Policy Study No. 198
December 1995 

Transportation system reform in our nation’s urban areas increasingly focuses on the promise of pricing mechanisms to reduce traffic congestion, improve air quality, and restore fiscal integrity. Long-time proponents of congestion, emissions, roadway, and parking pricing find that all to the good. These reforms face a serious challenge, however, from auto critics whose claims of huge auto-related external costs could lead to a significant overpricing of transportation.

Estimates proclaiming a huge disparity between the social and environmental costs of automobile use and the revenues contributed by auto users have been published by governmental agencies, environmental groups, and transportation planners at numerous universities and private research institutions. These studies are often championed by opponents of an automobile-based transportation system in attempts to justify raising the bill presented to automobile users. The estimated national underpayment in these auto-cost studies ranges from $60 billion to $700 billion annually.

But many claimed auto-use externalities fail to satisfy the criteria which would legitimize hiking the cost of auto use. While focusing on numerical estimates, most auto-use estimates are uncritical with regard to the questions of whether claimed externalities are qualitatively established to exist, quantifiable, allocable according to automobile use and behavior, and recoverable without causing greater distortions in mode and fuel choices than already exist. In this context, a close scrutiny of the assumptions used to justify the numbers is more important than offering another review of current guesstimates.

After evaluating the wide range of proposed auto-externalities against market oriented, property-rights criteria, only three are found to have significant validity and warrant cost recovery: health effects of air pollution, employer-paid parking subsidies, and unrecovered health-care costs for accidents involving non-users are candidates for cost-recovery, assuming they are not currently being paid for through the auto-user-generated revenue surplus that already exists.

In summary, auto use must be priced according to generally acceptable cost principles. Otherwise, pricing mechanisms will not be accepted by the general public, the majority of whom rely on the automobile for their mobility. The price paid for automobility must also be protected from the overpricing that could occur with an uncritical incorporation of all proposed societal effects, however legitimately related to actual auto use, into the pricing structure. To do otherwise could adversely impact economic vitality and consumer well-being. This study supports the findings of other recent studies which clearly establish that transportation does not so much lack revenues as it does a rational fee structure. Pursuit of that rational fee structure should not be buried under a blizzard of proposed but unsubstantiated auto-externalities.

I. THE DEBATE OVER AUTO COSTS1

II. THE DEBATE OVER AUTO EXTERNALITIES6

III. EVALUATING ENVIRONMENTAL AUTO EXTERNALITIES8

A. Air Pollution 9

B. Water Pollution10

C. Agricultural Impacts11

D. Global Warming 12

E. Wetlands Loss 12

F. Noise13

G. Resource Overconsumption14

H. Hazardous and Non-hazardous Waste Generation14

IV. EVALUATING SOCIAL AUTO EXTERNALITIES15

A. Damage to Persons15

B. Parking17

C. Congestion18

D. Barrier Effect19

E. Lost Roadway Land Value20

F. Land Use Impacts20

G. Equity21

H. Resource Acquisition 21

I. Damage to Historic Buildings and Archaeological Properties22

J. Property Value Depreciation Due to Private Vehicle Mobility-based System22

V. POSITIVE EXTERNALITIES, UNCOUNTED BENEFITS AND USER-PAYMENTS, AND MONOPOLISTIC INEFFICIENCIES23

VI. WHAT GOES ON THE AUTO USE BILL24

VII. DISCUSSION AND CONCLUSIONS27

ABOUT THE AUTHOR27 

I.THE DEBATE OVER AUTO COSTS

What are the social and environmental costs of automobile use in the United States? How much of those costs are paid for by auto users? To what extent, if any, is auto use subsidized? For that matter, what social or environmental costs are appropriately billed to auto users in the first place? Besides being charged for roadway construction, operation, maintenance, and service provision, should auto users also be charged for air pollution, water pollution, global warming, ozone depletion, species endangerment, plant damage, military involvement in the Middle East, and the "loss of community" that some auto-cost theorists claim result from auto-induced urban sprawl?

A rapidly growing body of literature estimates the social and environmental costs associated with automobile use in the United States as a whole, as well as in various municipalities. Governmental agencies, environmental groups, and transportation planners at prestigious universities and private research institutions have put forward assertions of huge subsidies to auto use. The estimates produced by these studies influence decisions about transportation system funding. They also affect decisions about transportation system reform, funding mechanisms for environmental regulations, and general revenue raising at all levels of government.

But how do the auto-cost estimates produced by various environmental groups, transportation researchers, and government agencies relate to either a market-oriented or a property-rights view of auto costs? What would happen if these estimates were taken at face value and used to establish pricing schedules for auto use? How do these estimates conform to the basic market principles that might actually solve our congestion and air- pollution problems?

Table 1 lists several of the most frequently cited auto-cost studies, and the auto-cost deficits which they assert as both an annual systemwide cost, and as an average cost per vehicle mile traveled. These auto-cost studies come to a common conclusion: because of the alleged externalities of auto use—air pollution, water pollution, unrecovered accident costs, and so on—automobile users are not paying enough through their fuel and other auto-related taxes, tolls, vehicle license, and registration fees to cover the full costs that their auto use imposes on society and the environment. Estimated national underpayments in these auto-cost studies range from $60 billion to $700 billion annually.

Besides the magnitude and negativity of their findings, these auto-cost studies have something else in common: they cast an extremely broad and unselective net when trying to capture externalities, yet they virtually ignore any benefits from automobility. Global warming, though not yet demonstrated to have any observable effect in real-world measurement, is counted as a cost, while the demonstrably increased personal mobility and corresponding personal autonomy derived from auto-use is ignored as a benefit. Revenues taken out of general funds to support auto use are counted as a cost of auto use, while revenues put in as a direct result of auto use (such as sales tax on automobiles and replacement parts) are not counted as user-contributions, though they go into the same general revenue pool. When it comes to the final numerical cost estimates, the assumptions used result in a gross overestimation of auto costs and an equally gross undercounting of the benefits of automobility as well as the revenues generated by auto use.

Such inflated auto-cost estimates would only be of academic interest were it not for the fact that such cost estimates are being used to justify increased fuel taxes, registration fees, and other pricing systems. For those with an interest in reducing the environmental impacts of auto use and increasing the rationality of our transportation system by rationalizing prices, the prospect of these apparently arbitrary pricing schemes is cause for serious concern.

It is certainly fair for auto users to pay the full, verifiable costs of their auto use. However, it is not fair, and not in the interests of the nation’s economy or of individual well-being, to force auto users to pay more for their auto use than the costs which they actually impose upon society. The inflated auto-cost estimates now infusing the debate over transportation reform could poison the promise of market-based reforms, lead to artificially inflated costs for transportation in general, and prolong our reliance upon the very same irrationally priced transportation strategies that contributed to the problems we now face.

When examined closely, it becomes apparent that the debate over auto costs is not about simple revenue-in/revenue-out accounting. It is, to a much larger extent, a debate about externalities.

Three recent studies that examine the bare bones of roadway finance nationally and in California demonstrate that without counting externalities, and with a rigorous accounting of payments made by auto users and expenditures made on the transportation system, auto users pay considerably more than the bare-bones internal costs of their transportation choices. Tables 2, 3, and 4 show the revenue-expenditure accounting of one nationwide and two California-only studies conducted in the last several years.

A Reason Foundation study, by Randall Pozdena, indicates that our transportation system problems stem more from irrational administration and funding allocation rather than user underpayment. The Pozdena study showed that California’s auto users pay in approximately $16 billion through auto-related federal, state, and local levies, while only $7 billion to $8 billion is actually being expended on roadways and other related auto-use infrastructure (e.g., highway patrol, emission monitors, etc.) in California (Table 2). Pozdena goes on to demonstrate that existing financing mechanisms would produce enough revenue to meet consumer demand if transportation funding decisions were based on market forces rather than political forces.

An American Petroleum Institute study by Rayola S. Dougher, which limited itself to a straightforward accounting of auto-user revenues and highway-system expenditures, shows that without discussing externalities, auto users are paying enough to cover direct expenditures on roadways. Dougher shows that nationwide, total user receipts (for 1992) totaled about $114 billion while expenditures only totaled about $76 billion, producing a surplus of about $38 billion used for mass-transit subsidies and other social programs (Table 3).

Finally, a study conducted by Adam Diamant for the Environmental Defense Fund showed that in Southern California auto-related revenues exceeded expenditures for 1989, 1990, and 1991 (Table 4). The Environmental Defense Fund study by Diamant showed auto-user revenues running ahead of highway system expenditures in Southern California for 1989, 1990, and 1991. Although the surplus has declined over the period (from about $1 billion to about $200 million), the causes of that decline are not clear. The wide disparity between Pozdena’s finding of a nearly $8 billion surplus for California as a whole and Diamant’s findings that highly urbanized Southern California generates only a small surplus is consistent with Pozdena’s findings that the ratio of revenues to expenditures is higher in non-urban areas than it is in urban areas.

As can be seen, these studies demonstrate that there is enough of a surplus generated through even the narrowest accounting of auto-user revenues to constitute a significant subsidy for mass transit and other general fund purposes, or as a potential pool of funds already being collected and used for the remediation of several conservatively estimated externality costs, such as that created by air pollution.

Even the studies published by authors who claim that a huge auto subsidy exists support the contention that without including alleged auto externalities, the books balance out nicely in favor of auto-users paying their own way.

Table 5 shows what is left of the projected auto-cost deficit projected by James MacKenzie and his coauthors as well as the deficits proposed by the Natural Resources Defense Council’s Peter Miller and John Moffat, U.S. Department of Transportation’s Douglass B. Lee and Charles Komanoff after removal of the costs of all proposed social and environmental auto externalities. These adjusted estimates will be broken down in greater detail later in this study. 

It is clear then, that the crux of the auto-cost debate revolves around the question of legitimately defining and attributing alleged "externality" impacts of auto use. Let us now turn our attention to the questions that might help us render those determinations of externality legitimacy.

II. THE DEBATE OVER AUTO EXTERNALITIES

What exactly are the externalities of auto use? Can they be accurately identified? Can the effects be accurately quantified? Can costs be assessed reliably? Can the costs be uniquely attributed to auto use? What benefits are these costs weighed against? Are auto users the only beneficiaries of an auto-based transportation system? Do all auto users contribute equally to each externality? Are they already paid for by the auto-user revenue surplus described above?

And what is the best way to evaluate the legitimacy of a claimed externality? Do we simply accept any claimed environmental or social impact as an excuse to raise the costs of auto use? Is welfare economics the only viable model available to us? Is it the best model for evaluating such claimed impacts? What about the benefits that stem from automobility? How are they factored into a cost accounting?

These questions frame the externality debate and highlight the extent to which such determinations reflect value judgments more than either pure environmental science or straightforward accounting practices. The question of externalities is inextricably linked with the subjective values that render matter-of-fact accounting problematic. As we will see, however, most studies in the auto-cost literature give little consideration to these questions.

So what is an externality? In a draft copy of "A Guide for Reviewing Environmental Policy Studies," a handbook for the California Environmental Protection Agency, externalities can be positive or negative, and are "impacts on one or more individuals resulting from an activity of another person or persons for which there is no corresponding compensation to or paid by those creating the impacts." Externalities, the definition continues, are a "form of market failure."

Without exception, the auto-cost studies examined in this research relied on this definition, or on very close variations. And yet, the concepts which underlie this definition are themselves problematic, as economist Roy Cordato has pointed out in a recent paper:

First, social costs themselves are unobservable. There are two reasons for this. Despite their name, social costs are not incurred by some collective called "society" but by particular individuals existing in particular circumstances. Indeed, these costs are experienced privately. The costs that these individuals bear are appropriately viewed as the value that they place on what they must forego as a result of the offending activity. These are what economists call "opportunity costs" and are the only relevant costs for economic analysis (emphasis added).

Cordato goes on to quote Nobel Laureate James Buchanan, who points out that such costs are virtually inestimable:

Cost is that which the decision-maker sacrifices or gives up when he selects one alternative rather than another. Cost consists therefore in his own evaluation of the enjoyment or utility that he anticipated having to forego as a result of choice itself....Cost cannot be measured by someone other than the chooser since there is no way that subjective mental experience can be directly observed.

Welfare economists often champion various survey methodologies such as willingness-to-pay as being a satisfactory method of estimating externality costs, and the auto-cost literature is no exception to this rule. Willingness-to-pay is often used as the rationale for creating estimated costs of various externalities such as air pollution, traffic congestion, and so on. But as economist Mark Sagoff points out, actual costs are a function of real choices made—e.g., forgone opportunities—they are not a function of some hypothetical preference ranking.

Values, in short, are not based upon economic models, but are based upon real choices made by real people. Transactions between individuals that require concrete choices between one good and another determine the actual value which those individuals place upon each good. Contingent valuation methods (exemplified by willingness-to-pay studies), on the other hand, are highly hypothetical, asking people to place a cost valuation on "goods" outside of any context of limited resources and opportunities foregone—the very conditions that give meaning to the concept of cost.

This hypothetical nature of defining costs associated with negative externalities becomes critical when one realizes what the claims of externality represent. They represent, essentially, a claim for payment—a claim that auto use is creating a costly externality is equivalent to a call for increasing the price of auto use by that amount. The various authors involved in the debate over auto costs invariably propose mechanisms by which their claimed externality bill is to be collected from auto users, above and beyond taxes and fees already paid. However, they spend little or no effort on an examination of the assumptions that underlie the categorization of a proposed externality as valid or invalid, billable or non-billable from any market-oriented perspective.

And then there is the question of benefits from automobility. Loren Lomasky points out that automobility, in fact, is a powerful good virtually inseparable from the good of personal autonomy which, like the ownership and control of other privately held property, significantly enhances the quality of our lives as a whole. He argues:

[T]he value of automobility is strongly complementary to other core values of our culture, values such as the freedom of association, pursuit of knowledge, economic advancement, privacy, even the expression of religious values and affectional preference.

Lomasky’s argument highlights the fact that there is a highly personal, individualistic value to automobility, a value which individuals have the right to pursue in our society without interference from "society" so long as they are paying their own way, and harming no one.

The work of these and other researchers lead us to ask if there is an alternative to the welfare economics view of auto externalities—a way to view these proposed externalities of auto use which bears greater resemblance to the normal world in which most people live their lives and constantly make decisions about how to expend their resources. Cordato points out that indeed, there is such a framework: a framework of well-defined property rights in which external impacts stemming from resource use are (and historically have been) easily adjudicated through tort law. In this framework automobility is more properly viewed as a question of legitimate use and control over both a piece of property (one’s car) as well as one’s right to engage in an activity which is integral to one’s strongly held rights to life, liberty, and property. Such a framework suggests that a set of criteria akin to those which might be applied in adjudicating a property-rights dispute would make a superior touchstone for evaluating legitimacy claims for proposed externalities.

This is the touchstone that will be used to examine the proposed social and environmental externalities of auto use. We will look at a proposed externality as though it were a claim of trespass by one person (or even one group of people) against another person or group. We will focus on making a determination of whether a proposed externality would legitimately be considered billable in a framework more akin to that for disputes over private property use (which is what we actually have occurring) rather than using economic models that build hypothetical and apparently arbitrary categories of "external" costs. In this process of evaluation, it is most important to determine first which proposed externalities would be considered a legitimately recoverable cost from the viewpoint of a trespass claim made by one person or a group of people upon others. Only then would evaluation of the numerical estimates of externality costs come into play with regard to their input into the transportation policy-making process.

III. EVALUATING ENVIRONMENTAL AUTO EXTERNALITIES

Certain byproducts of automobile use, namely air pollutants, have been studied extensively, and pass virtually any reasonable test of qualitative identification, quantification, and even, increasingly, estimates of the costs associated with air-pollution health impairment, and air-pollution remediation. The same cannot be said of the majority of proposed externalities of auto use which pervade the auto-cost literature.

Costs attributed to such speculative environmental problems as global warming or stratospheric ozone depletion, for example, are neither as clearly established in a scientific sense nor as clearly linked exclusively and uniformly to auto use.

What follows in this section is an examination of proposed environmental auto-use externalities in light of a set of proposed criteria by which we can judge their legitimacy and suitability for cost recovery. As discussed in the previous section, the proposed criteria reflect a common-sense view of the necessary criteria against which a claim for payment against an individual for alleged side-effects of their authorized use of their legally held property might be evaluated. This approach seems reasonable, considering that the end result of such deliberations will, in all probability, involve handing auto users a very nontheoretical price tag through a variable-rate pricing system or a series of fuel-tax or other flat-fee increases.

We propose the following as a set of minimal criteria which render a claimed environmental externality of automobile use suitable for billing to auto users.

ŒThe claimed auto-use externality must be solidly verifiable as a phenomenon in which an individual (in this case, the driver) imposes real costs on other individuals who have not explicitly or implicitly accepted those costs in a reciprocal exchange of value.

The claimed auto-use externality must be quantifiable within reasonable levels of certainty.

ŽThe claimed auto-use externality must be avoidable without doing more harm than good.

The claimed auto-use externality must be proportionally attributable to auto users.

In addition, for an auto-use externality that has met the above criteria to be equitably and effectively compensated or deterred through pricing, rather than through a flat increase in existing per-driver fees, that auto-use externality has to be:

Divisible among auto users in accordance with their individual contribution.

Since each proposed environmental externality is unique in the way that it satisfies some or all of the criteria above, we must assess the various proposed environmental externalities one by one, to determine their validity and suitability for cost recovery. For the sake of easy reading, the externalities will be presented starting with those which meet most or all of the aforementioned criteria, moving then to those which meet less and less of these criteria.

A. Air Pollution

Certain byproducts of auto use have been consistently identified as a hazard to human health. The extent to which automobiles contribute to the problem is measurable, either in the aggregate, or increasingly at the individual level. Driving behavior, vehicle purchase and service decisions, fuel choice, and a host of other activities can give individual drivers control over the level of vehicular emissions they produce. Thus, controlling emissions is generally within the control of individual motorists. Pollution-free, or at least significantly reduced-pollution alternatives, are available to consumers, or could easily be provided in light of consumer demand. Additionally, the cost impacts of air pollution have been studied, producing at least the beginning of a consensus on the question of adverse health effects upon other drivers, along with the young, elderly, handicapped, and other sensitive populations.

Given the revenue surplus contributed by auto users, it is quite possible that the cost of this externality is already being paid for. Estimates of the health costs of air pollution upon all of society (excluding theoretical harms like global warming, stratospheric ozone depletion, and so on) are in the $7-billion range nationwide. However, should further research prove that these costs exceed that revenue surplus, auto-generated air pollution would satisfy enough criteria to render it acceptable for cost recovery, most equitably done through some form of transportation pricing, whether through a comprehensive emissions charging system, or piecemeal through congestion and parking pricing or fuel-tax increases (decidedly second- and third-best alternatives, respectively).

Indeed, the health impacts of automobile-generated air pollutants are the single best example of an externality which passes the majority of the tests outlined above and while it does not necessarily justify an overall increase in the price of auto use, a good argument can be made for accelerated reduction of air pollution impacts through the substitution of an emissions-pricing approach for the more indirect cost-recovery which is now in effect.

B.Water Pollution

Auto-use impacts upon water sources are rarely quantified in the auto-cost literature, but are generally predicted to be extremely high when they are quantified. It is a virtual certainty that auto use has adverse impacts on coastal waters, surface waters, and ground waters through the contamination of rainfall runoff. However, other criteria necessary for supporting additional charges to auto users for the remediation of such pollution are lacking. Quantification of the extent to which it is automobiles (rather than other activities) creating water pollution do not yet exist. Hanson observes that such estimates may "contain significant uncertainty." The question of whether auto users can control the extent of the small fluid leakage that accompanies virtually all moving-part systems is debatable. As acknowledged by Litman, "it is difficult to determine exactly how much motor vehicles and roads contribute to water-pollution problems since impacts are diffuse and cumulative" (although this doesn’t stop Litman from proposing a very concrete price in the range of $30 billion per year). Further, virtually all proposed alternative modes of transportation will have similar effects, and indeed, even those whose transportation does not involve automobile use contribute to water pollution with any choice of transportation excluding that of pedestrianism. (Though Litman asserts otherwise, even bicycles use lubricants on chains, gears, and in tire-hubs.)

In light of these constraints, water pollution is not legitimately claimed as an externality of auto use suitable for inclusion in either estimates of auto costs or in transportation pricing systems. In the event that further research satisfies the above criteria, as an environmental impact which is, in all probability, independent of the choice of motorized transportation mode, one might recoup auto-generated water pollution with a transportation pricing structure based upon distance-traveled or time-in-use pricing.

C.Agricultural Impacts

Various claims have been put forward with regard to the effects of automobile-related air pollution upon agricultural crops. MacKenzie cites research conducted by Mark French of the Federal Reserve Board to justify a claim of $9 billion per year as an externality cost for the effects of auto emissions on plants through air pollution. Ground-level ozone is especially implicated as an agent of crop loss and damage to vegetation. Ozone production can clearly be related to auto use, and as with air pollution, control of ozone production is within the control of auto users through their choice of automobile type, fuel, and usage patterns. Moreover, a good case can be made that most alternative forms of transportation to the automobile would produce considerably less ozone.

Meriting further examination is the question of whether agricultural impacts constitute an externality in the sense of imposing costs on others who have not explicitly or implicitly accepted such costs as part of a reciprocal exchange of value. Insofar as such damage has been qualitatively and quantitatively demonstrated, it might be reasonable to question whether farmers are subsidizing automobile users through their unwilling suffering of such property damage. Of course, in a completely market-oriented evaluation, one would also have to consider whether automobile users subsidize farmers by paying the majority of the costs of the transportation system that allows farmers to bring their goods to market and allows consumers the mobility to travel to those markets, through their majority contribution to general tax revenues, as well as through the farm subsidies taken from the general tax fund.

It is quite conceivable that ozone-induced crop damage is being offset by the positive effects of automobile-generated carbon dioxide on those same crops. Recent studies have indicated that the increased carbon dioxide produced by automobiles might actually lead to increased productivity of cropland. If this is substantiated, would it be considered a subsidy to the farmer from the auto user that required recompense through a tax on farm products? As Cordato puts it, such questions regarding subsidization are "symmetrical" and must be considered that way if one is using the standard social cost models. Further research seems warranted to further illuminate the question of agricultural impacts of auto-use before proposing it as a cost item in transportation pricing systems, as is now being done.