Tradeoffs, Self-Insurance, and Externalities:

A common refrain in response to the hurricane situation and the interruption in gas supplies that it has occasioned is the argument that this demonstrates the need to reduce our reliance on oil and gasoline, including providing incentives to get people out of their SUVs (I own one) and into smaller cars. It is argued that there are all these externalities associated with SUVs, such as pollution, lower gas mileage, etc. So, it is argued, we just want those SUV guys (I own a Pathfinder) to internalize their externalities. Policy conclusion: We should get rid of all the SUVs, right?

But then I heard historian Douglas Brinkley on Bill O'Reilly describing about his escape with his family from New Orleans after the hurricane. O'Reilly asked him to describe how he got out. I haven't been able to locate the transcript, so I'm going from memory, but his answer went something like this. "Luckily I own an SUV. So I was able to drive through the flooded streets and go up over curbs and road medians in order to avoid downed trees and power lines. After weaving through town, I finally got out to the highway and then drove straight to Houston." Now I haven't seen any data on this, but I am willing to bet that people who owned SUVs were much more likely to be able to escape New Orleans after the hurricane than those who owned hybrids (we know of at least net one family who wouldn't have been able to escape--Brinkley's). And, by self-insuring their ability to get out of the crisis zone, this of course reduced the number of people who have needed to be tended to in New Orleans, leaving more supplies for those who couldn't get out. More SUVs, it follows, equals more people able to exit the city. So the externality is actually created by those who could afford to purchase an SUV, but instead choose to indulge their pro-environment tastes not to, thereby relying on taxpayers and other victims to subsidize their decision. Policy conclusion: We should mandate that every American household purchase an SUV which they can use in the event of an emergency.

The point is more general. Every time it snows, I can get around in my SUV (that's one of the many reasons we bought an SUV in our family). Those hybrid drivers out there, by contrast, can't move until the streets get plowed. Yet the snow plows are paid for my tax dollars as well as theirs. Again, whereas I have self-insured against snow and internalized my costs of getting to work, the hybrid driver has again decided to externalize the costs of his choice by forcing me to pay for the snow plows that he needs and I don't. Again, policy conclusion: Mandate that every household own an SUV.

Of course, the real point is that there are tradeoffs to every policy. An energy policy that reduces SUV ownership will reduce energy consumption and pollution, but it also means that fewer people like Professor Brinkley and his family will be able to self-insure against a disaster like the hurricane and instead will be trapped in the city, participating in the horrible misery, and relying on taxpayers and others to help them.

Either way, there are externalities and subsidies. If we only examine some of the externalities and subsidies in isolation, we will be led to to a terribly incomplete understanding of the full policy consequences. One might say that the eventualities under which SUVs will really be beneficial are sufficiently rare that they are offset by the costs. Or one could say that even if the likelihood of the risk is small, the benefit of enabling many Brinkley families to be able to save themselves is sufficiently high that we are willing to allow them to make that choice. Or one could say that in general we prefer self-insurance to social insurance, in that social insurance creates too many moral hazard and adverse selection problems, like people buying small cars and then relying on tax payers to bail them out when it snows.

These are difficult tradeoffs to think about and I can't see that there is any obvious way to measure them in any meaningful sense, which requires us to fall back to a large extent on our intutions, which inevitably are going to differ from person to person. My personal priors are that I have a hard time saying that we should prohibit Brinkley from making the choice to buy an SUV, or heavily subsidize those who want to indulge their preferences for the environment at others' expense. But it is quite evident as well that many, many others disagree with me on this and would weigh the tradeoffs otherwise. But most importantly, we must recognize that those tradeoffs will, and must be weighed.