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Price mechanism in action - student car insurance

Jim Riley

16th October 2010

Here’s a great example of the price mechanism in action - on a topic that should be highly relevant to many A Level Economists. As our accompanying chart shows, the cost of buying car insurance(as measured by the retail price index) has risen by a staggering 40% in the last year, with even bigger increases being registered for young drivers wishing to insure their own car or be added to their parent’s policy. This BBC video shows one such customer whose pride and joy (a Ford Fiesta) cost him just £700, but whose annual insurance premium is over £2,000. Suppliers are raising their prices and (in some cases) withdrawing from the market altogether for this “risky” group of customers. A great way for a lesson to combine supply and demand curves with some citizenship advice too One aspect of the rising cost of car insurance is an increase in the number of uninsured drivers on the roads - higher premiums have made insurance unaffordable for many and some choose to take the risk of failing to insure their car. But accidents involving uninsured drivers has the follow-on effect of increasing the premiums that law-abiding motorists end up paying - a negative externality.

Jim Riley

Jim co-founded tutor2u alongside his twin brother Geoff! Jim is a well-known Business writer and presenter as well as being one of the UK's leading educational technology entrepreneurs.

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