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The Accident Externality from Driving

  • Edlin, Aaron S.
  • Karaca-Mandic, Pinar
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    We estimate auto accident externalities (more specifically insurance externalities) using panel data on state-average insurance premiums and loss costs. Externalities appear to be substantial in traffic dense states: in California, for example, we find that a typical additional driver increases the total of other people’s insurance costs by $2231 per year. In such states, an increase in traffic density dramatically increases aggregate insurance premiums and loss costs. In contrast, the accident externality per driver in low traffic states appears quite small. On balance, accident externalities are so large that a correcting Pigouvian tax could raise $45 billion annually in California alone, and over $140 billion nationally. The extent to which this externality results from increases in accident rates, accident severity or both remains unclear. It is also not clear whether the same externality pertains to underinsured accident costs like fatality risk.

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    Paper provided by Department of Economics, Institute for Business and Economic Research, UC Berkeley in its series Department of Economics, Working Paper Series with number qt0hw1m6q2.

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    Date of creation: 01 Dec 2005
    Date of revision:
    Handle: RePEc:cdl:econwp:qt0hw1m6q2
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    1. Aaron S. Edlin, 1999. "Per-Mile Premiums for Auto Insurance," Law and Economics 9902002, EconWPA.
    2. Christopher J. Ruhm, 1995. "Alcohol Policies and Highway Vehicle Fatalities," NBER Working Papers 5195, National Bureau of Economic Research, Inc.
    3. Steven D. Levitt & Jack Porter, 2001. "How Dangerous Are Drinking Drivers?," Journal of Political Economy, University of Chicago Press, vol. 109(6), pages 1198-1237, December.
    4. Jerry Green, 1976. "On the Optimal Structure of Liability Laws," Bell Journal of Economics, The RAND Corporation, vol. 7(2), pages 553-574, Autumn.
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