Thursday, May 15, 2008

Should We Lower the Speed Limit?

Cafferty at CNN makes the case, and the economics of the reduced demand are relatively sound. I have a feeling Matt would say no. I'm opposed based on the cost of my time. The general rule of thumb is that you lose 4 mpg's for every 10 mph faster you drive. Let's think on the margin then....If your car gets 28 mpg at 65 mph and hence at 55 mph you get 32 mpg. On a 200 mile trip you would save .892 gallons, which at $3.61\gallon is $3.22 in savings (here is an excel spreadsheet for you to use your own numbers). However, it would increase the time cost of the drive by 33 minutes, which based on the most recent wage statistics is a loss of $11.43.

Gain $3.22, Lose $11.43 if gas prices don't change from that. In fact, gas prices would have to fall by $1.31 from the reduced demand to break-even.

That $1.31 reduction in price is unlikely. It is hard to reduce prices over the long-run by reducing demand in a competitive market (yes, oil and gas is competitive at every point in the production process). The main driver of lower prices is lower costs, which usually requires greater investment, which needs a high pay-off as a reward.


Anonymous said...

I am confused by the second paragraph. Shouldn't gas prices have to increase to make going slower worthwhile? In fact, using this example the price of gas would have to increase to $12.81 to make the driver indifferent between driving 55 and 65.

In a nutshell, if gas prices are cheaper, then the driver cares less about the gas cost of the trip and effectively, she would care more about the time cost of the trip.

Am I missing something? Maybe I misread the post.

Justin M Ross said...

If gas prices become lower as a result of the reduction in the speed limit, then it will increase the financial payoff of the lower speed limit. I hope that helps.