Mandatory Auto Insurance

June 30, 2007

Steven Landsburg’s book More Sex is Safer Sex is full of pro free market examples but the information on why automobile insurance in Philadelphia is so expensive makes Landsburg squirm.

For ideological free-marketeers (like myself), theories like Smith and Wright’s can be intellectually jarring. We are accustomed to defending free markets as the guarantors of both liberty and prosperity, but here’s a case where liberty and prosperity are at odds: By forcing people to act against their own self-interest in the short run, governments can make everybody more prosperous in the long run. (Though some diehard libertarians will object that the prosperity is an illusion, because governments that have been empowered to make us more prosperous will inevitably abuse that power to our detriment.)

So what is this jar-a-libertarian theory of Smith and Wright?

CLAIM: the number of uninsured automobiles on the road drives up the cost of insurance which in turn drives up the number of uninsured automobiles.

It is a positive feedback loop that results in pockets like Philadelphia with very high insurance rates and a very high number of uninsured automobiles compared to other areas that are equivalent socio-economically.