Wednesday, April 10, 2013

Traffic Ticket Insurance? Yikes!

From the website of Trafficare International:
When a TCI member receives a moving citation, a traffic ticket, the member has several options;
TraffiCare will reimburse you for a specified number of qualified traffic violations provided that it meets terms and conditions listed in our AGREEMENT.
If/when you receive a qualified ticket for reimbursement, simply scan and email, fax, or express mail your ticket to us. That's it. It's that simple. Once your ticket is received, we will qualify the ticket and inform you of "next steps" within 24 hours.
There are different packages available, all with different monthly premiums, so the discerning moving violator can select her level of moral hazard.

Now, unless several reputable news organizations got roundly snookered, and this is just a lingering April Fools' Day joke, this is actually a thing. It's a thing where a third party will offer to transform a marginal cost into a sunk cost. For those of you who have taken an intro economics course, you should be able to pretty easily predict the likely outcome when that happens.

But is it euvoluntary? Ha ha, not by a long shot. Look, one of the reasons the states use traffic enforcement is to alter behavior. There is some probability-adjusted cost associated with traffic violations. It's nothing more fancy than Pr(being caught)*(value of the fine). The regulating authority can play around with the probability by putting more cops in police interceptors or they can adjust the fine amount in the legislature. These things raise the marginal cost of traffic infractions (that is, the expected cost per incident [edit] for the next incident of breaking a traffic statute), but this insurance scheme sets the marginal cost to zero, or close to it (there's still some time foregone and a bit of humiliation or fear when being pulled over). As long as there's still some marginal reward to making an illegal U-turn or driving 15 over, customers of this service will be more likely to flaunt the rules.

Seriously, a decent high school economics course is all you need to get this. It's not that confusing.

And if we further assume that traffic regulations are meant to provide guidelines that guard against instances of negligent harm, an increase in the rate of risky activity increases the likelihood of unintended harm to others i.e. negative externalities.

So not only is Trafficare International not euvoluntary, but it's plain idiotic in a world where demand curves slope down. I can't offer you stock advice, but if I were a betting man, I'd short the hell out of these guys. If people get their undergarments in a twist over payday lending (a voluntary exchange between consenting adults), there's no way in Hades they'll do anything but shut these guys down faster than you can say, "sir, do you know why I pulled you over?"


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Do you have suggestions on where we could find more examples of this phenomenon?