Travel Money Budget

A significant question about autonomous vehicles moving forward is how we will use them. Will we own them as so many do today (ownership) or will we access them more like an Uber or Lyft ride (Vehicle as a Service or VaaS)? This question is important for many reasons that I’ve discussed elsewhere, but it also has important implications for urban form.

The reason it is important to urban form, is that ownership and VaaS distribute the costs of driving very differently and people are sensitive to the costs of travel (both time and money). If the cost of travel increases, we travel less. If the cost of travel decreases we travel more.

So how do the costs of ownership and VaaS differ? All told, they may not differ that much. Sure, fleet management and maintenance will probably be more efficient than individual ownership, but fleets will also have operating costs and profit expectations that will drive costs up. The costs of driving in both cases will still include the purchase of a car, maintenance, insurance, fuel, registration, taxes, etc. The core difference between the two scenarios is the way we would experience the costs of driving.

Today, when we own a car, the ONLY cost we directly associate with the distance we drive (unless you are an accountant or an economist) is fuel. Fuel is what we would call the marginal cost of driving. It is the only cost that appears to directly fluctuate with driving distance. The other costs feel like sunk costs. In other words, we pay them irrespective of the distance we drive (which is true to an extent). So while car ownership may feel expensive, driving a car may not. In fact, AAA estimates the cost of fuel at roughly 10 cents per mile for the average vehicle in 2017.

In the VaaS scenario, all of the costs of driving will be bundled into the distance we drive. We’ll be paying for operating AND capital expenses on a per mile/per use basis. The marginal cost of driving will thus be substantially higher than with car ownership even if the total cost of driving is roughly the same. According to AAA’s 2017 “Your Driving Costs” report, the total cost of driving the average car is closer to 50 cents per mile, which is 5x times higher than the marginal cost of driving a car we own.

If we own driverless cars the way we own cars today, the marginal cost of driving may stay roughly same same, which, all else equal, means we won’t see an impact from driverless cars on urban form. It has been argued, however, that electric vehicles will be a more natural fit with driverless car technology and fueling an electric car is significantly cheaper per mile than gasoline. If this occurs, we can expect people to be willing to travel farther than they do today.

On the other hand, if the VaaS system prevails, the marginal cost of driving will increase substantially, which we can expect to translate to an overall reduction in travel: fewer trips and shorter trips. The urban form would stop expanding and may even contract. We know this because people drive less when gas prices spike, which causes an increase in the marginal cost of driving. We also know that people are less inclined to drive when parking costs are high and parking is another marginal cost of driving.  

In the end, driverless car may expand or contract our urban footprint, or they may have a nominal effect. It depends on how they are deployed, which, in turn will depend on the economics of ownership versus VaaS. That said, government has a large role to play in determining which model is more successful. If one model provides social benefits, governments can implement policies that embed those benefits into the economics of each model, thereby tipping the balance in favor of one or another.