“Drive less, save big” graphic from Metromile
Why do people eat so much at buffets? Once they’ve paid to enter, there’s no cost to eating as much as they can – aside from, well, feeling tired and sick.
Owning a car is like buying a 24-hour pass to a Vegas buffet. Every single day.
We drive so much because once we’ve shelled out to have a car, the cost to drive each extra mile is minuscule. While the average cost per mile is nearly 60¢, according to the IRS and AAA, the cost to drive just one more mile, a.k.a. the marginal cost, is just the cost of fuel. That’s 11-13¢ a mile at current rates, assuming a 25-30 mpg car, and the $3.32 per gallon gasoline (the CA average as of February 28,2015, per AAA). The fuel cost is about 20% of the total cost of owning a car, on a per-mile basis. For a single extra trip under 13 miles, true for most trips and most commutes, driving is potentially cheaper than taking the bus.
The more people feel the cost each time they drive, the less they will drive like they eat at a buffet. You might be willing to pay $1 for that first brownie, but not for the eighth one… unless that eighth one is “free.” Suddenly, some car trips that made sense when they cost 10¢ a mile, don’t make sense when they cost 15¢ or 30¢ a mile.
Artificially cheap or free parking has an integral role here – parking guru Donald Shoup estimated that employer parking subsidies amounted to 27¢ a mile on average for commuters in 1997. If employer parking subsidies went up at the same rate as inflation, that’s 39¢ per mile in 2015 dollars – that’s triple fuel costs for a 25 mpg car – and twenty times the current U.S. average gas tax of 48¢ per gallon, ~2¢ per mile. The more the share of the cost of driving can be felt each time people drive, the less driving people will do.
Gas taxes are effective, but incredibly unpopular. But now, there is another tool that would have a similar impact, without increasing the cost of driving per se – usage-based insurance.
The more you drive, all else equal, the more likely you are to get into an accident, and thus the costlier you are to insure. Traditional insurance gives discounts for driving fewer miles, but those discounts are modest, probably because the mileage figures that people report are unreliable. The new usage-based insurance policies charge you based on how many miles you drive, using a device that plugs into your vehicle’s diagnostics port to count the miles driven. A usage-based policy effectively converts part of the fixed cost of having a car to a variable one. In other words, it functions like a gas tax.
And a usage-based policy lets an insurer pick off those low-mileage customers that are the cheapest to insure, by giving them a lower price than a non-usage-based policy. With enough time and popularity, that could mean auto insurance gets pricier for people who drive a lot, as they’re the only people left on buffet-style policies, and are thus more prone to getting into accidents and are pricier to insure. This process is known as adverse selection. In fact, “The number of consumers who actually purchased a UBI [usage-based insurance] policy has nearly doubled in the last year and a half,” according to market research firm Towers Watson. Under the current paradigm, people who drive less subsidize the insurance of people who drive more, just as the abstemious subsidize the voracious at buffets.
Metromile – A Personal Experience
I signed up for one such policy recently – Metromile, currently the first and only usage-based policy in California. Read more…