TRANSPORT ECONOMICS

TU MNCHEN
18 December 2008
4. Lecture: Externalities
Dr. Andreas Kopp
World Bank
Tel: 001 202 473 6031
Akopp@worldbank.org

Outline
External costs of transport operations
Road safety
Environmental costs
Local air pollution
GHG emissions and climate change

Congestion

Road safety
Road safety risk perceived as the outcome of a
stochastic process, influenced by traffic
regulation and driver behavior
The more miles an individual driver does the
higher is the risk of being in an accident.
Costs of accidents depend on the insurance
system.
Functioning of an insurance markets, with
inclusive boundaries of all risks.
Information value in the absence of moral hazard
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Road safety
Empirical picture for the US
About constant number of fatalities, 40,000
persons per year since 1960.
Reflects a dramatic decrease in fatality rates per
VMT, from 5.1 per 100 mill. VMT 1960 to 1.5
per 100 mill. VMT in 2003.
Contributing factors:
Seatbelt wearing (9,238 deaths due to nonuse in 2000)
Reduced drunk driving (17,013 in 2003)
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Road safety

Contributing factors:

Pedestrian deaths down by 84 percent from 1960 to 2003

Accident insurance is on the type of the car.

Accident insurance rates should rather be based on
VMT traveled and marginal accident costs reflecting
differences across drivers regions and vehicles.
Risk classified per mile rates would bring down
insured accident costs by $ 9.8 -12.7 million,
adding non-insured accident costs $ 25 29 mill.
(Aaron Edlin, Per mile premiums for auto-insurance. NBER
Working Paper 6934.)
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Road safety

Road safety
Costs include
quality-adjusted life years lost from injuries,
property damages to automobiles,
travel delays, medical costs, lost productivity in
the workplace and insurance/legal expenses.

The total costs are high, $ 433 billion or 4.3 %

of GDP in 2000, or 15.8 cents per VMT

Road safety
Much of the accident cost is internalized, and
not an external cost. Estimates vary between
2-7 cents per mile. (DOT, FHWA)
Major discussion on whether light vehicles
increase or decrease expected damages. SUVs
as an irrational arms race.
Empirical studies found small differences in
external costs between different four wheeler
cars.
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Road safety
Probability of being killed in a two-vehicle
crash is 61 percent higher if the other vehicle
is a light truck than if it is a car.
High risk of two wheelers. At the OECD,
reborn bikers as a phenomenon that worsens
the US performance in international
comparisons.

Local air pollution

Pollutants of gasoline vehicles
Monoxide (CO)
Nitrogen oxides (NOx)
Hydrocarbons (HC) or volatile organic
compounds

CO reduces oxygen in the bloodstream

causing breathing difficulty and
cardiovascular effects.
HC and NOx react in sunlight to form ozone.
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Local air pollution

Ozone affects pulmonary function in children
and asthmatics.
NOx and HC react to form particulate matter.
Fine particles (PM2.5) are small enough to
reach lung tissue.
Positive relationship between exposure to
particulate matter and mortality is
statistically confirmed.
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Local air pollution

Ways to reduce local air pollution
Reduce the vehicle miles traveled
Improve the average fuel economy
Lower emissions per gallon of fuel combustion by
other means.

Policy instruments to reduce air pollution

Fuel taxation
Technical standards in terms of grams per mile
for CO, NOx, and HC. (harmonized for vehicles
and light trucks)
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Local air pollution

Policy instruments to reduce air pollution
Inconclusive debate on fuel taxation vs. technical
standards:
Pricing policies in general cheaper for relevant cost
functions in transport operations
Technical standards allow flexibility in addressing
emissions by reducing fuel input coefficients
Current abatement technologies have no longer the
risk of deteriorating over time.
Tailpipe emissions vary with VMT rather than fuel
consumption.
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Local air pollution

Implementation of emission standards has led
to a dramatic reduction of emissions despite
increase in VMT.
Estimates of costs of local air pollution is
dominated by the mortality effects especially
due to particulates.
Cost estimates depend on wind patterns,
geography, health effects inferred from
epidemiological evidence.
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Local air pollution

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Local air pollution

Monetary damage estimates are derived from
evidence on peoples willingness to pay for the
avoidance of health risks.
Major debate on the superiority of revealed
vs. stated preference studies
Quantitative estimate of monetary pollution
costs: 2.3 cents per mile for 2000 in 2005 $
(updated Small and Kazimi, 1995) for Los
Angeles region
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Local air pollution

Similar results for other regions.
Conclusion that other externalities are more
important, in view of further reduction due to
vehicle turn-over.
Completely different picture in developing
countries: market for second-hand cars
important with high-emission technologies.

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Global pollution, climate change

Transport is one of the main contributors to
climate change
For the US the share of transport in total
GHG emissions are 20 per cent.
GHG increase the radiative forcing, warming
up the atmosphere.
A warming atmosphere leads to damages in
terms of agricultural productivity, water
shortages, damages to infrastructure and
spread of diseases
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Climate Change
The table shows considerable damages at 2 C
increase.
There is a growing consensus that a
stabilization level of 2 C is no longer
achievable due to the massive reductions in
emissions required.

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Climate Change

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Climate Change
Damage estimates from climate change are
difficult and fraught with uncertainty.
Nordhaus and Boyer (2000) estimated the
expected global cost of 2.5 warming in 2100
to be 2 % of GDP.
50 % is the cost of disruptive climate change
(based on expert judgment),
tropical diseases second largest damage
agricultural productivity loss 10% of overall
losses
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Climate Change
Major damage classes
6% due to sea level rise

Scenarios define a price per ton of carbon in

terms of damages, according to Nordhaus 20$
per ton of carbon today, ramping up over time
to $ 84 in 2050 and $ 270 in 2100 (2005 $).
Disputed by the Stern review: higher shadow
price for carbon is mainly a consequence of
different views on discounting rather than
modeling philosophy.
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Climate Change
Discounting debate
Intergenerational ethics
Dilemma of non-intuitive implications for growth
models:
No discounting: extreme savings rate for today is
optimal
High discounting, fatal losses in the far distant future
appear unimportant

Stern shadow price of carbon: $ 311 per ton of

carbon
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Climate Change
The consequences for thinking about the
social costs of transport are modest relative to
the other external costs discussed above:
A gallon of gasoline contains 0.0024 tons of
carbon.
A price of $300 per ton of carbon then translates
into 72 cents per gallon of gasoline, which is not
overwhelming compared to recent changes of
energy prices resulting from volatility of currency
and futures markets.
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Congestion
The theory of congestion was discussed
earlier.
Value of time often assumed to be half the
hourly wage, with strong implications on the
working of the labor market.
Marginal congestion costs are difficult to
estimate due to the localized nature at
bottlenecks.
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Congestion
Estimates of marginal congestion costs should
also include costs of rescheduled trips and use
of mass transit.
Numbers of Federal Highway Administration:
weighted average marginal congestion costs,
weighted with VMT shares of urban and rural
roads at different times of the day.
Amounts to 5 cents per passenger mile.

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Congestion
Numbers of Federal Highway Administration
Equivalent to $ 1.05 per passenger mile for a car
with current average mpg of 21.

Other estimates with lower per mile costs:

3.5 cents per mile in Parry and Small (2005)
6.5 cents per mile in Fischer, Harrington and
Parry (2008).
Differences are due to assumptions on gas prices
and their effects on driving behavior.
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External costs of transport

Discussion is dominated by the discussion on
climate change.
Monetized costs are different.
Safety costs are very high
Congestion costs are second
Health costs of local air pollution is still higher
despite progress in cutting emissions.
Even a high estimate of the shadow price of
carbon does not lead to a jump in the gas price.
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