The Accident Externality from Driving

Posted: 1 Nov 2006

See all articles by Aaron S. Edlin

Aaron S. Edlin

University of California at Berkeley; National Bureau of Economic Research (NBER)

Pinar Karaca-Mandic

RAND Corporation

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We estimate auto accident externalities (more specifically insurance externalities) using panel data on state-average insurance premiums and loss costs. Externalities appear to be substantial in traffic-dense states: in California, for example, we find that the increase in traffic density from a typical additional driver increases total statewide insurance costs of other drivers by $1,725-$3,239 per year, depending on the model. High-traffic density states have large economically and statistically significant externalities in all specifications we check. In contrast, the accident externality per driver in low-traffic states appears quite small. On balance, accident externalities are so large that a correcting Pigouvian tax could raise $66 billion annually in California alone, more than all existing California state taxes during our study period, and over $220 billion per year nationally.

Suggested Citation

Edlin, Aaron S. and Karaca-Mandic, Pinar, The Accident Externality from Driving. Journal of Political Economy, Vol. 114, pp. 931-955, October 2006. Available at SSRN:

Aaron S. Edlin (Contact Author)

University of California at Berkeley ( email )

Dept of Economics 549 Evans Hall #3880
Berkeley, CA 94720
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National Bureau of Economic Research (NBER)

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Pinar Karaca-Mandic

RAND Corporation ( email )

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