Question

How do externalities drive the U.S. and E.U. automotive markets respectively?

Answer 1

Of all consumer products, few are taxed more heavily or regulated more extensively than automobiles. In the United States various taxes on vehicle ownership average about 18% , and state plus federal gasoline taxes average about $0.40 per gallon, or about 20% of 2004 retail prices. These tax rates dwarf those on almost any other consumer product (tobacco products are an exception), though they are still very low by international standards; gasoline taxes in the Netherlands, Germany, and United Kingdom exceed $3 per gallon . New vehicles are also subject to regulations governing local emissions, safety, and fuel economy, and in many states, mandatory purchase of liability insurance. At the same time, few consumer products require a gigantic public infrastructure to be useful, an infrastructure on which Americans spend over $100 billion per year on maintenance and new construction. Motor vehicles also cause over 40,000 accidental deaths and almost 3 million injuries each year no other consumer good approaches this figure.

Queuing costs associated with using automobiles are also uniquely large: travel delays now cost the nation around $70 billion a year in lost time. Furthermore, along with electricity generation, automobiles are a leading source of both greenhouse gas emissions and local air pollutants. And gasoline consumption is responsible for nearly half of the nation’s dependence on oil, which is a major national security concern. In short, the range and potential magnitude of externalities associated with automobile use are exceptional, and it is not surprising that they have attracted unprecedented attention from the regulator and taxman. What we may wonder is whether the current collection of policies could be improved upon, and perhaps even overhauled in favor of new, and more precisely targeted pricing instruments. For several reasons, it is a particularly good time for a thorough reassessment of federal automobile policies.

First, there are heightened concerns about energy security with the recent tripling of world oil prices and continued instability in the Middle East. Second, there is growing pressure on the federal government to curb greenhouse gas emissions, in light of solidifying consensus among scientists that global warming is occurring, various state level initiatives to control carbon emissions, and the birth of carbon emissions trading in the European Union. Third, because of rising urban land costs and intense siting opposition, it is impossible to build enough road capacity to keep up with expanding vehicle use, with relentlessly increasing road congestion the inevitable result. Fourth, due to the steady erosion of real fuel tax revenues per vehicle mile of travel, there is a growing transportation funding gap, increasingly met at the state and local level by referenda tying, for example, sales tax increases to specific transportation projects. Finally, due to advances in electronic metering technology it is now feasible, at very low cost, to charge motorists on a per mile basis according to the marginal external costs of their driving. In fact in the United Kingdom, which has Western Europe’s worst congestion and highest fuel taxes, the government is considering replacing fuel taxes with a nationwide system of per mile tolls on passenger vehicles that would vary across region and time of day according to the congestion on the road where the driving occurs. The confluence of all these factors suggests that automobile policies in the United States could be on the verge of a dramatic shake-up. With this policy backdrop, estimates of external costs of motor vehicles have more than academic interest. The first part of this paper discusses literature on external costs, focusing mainly on local air pollution, global air pollution, oil dependency, congestion, and accidents. The second part discusses traditional policies, primarily fuel taxes and fuel economy standards, but also emissions standards and alternative fuel policies. And a third section discusses emerging pricing policies, including congestion pricing and pay-asyou-drive auto insurance