Pay As You Drive (PAYD) Insurance: A Way to Address Negative Externalities
by Andrew Posner, Providence, Rhode Island on 04.21.08
We're all familiar with the concept of negative externalities: the behavior of one person has negative impacts on another person (or society as a whole), yet the person causing those impacts doesn't pay for them. Writing about this concept as it applies to driving, Stephen Dubner and Steven Levitt, authors of the best-seller Freakonomics, point out that driving has three negative externalities: congestion, carbon emissions and traffic accidents. They go on to quantify the cost to society of each of those negative externalities: $20 billion a year from carbon emissions; $78 billion a year from congestion (due to lost fuel and productivity); and a whopping $220 billion a year from accidents. They conclude that "with roughly three trillion miles driven each year producing more than $300 billion in externality costs, drivers should probably be taxed at least an extra 10 cents per mile if we want them to pay the full societal cost of their driving."
Unfortunately, most of the options for implementing that tax--higher tolls, congestion pricing and gas taxes--are not very politically feasible, especially with today's high gas prices. So what to do? Well, according to Dubner and Levitt, the answer is to be found in automobile insurance.
Here's the problem: given two drivers, one that drives 30,000 miles a year, and one that drives only 3,000 miles a year, the first driver is imposing 10 times more costs on society from his driving than is the second driver, yet both pay the same amount for their car insurance. The solution to fixing this imbalance, known as pay-as-you-drive (PAYD) insurance, was first seriously considered by the President's Council of Economic Advisers in the late 90's. At the time, there was a concern that enough research hadn't been on the subject in order to implement it. Well, that research has been completed and the researchers have found that "PAYD insurance would work well, reducing the carbon emissions, congestion and accident risk created by too much driving while leading drivers to pay the true cost of their mileage," with a total societal benefit of $52 billion dollars a year.
And now, Progressive Insurance has begun offering PAYD insurance in six states under the name of MyRate. Here's how MyRate works:
Drivers who sign up for MyRate will install a small wireless device in their cars that transmits to Progressive not just how many miles they drive but also when those miles are driven and, to some extent, how they are driven: the device measures the car’s speed every second, from which Progressive can derive acceleration and braking behavior. Which means that Progressive will not only be able to charge drivers for the actual miles they consume but will also better assess the true risk of each driver.
This plan could, of course, simply result in less revenue for Progressive, since low-milage drivers will pay less for their insurance. If Progressive raises rates on high-milage drivers to compensate, there's nothing to stop them from switching to other insurance companies. However, "if Progressive’s PAYD insurance can induce some of its high-mileage customers to drive less and especially to drive more safely, resulting in smaller claims payouts for Progressive and fewer negative externalities for everyone, then it could truly be a win-win-win situation."
Via: ::Freakonomics: NY Times Blog
See Also: ::Friedman on "The Green Road Less Traveled", ::Bloomberg Congestion Fee a No-Go, ::The True Price of Oil: Poverty and Death in Nigeria, ::The Oil Drum Looks at Some Transportation Energy Options, and ::Cure Air Traffic Congestion: A Systems Based Solution?
The Progressive car tapping sounds a little big brother to me, not really a fan. but the idea of the driving tax for societal damages is pretty cool. I mean, people would freak out, but 10 cents isn't really that much. Near me, gas has gone up 20 cents in the past 4 months or so.
I'm not into the whole big brother thing. Honestly, I think the government is way too involved in my day to day life. However, I don't see driving a vehicle however the hell I want as a right under the constitution.
Indeed the right of "life" granted under the constitution indicates to me that driving habits (acceleration/deceleration) should be regulated/taxed.
Personally, I'm about to buy a Prius and would love to use the Progressive PAYD Insurance. I don't plan on racing around and it would be nice to lower not just my fuel bill but also my insurance bill.
This would also be a huge boon to college students. Most of these students, IMO, pay way to much in insurance considering that they drive less than 3,000 miles a year.
@ Josh V, apples and oranges. Paying a tax of an extrat 10 cents per MILE is equivalent to paying an extra $3.00 per GALLON for a 30 mpg vehicle, and an even worse deal for a more efficient car.
It says 10 percent more not 10 cents more and the payd idea seems like a great idea.
I hate the tax for braking and accelerating though.
I like this idea, though it doesn't help in a place like LA where the city has few alternatives to driving your own car. This would work really well in areas with excellent public transport.
This is too much big brother to me.This is jamming a lo jack in my car.I will not have my driving monitored.This only leads to the government intrusion.I want less government not more.Our rights have been trampled enough.
No thanks, GM killed the electric car, and wouldn't let the
lease holders keep the cars. the State and Federal Governments aren't allowing us options.
To much tax revenue is generated on a gallon of petrol.
I will not be allowing any tracking device in my car, unless they want to pay for the car and the maintenance, then
maybe they would have jurisdiction.
Just say no to the Carbon tax scams.
Taxing us will do nothing to save the planet.
Strict environmental laws placed on corporations will.
I would be happy to show how safe I drive and how few miles I drive to get a better rate on my car insurance as a young male driver. Why should I pay the same as a speeding, reckless kid.
If this causes people to drive better, slower, and fewer miles, then the enviroment wins too.
I dont think people have a RIGHT to bad driving.