Let's talk about another everyday example of negative externalities, those from driving. When you drive, you get a benefit to yourself, getting where you want to go, and you face a cost. The cost of gasoline, wear and tear on your car, the possibility of getting into an accident, and your time.
So when you choose to drive, you make choices comparing your benefit from getting where you want to go by car to your cost. But what externalities do drivers impose? They can come from both what you drive and how and how much you drive and when you drive.
So emissions or pollution, road wear, accidents, and the big one, congestion. traffic jams. These are externalities because you're not considering the possible costs you impose on others. While you might consider the impact that congestion has on you or the possibility of your having an accident, you don't factor in how your presence slows down traffic for others or how you getting into an accident would impact other drivers.
So what policies are available to combat these externalities? When it comes to emissions and fuel usage, much of the government's focus has been on command and control policies. The Corporate Average Fuel Economy Standards, usually abbreviated for obvious reasons to CAFE, are a set of rules regulating how fuel-efficient A carmaker's fleet has to be on average.
Of course, when these rules are tightened, they only affect new cars. So there's a very slow transition over a number of years before the entire car population meets the standard. But more importantly, these rules don't change what people want to buy. They just change what car manufacturers are allowed to offer you.
And as it turns out, big surprise, people want big comfy SUVs even though the government might want them to buy little fuel-efficient cars. Governments can also use taxes based on what you drive. Vehicle use fees are usually annual taxes which can be based on the weight of the car, its engine size, carbon dioxide emissions, or fuel usage, though more often they're based on the value of the car instead.
So an expensive but efficient car gets taxed more than an inexpensive inefficient one. To some extent these could be Pigouvian taxes. If applied correctly they would help people internalize the externalities.
or at least some of the externalities caused by inefficient engines or heavy cars. They can push people into smaller, less emitting cars, but they don't account for driving behavior. Gasoline taxes, on the other hand, do account for both the efficiency of the vehicle and how much it's being used. A fuel-efficient hybrid being driven 20,000 miles a year burns more gas than a big truck that's only driven 5,000 miles a year.
And in general, the more fuel burned, the more pollutants are emitted. So gasoline taxes are a better policy for correcting the externalities from fuel consumption. But there's still something missing.
The externalities from when and where you drive. Everyone suffers the same loss of time from traffic congestion, even if someone's time is worth more than others. If you're on your way to the hospital with an emergency, you're delayed the same amount of time in a traffic jam as someone who's driving to see a lousy movie for the third time and who decided to drive separately from their friends just in case they wanted to leave early. You pay with time, and everyone pays the same amount of time no matter how much they're willing to pay.
Cost of traffic congestion in the U.S. is nearly $150 billion a year. That's $500 for every man, woman, and child in America, and is obviously much, much higher on people who live in congested areas. Now that calculation includes not just time and fuel costs from traffic jams, but indirect costs as well, like that it's more expensive to transport goods in a city with lots of traffic, meaning that prices can be higher.
The problem here is one that you should recognize from what we've already seen in the course. The price of driving is wrong because there's no real market. So how can it be corrected?
So the obvious answer is to allow a price for driving through congestion pricing or even pay as you drive. policies. Some highways, including a handful in Texas, already have variable tolling, where the toll, the price, is higher when there's more demand to keep the road flowing smoothly. People who have a higher value of time, like a parent trying to get to school to pick up their kids on time, can indicate that higher value through their willingness to pay the price. Those who aren't willing to pay it, because they could run an errand at some other time or leave for work a bit earlier, would choose to drive at some other time or take some other method of transportation.
And this is the important bit. Traffic will move faster for everyone. At the extreme end, you can pay depending on when and where you drive, which would be this full pay-as-you-drive policy. Technology is advancing to the point where it's going to be much, much easier and cheaper to do this kind of monitoring, though, of course, privacy concerns are absolutely an issue. A few years ago, there was briefly a proposal in England to introduce pay-as-you-drive in place of vehicle use fees, which they call road tax, and gasoline taxes, which they call the duty on fuel or petrol.
Both of these taxes are much higher in England than they are in the United States. The car and humor show Top Gear did a segment on it in which they covered some of the issues. So let's take a look. Speaking of which, it's time now to talk about Darling and Man Love.
Yes, Darling and Lady Man. Now, they run the Department for Transport, and I'm sure you've read recently that they've got some pretty radical ideas for reducing congestion. Essentially, what they're saying is that road tax will be greatly reduced, maybe even abolished altogether. The duty on fuel will be greatly reduced. Instead, you will pay as you drive.
Road prices. Exactly, per mile. Slightly more complicated than that, because then you'll pay more for certain times.
So, you know, on the M4 at half-eight in the morning, you might pay £1.40 a mile, but on a country road in the middle of the afternoon, about... What do we think? What do you reckon?
You don't like the idea? Well, there are some advantages, aren't there? I thought about this very carefully.
And if, for example, you were an old lady who just went out in the car once a week to buy some cat food, for example, you'd pay less fuel duty, you'd be paying less road tax, you'd be driving in the middle of the day, and it would cost you threatens, ain't it? Yes, it would be cheaper. It's good for me, to be honest. You drive loads. No, Ford GT.
Because at the moment, if you drive a car that you use four miles to the gallon, it's a lot more expensive. more expensive than running a Ford Fiesta, but if the roads are the same price, the Ford GT, I mean petrol's much, much cheaper. Oh, because there's no duty on the petrol. Exactly, so the roads, you pay the same whether you're in a Ford Fiesta or a...
Wait, we can all have Dodge Vites. It's very egalitarian. Well, no, you don't, yeah, you've got to be slightly worried, because if they put a back box in your car and know where you are, they also know how fast you're going. Exactly.
And how fast you're going, so you're going to get letters from these two saying you were doing 72 on, and you were in fourth, and you should have been in fifth gear. That's what I'm going to be doing. Well, not fifth gear, obviously. Top gear. I'm not going to go on with that.
What concerns me is this. What about all the people who work in towns and cities? Maybe firemen or teachers or traffic wardens, but they can't afford anymore to be priced out of flats, they can't afford to live in the city.
They won't be able to afford to commute in from the outskirts either because it would cost a fortune at peak times. That's a good point. I was going to say my big point, but actually that's my new big point.
The point I was going to make is now my second big point, which is, at the moment, BP, Shell, SO, all the fuel companies, they get, I don't know, 50 million quid from selling petrol, diesel, have you? They just write out a check for 70% of that, so 35 million, send it to Gordon Brown, he pops it in the bank, jobs are good. That's how it works.
If we now have this, everybody here, somebody's going to have to monitor how you drove here, your black box, send you letters, send you bills, they're going to have to have people dealing with company car, and it was a hire car, and all of these different things. It's going to cost them. absolute fortune.
And here's another thing. The only way this can reduce congestion, a system like this, is by pricing us off the road, by having fewer cars on the road. But that's forgetting that the only reason we have congestion and rush hours is because we all need to be in the same place at the same time.
That's when we go to work. There is that sort of assumption by the government that we're all driving around at 8 o'clock in the morning to be really annoying. Let me put it to you this way.
As far as I can work out, it's a bit like saying, well, the sewage system's completely clogged up, OK? Okay, so if you take a dump during say, I don't know, a penalty shootout in a World Cup final, two pick. If you take a dump just after the papers have been delivered in the morning, five quid.
I can't afford to go. That's when you go in the morning, got paper. That's how it works. Now, let's talk about cars.
I'd like to talk about this. This. One of the points that was made by the presenters is a really interesting one, that we all need to be at the same place at the same time.
Now it turns out that's not really true. Studies that track license plates over time show that only half of people, about half of people on the road during rush hour are actually commuters. In a really enjoyable book called Traffic, How We Drive and What It Says About Us, the author Tom Vanderbilt interviews the New York City traffic commissioner who boasts that he could knock... 50,000 cars off the road just by declaring a gridlock alert first thing in the morning.
People stay home or they take some other mode of transportation. People can change their behavior. Those who have flexibility can leave at different times. They can carpool, plan out their trips better, take mass transit where it's available, and in the long run, change their decisions about where they live and work.
Roads move faster as fewer people are on them at congested times. and also accidents are reduced. Remember the prices convey a lot of information.
Accounting for the externality of congestion can help us get to a more efficient outcome.