The Externalities Associated with Driving an SUV Dr. King

Econ 690 Assignment # 3 The Externalities associated with driving an SUV Dr. King

The purpose of this assignment is to estimate in dollar terms whether there is a negative externality associated with driving a sport utility vehicle (SUV) and recommend realistic and appropriate policy measures. Several recent studies and books have suggested that SUV drivers impose costs on other drivers and members of society—if so most economists would suggest that this cost must be internalized somehow. If you do not remember the theory of externalities and how economists recommend dealing with externalities, then please go back to your introductory or intermediate Micro text, or look at http://pespmc1.vub.ac.be/ASC/EXTERNALITY.html or http://enduse.lbl.gov/Info/Externalities-abstract.html. You will work in groups of two or three for this assignment. Components of this assignment: 1. Economists have constructed a number of techniques for valuing a human life. The most common involves examining wage differentials between relatively safe jobs (e.g., office manager) compared to unsafe jobs (e.g., nitro-glycerin truck driver or policeman). Courts often look at the lost wages (e.g., if a 20 year old dies, how much would he have earned) although this understates the value of a life. For this assignment, please assume that the average human life is worth $5 million. 2. A number of studies have determined the loss of life and injuries due to SUV’s. For this task you need to do a brief search of the literature and find reasonable values. Make sure you know your sources and you will need to explain how these estimates were derived and whether they are credible. Some of the papers will use statistical methodology beyond your own knowledge, but you can still obtain the main conclusions as well as a feel for the strengths and weaknesses by reading the discussion sections. For a start look at the following: http://papers.nber.org/papers/W9302 [Use SFSU’s server to download this article.] http://repositories.cdlib.org/iber/econ/E01-297/ http://www.cato.org/pubs/regulation/regv24n1/coate.pdf 3. Write a brief summary (3-4 paragraphs each) of the three articles in (2) above. 4. For this assignment I would like you to perform your own analysis of the cost of driving a vehicle when accounting for death rates in accidents. Data for death rates are available at: http://www.crashtest.com/explanations/deathrate/deathrate.htm. First, look at the death rate for driving a small subcompact vs. a large sedan. Calculate the additional (implicit) “cost” of buying a various vehicles in terms of the probability of dying in an accident and the value of life. 5. Can you think of another reason why smaller cars would have higher accident rates besides the fact that they are unsafe? (Hint: Who drives them?) How would you correct for this? 6. From the data, one can also see that when cars collide with SUV’s, the occupant(s) of the car have a much higher probability of dying. This can be considered a negative externality since the driver of the SUV imposes an additional cost on the driver of the car. Calculate the cost of the additional deaths imposed by SUV’s on automobiles. In other words—what costs do SUVs impose on automobiles. 7. Are there other negative impacts of SUVs (e.g., low fuel mileage). 8. Can the market take care of these problems? Does it (Hint: Do SUV owners pay higher insurance rates commensurate with the higher risk—you might want to look at insurance rates.) 9. Suppose the market does not take care of the problem. Suggest policies that would mitigate these impacts. 10. Write up your paper and submit it to [email protected]. Be sure you mention all of your references and the methodology you used to estimate your answers. It is not enough to say, “this is the answer,” I want to know how you came by this answer. Your paper should be 8-12 pages long.

Hints: 1. The externality you are looking at here is the additional deaths due to an SUV. As you will see, SUV’s are slightly safer than cars as a whole, but this is due to their higher weight. Correcting for weight, SUV’s are actually a bit less safe than cars (of equivalent weight) mostly due to rollover risk. What we want to know here is what is the risk to the OTHER PEOPLE involved in an accident. This is an externality since they will be more likely to die if an SUV hits them. Use $5 million for the value of a life, which is a good average estimate. We only consider fatalities here, though one could also look at morbidity (injury). 2. This web site http://www.crashtest.com/explanations/deathrate/deathrate.htm contains the key data I would like you to use. Please read the text carefully. The key column is “other,”—that is deaths created when two cars collide to the other vehicle. For example, if you are driving a vehicle weighing less than 2500 pounds, if you crash into a car, as the “other” vehicle, you have a 35/1000000 chance of dying per vehicle, but if you hit an SUV, you have a 58/1000000 chance. In other words, you are 23/1000000 more likely to die for every SUV on the road. This may sound small, but a life is worth a lot (especially mine)--$5 million is the number we will use. What I want you to do is compare the probability of dying (assume you drive a car) for SUVs vs cars on the road. Cars vary in weight, and the probability of dying in a small car is much greater. Assume that cars are distributed as follows: 20% under 2500 pounds, 25% 2500-2999, 25% 3000-3499, 20% 3500-3999, 10% 4000-4499. What you need to do is as follows: a. Calculate the additional deaths per million for an “other” car hitting a car vs. hitting an SUV; do this for each weight class. b. Calculate the average by multiplying the probability that a car is in each weight class (see above) by your calculations in (a) above. c. Add up each number in (b)—this should give you an average increased death rate per million SUVs. d. Now we want to know the “cost” of this increased death per SUV. The value of life is $5 million; multiply by probability per million SUVs (hint the millions cancel). This is your answer.