In the United States, drivers (and parenthetically transit users … but this post is about drivers) don’t pay enough for transportation. As a result, drivers use too much and have misleading anchors about what prices “should” be. When drivers are shown and charged the actual cost of things, they are surprised, and not a little bit disgruntled.

An illustration: car2go vs. Private Costs of Auto Ownership

Why should my car2go ride be $0.38 per minute? [Note, rates vary by city.] I don’t pay $0.38 per minute to ride my own car, or transit, do I?

When driving my car, I pay out-of-pocket for gasoline. At today’s prices of about $3.50 per gallon (inclusive of taxes), and 35 miles per gallon, I am paying just $0.10 mile out-of-pocket. At 30 miles per hour (2 minutes per mile), I am paying $0.05 per minute (assuming no variation in fuel economy).

Much of the other $0.33 per minute is paying for what we perceive to be the fixed costs of vehicle ownership: the cost of the vehicle itself, insurance, maintenance, and repairs.

The cost of the vehicle, say $15,000 for a vehicle that runs 100,000 miles before depreciating to $0, is $0.15/mile or $0.075/minute.

Insurance might run $1000 per year or $0.10/mile ($0.05/minute). (Pay as you drive (or pay at the pump) insurance is a long discussed policy that has yet to be mainstream in the US. A version exists in Australia and some other places, including some US opt-ins.)

Vehicle taxes are about a quarter to half that (depending on where you are), so let’s say $0.01/minute. In some states these are dedicated to infrastructure, so we need to be careful to avoid double counting.

Repairs, oil, and maintenance probably have a similar running cost to insurance, less in the early years, more in the later year ($0.05/minute).

Adding that together is $0.185/minute.

That leave $0.165/minute in “out-of-pocket” costs car2go charges above what you would pay for an equivalent vehicle. Some of this is car2go operating expenses — load balancing or moving cars around so they will be near you, paying the cities for “free” on-street parking, having a nice app and GPS. Some of this might be because car2go vehicles are actually used less than many private cars, so the fixed costs have to be spread over fewer minutes. Some of this might be higher insurance than you would pay. Some of this is on-road assistance as needed. Some of this is operating profit, car2go has to break-even as a business or it will cease to exist.

One point is the average user of car2go drives less than the average owner of an equivalent car, thereby saving the outlay of $15,000 for ownership, $1000 per year for maintenance, $1000 per year for fuel, $1000 per year for insurance, and $250 per year for vehicle tabs. Thus when they are willing to drive, they pay more per minute than the per minute basis for an owned car because they are paying for the option value of having a car when they want, but not when they don’t.

The second point is if the average owner of a car paid an additional $0.185 per minute on top of $0.05 per minute, they would drive less. For a 10 minute trip, they would be out-of-pocket an extra $1.85. For a 30 minute trip, they would pay an extra $3.55, which is about the out-of-pocket price of an express bus. We will discuss this more later in the post.

Thus far we have shown over-consumption of private vehicle ownership costs due to bundling these costs as fixed rather than variable.

Non-Private Costs

Infrastructure

This does not yet fully include the full cost of infrastructure. Nationally direct user fees (gas tax and tolls) pay for about one-third the cost of all roads, the other two-thirds comes from general revenue (particularly property taxes at local jurisdictions, but also pseudo-user fees like motor vehicle taxes). Since fuel taxes (the bulk of highway user fees) are $0.184/gallon at the national level and $0.285 in Minnesota, $0.47 in total, we would need to about triple it for user fees to pay for all of infrastructure costs (to $1.41/gallon or $0.04/mile or $0.02/minute, of which $0.0067/minute is already covered by existing gas taxes, meaning a new tax of $0.0133/minute should be levied to convert road infrastructure costs into a user charge).

This assumes infrastructure spending is the right amount in total, about which there is considerable argument. Clearly much infrastructure is in poor quality or insufficient, which increases vehicle repairs, crash rates, congestion, and future infrastructure costs.

Parking

Parking is usually “free” where I and most Americans live and work and shop, so this is not an out-of-pocket cost until we start charging for parking. Obviously there is a cost that is bundled into other real estate transactions, or is subsidized by the infrastructure provider in the case of free on-street parking. The value of this land in alternate uses depends on location, and in most but not all US places approaches zero.

Externalities

Like parking, this also does not include externalities, which are also “free”. Crashes are mostly internalized in insurance, but congestion and pollution and CO2 emissions and noise are not internalized. The estimates on these vary widely. I looked at this a long time ago, and I think the logic is still valid, though valuations have certainly increased. (A more recent peer reviewed summary is here). This might be on the order of magnitude of $0.20 per mile or $0.10 per minute, though again varies hugely based on location and assumptions. I think I am being generous here (assuming a high value rather than a low value), but there will always be someone with a higher value.

We have not also included user time. Presumably drivers consider their own time already (though undoubtedly over-estimate the time spent driving). At an average wage of $20 per hour (it is probably a bit higher) this would be $0.33 per minute of labor foregone. Note this is roughly the same level as the full monetary costs of travel. In Benefit Cost Analysis, transport economists typically use half the wage rate.

Summarizing

Summarizing our ballpark out-of-pocket monetary costs per minute:

$0.05 fuel (currently paid, including gas taxes)

$0.075 vehicle ownership

$0.05 Repairs, oil, and maintenance (converting to a per minute charge)

$0.05 insurance (converting to a per minute charge)

$0.0133 additional fuel tax for transportation infrastructure (replacing vehicle taxes and general revenue)

$0.10 externalities (excluding crash externalities – see insurance)

———————

$0.34 Total

Reduction in Travel

How much less travel would there be if the costs of driving paid out-of-pocket on a per use basis? Economists use the elasticity of demand with respect to price to estimate this. This tells us how much demand drops as prices increase. The short run elasticity of demand for driving (measured in vehicle miles traveled) with respect to the price of gas is about -0.05, meaning for every 100% increase in the price of gas, there is a 5% decrease in gasoline consumption (which correlates to driving in the short run, in the long run there is also a shift in vehicle fuel economy). So if we hold that to be true for all costs, going from $0.05 per minute to $0.34 per minute is 676% higher cost (a 576% increase), leads me to expect about a 29% reduction in fuel use (mileage) in the short run if people paid their roughly fixed costs plus infrastructure plus externalities of vehicle ownership as variable costs instead. Of course at the magnitude of shift, the elasticity values may no longer hold. In any case, this is no small matter. Certainly the direction is right, countries with much higher fuel taxes see much less driving in general.

Economic Responses

Income Effects

There would be a countervailing income effect, as people now had an income that was higher by the cost of the car-payment (say $1500 per year over 10 years), and $2250 in other vehicle costs. That additional income effect would be spent con onsumption of lots of goods, not just travel by automobile. A fraction of it (maybe 20-30%) would go back to pay for additional transportation, though not necessarily more travel, perhaps just nicer travel in a better car (a Smart ForFour instead of a Smart ForTwo). Since wealthier people travel a bit more than less wealthy, there would be a small bit more travel, but probably a relatively de minimis amount.

Induced Demand

Further, if we did reduce congestion, we would expect at least some people to take advantage of that change and start traveling more than they otherwise would have (there would be induced demand from the lower travel times).

Time is money

As the adage goes, “time is money”, and if we were more directly aware of the cost of our travel, we would spend far less on it. This implies we over-consume travel compared to a system that charged users directly for their full costs. As we move towards more efficient and equitable transportation funding, using road pricing, and an economy with vehicles as a service (car sharing, ride sharing, cloud commuting) we should expect significantly less travel demand.

Consequentially infrastructure providers should supply less transportation capacity in this policy environment than one where people could free ride and over-consume. Since infrastructure is long-lived, planning for a smaller network should begin now, with the aim to avoid irreversible investments made today that will later be seen as unnecessary.