Accident externalities are among the most important external costs of road transport [3]. In this work we study the regulation of these when insurance companies have market power, and can influence road users’ strategy choices in terms of mileage, investment in car safety, and speed choice. The government, in turn, has control over both insurance providers and the drivers.  The model describes a two-stage game between insurance firms and road users. First, insurance companies maximize their benefit with respect to insurance premiums, subject to equilibrium constrains. Then, representative atomistic road users opt for a safety technology and speed in order to minimize generalized costs, i.e. the sum of time costs, investments into safety, insurance premium, and the part of the expected accident costs not covered by the insurance. Following the reasoning fashion of [1] and [4], in the analytical part of the work we obtain marginal conditions of the first- and second-best solutions. In our model we assume that companies can influence drivers’ behavior via insurance programs. Government then can impose taxes, subsidies on companies and/or road users, fines for speeding, and other regulations.  We complete the study with numerical sensitivity analysis of relative efficiency of solutions under different types of market structures (monopoly and oligopoly) and regulations.  In line with the earlier literature on airport congestion and private road operation, we find that market power is of key importance when insurance markets are regulated. The discussion on private internalization of externalities is therefore not only relevant for airport congestion or the operation of private roads, but also impacts optimal road transport pricing when regulating the accident externalities related to road use, speeding, and the level of safety technologies. Furthermore, our results may guide empirical research that aims to estimate accident externalities from data on insurance premiums (see for example [2]). On top of that, the analysis results are relevant for policy makers and engineers (subsidies for safer vehicles, speed limits, even influence of the results to the road quality as roads have to correspond to the speed of vehicles).

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Piotr Dendeski will not be presenting