Thursday, June 10, 2010

US households under-estimate gains from fuel efficiency

If you compare the cars sold in Europe and the United States, the US ones are woefully fuel inefficient. And it is striking that even American automakers provide better cars in this respect abroad than at home. Of course, fuel is much more expensive in Europe, so this should not be surprising. But does this difference in fuel efficiency reflect only the price difference?

One clue about this question is given by Hunt Allcott and Jean-Nathan Wozny who use variations in gas prices in the US and look at how this translated in car sales by fuel efficiency. It turns out Americans are only willing to pay $0.61 to reduce gas consumption by $1.00, after controlling for other car characteristics, the expected usage of cars and even how new cars filter through the used car market over time. Are consumers really that dumb? I suspect rather that it is 'uncool' to have an efficient car, something that the data cannot identify. And how do you take care of such an attitude? One way is a paternalistic way, by setting fuel efficiency standards for all cars. Another way would be to tax cars by fuel efficiency, or equivalently tax gas more, in order to get households to increase fuel efficiency to the dollar.

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