I.W.H. Patty, M. Walls & W. Harrington

Journal of Economic Literature Vol. XLV (2007) pp. 373-399 

In a Nutshell

This is a wide ranging and very detailed paper that describes a host of negative externalities that are imposed by drivers on the road, and the policy responses that seek to address them. The main conclusion is that for the most persistent externalities that cause gridlock in so many places, the best hope is offered by congestion charging via electronic road pricing. To improve highway safety some mileage based insurance policies should be considered. Whilst it is unlikely that there measures will internalize global warming type externalities it is argued that to do so with transport policy would not be most efficient. To reduce carbon emissions some form of carbon trading is preferable, or a tax on all oil products, not just on gasoline. These measures could be buttressed by R&D into new technologies to aid in the shift away from fossil fuels.


A Typology of Externalities

Local Air Pollution: gasoline vehicles emit harmful elements into the atmosphere which can be damaging to the health of those located in the vicinity. These pollutants can be reduced by reducing VKT and lowering emissions through technology. A fuel tax may achieve the former, but it cannot achieve the later and so should not be pursued in isolation. In fact emissions have fallen dramatically due to progressively stringent emissions standards. A willingness to pay estimate for the cost of avoiding poor health indicates that 2.3 cents per mile is the value of the externality.


Global Air Pollution: cars etc. account for 20% of nationwide carbon emissions. A fuel tax is a tax on carbon emissions as there are no available technologies for reducing carbon emissions on light vehicles. Various estimates of the value of a rise in temperature have been proffered, and they differ wildly, largely due to different social discount rates being used. They yield estimates of between 5, 12 and 72 cents per gallon of gasoline.


Oil Dependency: dependence exposes the country to volatility and price manipulation.  Like the vulnerability to oil price volatility and the cost of military presence in the Middle East, this externality is pretty murky and ill defined, and is not clearly related to market failure. See the paper for more details.


Congestion: I do not go again into how congestion is related to externalities. Estimates of the externality imposed in terms of reduced speed indicate a tax of $1.05 per gallon. However, if this were applied to fuel the effect may not be as intended as peak driving decision are often much more inelastic with respect to price – people have to get to work. Thus such a fuel tax would probably only have an effect on the least congested roads.


Traffic Accidents: there are around 40,000 deaths per year on the US highways. What is needed is a tax on VMT reflecting differences in marginal costs across drivers, vehicles and regions. Using quality adjusted life years estimates the value would appear to be 15 cents per VMT.


Noise Costs: are estimated at 0.4 cents per mile for passenger vehicles.


Others considered are highway maintenance, urban sprawl, parking subsidies etc. 


Fuel Tax: fuel taxes have declined as they have not kept up with inflation and improved fuel economy. Behaviour changes in response to fuel prices, but the elasticity of VMT to fuel range is between -0.1 and -0.6.  This could thus be an avenue for policy. However, there are issues regarding equity (fuel is a proportionately larger part of the poor’s budget, so the tax is thought to be regressive) although these could be partially solved by recycling the tax dollars in the direction of pro poor policy. There are also political issues with a strong auto/oil lobby.


Fuel Economy Standards: economy standards reduce emissions and dependence although they may increase other externalities as people are encouraged to drive more VKTs.


Alternative fuel technologies are another possible response.


Congestion Tolls: This is attractive. Building new roads is now hard (given high levels of existing development) and may not even be efficient. New income is needed for highway maintenance as fuel tax levels have fallen. Congestion can now be collected electronically which reduces bottlenecks due to toll booths etc. On the other hand, it may be hard to make meaningful estimates of what the marginal pricing structure should be, and it may represent a substantial information barrier which the consumer is not able to react to efficiently. There are political problems too.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: