Progressive fines for traffic violations might make economic sense.
My jogging route always involves crossing busy intersections, and I've nearly been run over more than once by the peace-loving Berkeley crowds running amber-red lights.
I've been watching cars run red lights and a pattern is emerging: If the car is an expensive one like a BMW 5 Series or a Tesla, the driver is more likely to hit the gas to make it to the light. If the car is a 15-year-old Toyota Corolla, the driver is much more likely to stop.
This got me thinking about traffic violations, wealth, and fairness. Apparently I'm not the only one thinking about this. The New York Times The editorial makes the case for income-based traffic fines — Finland and Switzerland have been imposing higher fines on wealthy speeders for years — and I believe the cold logic of economics has much to offer in this emotive and populist debate.
Let's start with the basics: It doesn't take a PhD in economics to see that while for some (wealthy) BMW 5 Series owners a $500 fine for running a red light may be less than what they spend on their weekly personal goat yoga session, for some (not-so-wealthy) Corolla drivers it's the equivalent of a week's income. (Ignoring the difference between wealth and income.) My observations are consistent with general trends: wealthy people receive more traffic tickets and are more likely to behave unethically overall.
Is there something wrong with that?
In one sense, the answer from economic theory is no. Using an environmental economics framework, traffic fines can be thought of as a tax on behavior that produces externalities, like CO2 emissions. Running a red light makes you more likely to cause a traffic accident involving other unsuspecting drivers. That potential harm is the same whether you are rich or poor. We impose fines because we want to deter behavior that harms others.
For the sake of argument, let's suppose that red light fines are set at an economically fair level. It makes no sense for there to be zero red light runners (say, if we were to impose a $100 million fine) because the harm to others (i.e., the likelihood that a red light run will lead to an accident and the harm that will result from that accident) is not very high. If, at the current fine level, there are 10 rich people who run red lights in Berkeley each month and zero less affluent people, then the fair number of red light runners is 10, all of whom happen to be rich.
but why all Who are the rich red light runners? One answer might be that rich people have a higher value of time. This is getting into economics, so bear with me, but I'll backtrack a bit. You want a highly paid, skilled surgeon on call to operate on your family member when they run a red light, and you probably don't care that much about an unemployed video gamer getting to their destination on time. But the value of someone's time to society and wealth aren't highly correlated. The unemployed video gamer might have inherited a lot of money.
So why do countries like Finland, which reportedly fined a businessman $58,000 for speeding, and Switzerland, which fined a wealthy Ferrari-driving diplomat $290,000 for speeding, have income-based penalty systems? Are they counter to economic efficiency?
Populists support income-based fines as a form of “progressive punishment,” arguing that the wealthy should feel the pain of a traffic ticket just as much as the poor. In economics, progressive punishment is akin to setting higher prices for the wealthy because they are less elastic, meaning they won't adjust their reckless behavior to match the fine at current prices.
And if you think of traffic fines not just as a way to price an externality but also as a way to raise government revenue, you will want to charge the wealthy more (this is a form of Ramsey pricing, named after the early 1900s economist Frank P. Ramsey).
Indeed, this amounts to using traffic fines as a kind of tax. The question then arises as to whether the tax distorts other behavior. A Finnish businessman who had to pay $58,000 apparently ranted on Facebook that he was thinking of leaving the country, saying “the way things are done here doesn't make sense.” It's hard to imagine anyone following through on that threat. This isn't really a tax on being wealthy, but on being wealthy and deciding to break the law. Deciding not to break the law seems like an easier solution than moving to another country.
According to my introductory microeconomics students, many companies have cleverly come up with ways to charge rich people more. We call it “price discrimination.” Do you really think United Airlines is going to pay a business-class passenger an extra $8,000 on a flight from San Francisco to London to get more space and a little bit of finer wine than they would in economy class? No, they don't. But it does function as a very good way to differentiate between the wealthy who are willing to pay $8,000 for a little bit of space.
To implement price discrimination, firms must distinguish between different types of customers and prevent them from reselling to each other. They must also have limited access to competitive substitutes. All of these conditions are met when the government assesses traffic fines. So why would the government use its monopoly position as the assessor of traffic fines to generate additional revenue? Even better, if that additional revenue helps the government lower other, potentially more distorting, taxes, such as income taxes.
But you might be thinking: why stop with traffic fines? Can't we use the same logic to argue that rich people should pay more for a lot of things? If traffic fines are like a tax on carbon dioxide, doesn't this suggest that rich countries should pay much more to emit a ton of carbon dioxide than poor countries? The nice thing about traffic fines is that if Bill Gates gets a million-dollar speeding ticket, he can't just give it to Katherine Wolfram and get it reduced to a reasonable amount. But if we impose a high carbon tax on pollution in the United States, some polluting companies might relocate to Malawi to get a cheaper tax. In other words, there is no leakage problem with traffic fines.
There are certainly issues I haven't addressed, such as the possibility that rich people could use their own wealth to challenge fines, which would consume court time and cost the rest of us, and I'm not taking a position on what measure of wealth/income should actually be used to assess fines, but I think this is an idea worth exploring further.
