An argument I see from
time to time from libertarians is that "If it wasn't compulsory, car
insurance would be much cheaper, and more competitively arranged, instead of
being something the law compels you to purchase".
I think, on this occasion,
people who make this claim are under a slight misapprehension. Whether
something is a legal compulsion is not the determiner of how cheap it is - what
determines prices is competition.
Even though car insurance
is mandatory, there is plenty of competition among providers regarding prices. Therefore,
as long as no politician looks to impose a price control on the industry, car
insurance can operate contemporaneously under a system that legally mandates
it, yet allows the competition to keep prices close to their market clearing
rate.
Furthermore, something else of interest - from what I recall reading in Freakonomics, car insurance was one of those strange instances of a departure from the norm, whereby, actually, making it non-compulsory in one State (
This also isn't that
surprising. To see why, let me explain about feedback effects. The general rule
of feedback is that an event becomes part of a feedback loop where a cause and effect
chain ends up with situations feeding back into the event.
You have seen this happen
in real situations – for example, when a guitar and speaker produce a sound
loop between the audio input and the audio output we hear feedback effects. This
is what happens in society too, and here are some examples.
On the Internet an artist
or a weblink can become hugely widespread by a sticking effect. A YouTube video
with an unusually high number of hits may create an interest, meaning more hits
'because' of that interest, and this causes a sticking effect, where hits begets more hits, and so on.
For example, suppose 15,000
people happen to view a weblink (this may be a fairly random occurrence), the
link may be passed on to an average of 7 people by each one of 80% of the
people, meaning that by the second day it has been viewed by 75,000 people. Suddenly
you have a lot of people wondering why this link has attracted so much
attention - so people look to see what all the fuss is about.
This then increases the
weblink views, which then increase the interest further, which then knocks on
to increase the viewing numbers further. In a very short space of time an arbitrary
weblink can have huge popularity almost entirely on the basis that this
sticking effect has occurred. Most of the views have been because others have
been viewing it, and the greater the increase in views the greater the
interest, and so on.
Here's another
example. As more people shop online, department
stores lose custom. They compensate this loss by putting their prices up,
meaning the remaining customers are hit with more expensive products, which
means more will change to the cheaper option online, which means that to
compensate the department stores hike their prices up even further, causing
even more of their customers to choose the online option, and so on.
This same principle
explains why, in all probability, if it wasn't compulsory, car insurance would not
in actual fact be much cheaper, but probably more expensive. The logic is the same
as above. If a US State introduces a policy of non-compulsory car insurance, there
will be a reduction in drivers buying car insurance, with the knock on effect being
that more drivers have to claim off their own insurance because the person who
has hit them has no insurance.
Because of this, insurance
companies increase their premiums, which then prices out more drivers who chose
to opt out of insurance buying. This increases the need for insurance companies
to increase premiums further, which means more people do not insure their cars.
One cause affects the
other, and we see back and forth causal factors, leading to a situation like in
Philadelphia
The Philadelphia
