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The Real Cost of a Car

by Elaine Schwartz    •    May 23, 2011    •    211 Views

To see how much a car costs, just add up the purchase price, insurance, gas and a yearly service. Yes? According to one group of researchers, a car that is driven 100,000 miles costs $19,000 more than you might think.

The $19,000 relates to external costs. Pollution from autos creates health spending. Congestion generates delays, alternative plans, noise. Accidents means fatalities, days lost at work, medical expenses, property damage. In addition, more gas takes us to oil dependency and carbon emissions. Not included in the $19,000 total but also a cost is bridge and road maintenance and construction.

What does that extra $19,000 mean? It says that the cost of driving is both private and social.

Citing the private and social cost of driving as one of many examples, a new paper from the Hamilton Project, “Strategy For America’s Energy Future: Illuminating Energy’s Full Costs.” suggests we need to rethink public policy in 4 areas: 1) Changing the incentives that shape consumer and business energy use; 2) Enabling innovators to capture more of the profit of new technology; 3) Using more accurate cost benefit analysis for regulatory policy; 4) Pursuing global solutions to environmental and climate concerns.

The Economic Lesson

Economists see positive externalities wherever a transaction between two parties affects a third individual or group in some beneficial way. They see negative externalities when the impact on a third party is harmful. Vaccines usually have positive externalities while pollution is the typical example of a negative externality.

Taking externalities an economic step further, we can look at cost. On a demand and supply graph, the equilibrium price of a decision that has a positive externality is too high because of the benefits experienced by society. Correspondingly, the equilibrium price of a decision with negative externalities is too cheap because of the associated costs that result.

An Economic Question: Which business or individual decisions have a social benefit that (theoretically) offsets the private cost? Which business or individual decisions have a social cost that (theoretically) adds to the private cost?

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