This is modified from a post I wrote a while ago for my own blog “Environmental Economics.” There I spend a good bit of time trying to convince people that the easiest solution to many environmental problems is to get the prices right. Markets are a really good way to organize economic activity. Markets allow individuals and businesses to make decisions based on the benefits and costs that accumulate to them. The trade-offs associated with these benefits and costs, and therefore the ‘value’ of the thing being traded, are reflected in the market price. Unfortunately, sometimes we make decisions that not only benefit ourselves, but also impose costs on others.
Take for example, driving. When I drive, I benefit me. To drive I need to buy gas. When people want to drive more, gas prices rise (think Memorial Day). When people drive less, gas prices fall (think winter). The price of gas reflects the value of driving…to me. But, when I drive, I also impose costs on others. Stuff comes out of my tailpipe that makes it difficult for some to breath (asthmatics). My driving might also cause traffic–an inconvenience for you. Burning gas releases carbon which contributes to climate change. These costs on others, however, are not reflected in the price of gas, so people consume too much gas based on the total costs of driving. Economists call these externalities (we like big words for simple ideas).
So how might we fix the externality problem if the problem is too much driving?
Here’s my proposal (trust me, read to the end…there’s a twist): All cars are subject to an annual fee based on miles driven. The fee will be per mile driven and will be inversely proportional to the EPA calculated city fuel efficiency figure.
Here’s how it would work. Each year, drivers will be required to have their mileage checked at an authorized service facility. Based on the EPA certified city fuel efficiency rating provided by the EPA for the specific type of car, the car owner will pay a fee (call it F) per mile driven. The fee will be equal to the inverse of the EPA fuel efficiency figure.
The details: Consider two car types: a gas guzzler (GG) and a fuel efficient car (FE). Suppose the gas guzzler has an EPA MPG rating of 15 mpg city and the FE car has a rating of 35 mpg city. The per mile fuel efficiency payment for the gas guzzler will be $0.067 per mile drive (1/15) and the per mile fuel efficiency payment for the fuel efficient car will be $0.029 per mile driven. If a driver of each type of car drives 12,000 miles a year, the GG driver will pay an annual fee of $804, and the FE driver will pay an annual fee of $348.
The Fuel Efficiency Payment has a couple of nice features:
1) It places a higher burden on those driving less fuel efficient vehicles–that should satisfy those blaming the SUV drivers for all of the problems*.
2) It places a higher burden on those driving more. By increasing the marginal cost per mile driven, total miles driven should decrease.
3) Assuming fuel efficiency and income are negatively correlated–that is, the rich tend to drive larger, more expensive, less fuel efficient cars–the Fuel Efficiency Payment places a higher burden on higher incomes.
4) It provides an incentive for drivers to switch to more fuel efficient vehicles.
The twist: Now that I’ve hopefully convinced you that a fuel efficiency payment will act as a type of gas guzzler tax that would be less of a burden on lower income drivers, would provide incentives for decreasing miles driven and would encourage a switch to more fuel efficient vehicles, I’d like to point out that the fuel efficiency payment is algebraically identical** to a $1/gallon GAS TAX that many economists, including me, think would go a long way toward solving many of the transportation related externalities.
*Full disclosure, I am a gas guzzling SUV driving suburban commuter. In short, I am the problem. Why you may ask, would I stoop to such low moral standards? Easy, I have 3 kids and a lot of sports equipment. Try fitting 3 kids and a team’s softball equipment in the trunk of a Prius. Oh, and the SUV was a great deal.
**Multiplying the FEE=$(1/(miles/gallon)) by miles driven gives $Fee*miles=$1/gallon.