Lecture Notes: Negative Externalities in Driving

Introduction to Negative Externalities

• Definition: Costs imposed on others that the driver does not consider.
• Examples of personal costs: gasoline, wear and tear, accident risk, time.
• Examples of externalities: emissions, road wear, accidents, congestion.

Government Policies to Mitigate Externalities

Emissions and Fuel Usage

• Command and Control Policies:
  • Corporate Average Fuel Economy (CAFE) Standards.
  • Issues: Affect only new cars; slow transition; influence on availability but not consumer choice.

Vehicle Use Fees

• Annual taxes based on car attributes: weight, engine size, emissions, or value.
• Potential to act as Pigouvian taxes to internalize externalities.
• Limitations: Do not account for driving behavior.

Gasoline Taxes

• Taxes that consider vehicle efficiency and usage.
• Benefits: More fuel burned leads to more pollutants; taxes can reduce externalities from fuel consumption.
• Gaps: Do not address when and where driving occurs.

Congestion and Traffic Externalities

• Equal time loss for all in congestion, regardless of personal urgency or willingness to pay.
• Cost of congestion in the U.S.: $150 billion annually.

Solutions for Congestion

Market Pricing for Road Use

• Congestion Pricing & Variable Tolling:
  • Higher tolls during high demand times to maintain flow.
  • Allows individuals to signal the value of their time through willingness to pay.
• Benefits: Faster traffic, reduced congestion.

Pay-As-You-Drive

• Potential for detailed pricing based on driving time and location.
• Advantages: Easier and cheaper monitoring with advancing technology.
• Concerns: Privacy issues.

Case Study: Pay-As-You-Drive in England

• Proposal to replace vehicle use fees and gasoline taxes with road pricing.
• "Top Gear" Show Discussion:
  • Pros: Reduced tax for infrequent drivers, equitable road use costs.
  • Cons: Privacy concerns, complexity in administration, and potential exclusion of low-income commuters.

Behavioral Changes and Traffic Management

• Misconception: All drivers need to be at the same place at the same time.
• Studies and insights:
  • About half of rush hour drivers are actual commuters.
  • Behavioral flexibility exists: alternative transportation, adjusted travel times, carpooling.
• Long-term benefits: Efficient road usage, reduced accidents, and improved traffic flow.

Conclusion

• Pricing externalities correctly can lead to more efficient outcomes.
• Encouraging behavioral changes through accurate pricing and incentives can significantly reduce congestion and related costs.