The vehicle value externality

This paper introduces the vehicle value externality as a previously unacknowledged cost of car traffic. Unlike established externalities such as emissions or congestion, the vehicle value externality arises from the impact of vehicle value on accident damages. By developing a model linking insurance premiums to this externality and applying it to German car traffic data, we estimate the annual aggregate cost at 10 billion euros in 2021. • We identify an externality of car traffic that was previously unknown. • Owners of vehicles externalize part of the damage in case of unavoidable accidents. • Vehicle value externality (VVE) arises from the impact of vehicle value on accident damages. • The aggregate VVE is about 0.25 percent of German GDP. • A levy differentially according to vehicle value should internalize the VVE.