Is Pay-As-You-Drive Insurance a Better Way to Reduce Gasoline than Gasoline Taxes?

Ian Parry

RFF Working Paper Series from Resources for the Future

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.

Keywords: gasoline tax; pay-as-you-drive insurance; mileage tax; welfare effects; motor vehicle externality (search for similar items in EconPapers)
JEL-codes: H21 H23 R48 (search for similar items in EconPapers)
Date: 2005-04-20
New Economics Papers: this item is included in nep-ene, nep-ias and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

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Related works:
Journal Article: Is Pay-as-You-Drive Insurance a Better Way to Reduce Gasoline than Gasoline Taxes? (2005)
Working Paper: Is Pay-As-You-Drive Insurance a Better Way to Reduce Gasoline than Gasoline Taxes? (2005)
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