. "Government failure and market failure: on the inefficiency of environmental and energy policy," Oxford Review of Economic Policy, Oxford University Press, vol. 26(2), pages 197-224, Summer.
    11. repec:eee:pubeco:v:152:y:2017:i:c:p:34-46 is not listed on IDEAS
    12. Tscharaktschiew, Stefan, 2016. "The private (unnoticed) welfare cost of highway speeding behavior from time saving misperceptions," Economics of Transportation, Elsevier, vol. 7, pages 24-37.
    13. Welch, Timothy F. & Mishra, Sabyasachee, 2014. "A framework for determining road pricing revenue use and its welfare effects," Research in Transportation Economics, Elsevier, vol. 44(C), pages 61-70.

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    Keywords

    Risk and Uncertainty;

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