Sunday, October 26, 2008

The Externalities of Speed Limits

Speed limits on highways are setup to reflect externalities linked to damage caused by accidents (affecting other drivers' cars and bodies). Clearly a balance must be struck between the frequency and severity of accidents, and efficiency of transits. Given that not all transits bear the same costs in lost time, properly matching the cost of going slowly with the harm caused by accidents requires some form of adaptive pricing of speed.

If cars were equipped with some form of time, position and speed tracking device (a GPS), the cost of causing accidents could be adjusted based on actual risks measured in recent years. With basic statistical methods, we easily could account for weather, time of day, moose activity, traffic conditions, etc. With enough data, prices could even be adjusted based on the type of vehicle (4x4, car, truck) and the driver's history.

When you are really in a hurry, you won't mind paying the extra 0.20$ per kilmeter to drive at 130 km/h. To make the scheme revenue neutral, slow/safe drivers should actually be paid to compensate them for the risk they are taking sharing the road with their speedy neighbors.