Abstract: Gasoline taxes are widely perceived as the most efficient instrument for reducing gasolineconsumption because they exploit all behavioral responses for reducing fuel use, including reduceddriving and improved fuel economy. At present, however, higher fuel taxes are viewed as a politicalnonstarter.Pay-as-you-drive (PAYD) auto insurance, which involves replacing existing lump-sum premiumswith premiums that vary in proportion to miles driven, should be more practical, since they do not raisedriving costs for the average motorist. We show that when impacts on a broad range of motor vehicleexternalities are considered, PAYD also induces significantly higher welfare gains than comparablegasoline tax increases, for fuel reductions below 9%. The reason is that under PAYD, all of the reductionin fuel use, rather than just a fraction, comes from reduced driving; this produces a substantial additionalefficiency gain because mileage-related external costs (especially congestion and accidents) are relativelylarge in magnitude.

Abstract: This paper derives and implements formulas for the welfare effects of differentiated and uniform mileage taxes, gasoline taxes, and per mile insurance premiums, for reducing the external costs of passenger vehicle accidents. The model distinguishes three driver groups and five vehicle groups, and we obtain estimates of external accident costs per mile for each group from crash data.The (average) external accident cost is estimated at 2.2-6.6 cents per mile. Accidents costs differ substantially across drivers of different ages, but only moderately across different vehicles groups. Annual welfare gains from a mileage tax differentiated across drivers and vehicles according to marginal external costs are $9.4 billion in the benchmark case. The uniform mileage tax and per-mile insurance reform can achieve 76% and 65% of this welfare gain, respectively, while the gasoline tax can achieve only 28% of the welfare gain. Unlike other policies, the gasoline tax induces costly improvements in average fleet fuel economy that have little effect on reducing external costs.