Using Loopholes to Reveal the Marginal Cost of Regulation: The Case of Fuel-Economy Standards
AbstractEstimating the cost of regulation is difficult. Firms sometimes reveal costs indirectly, however, when they exploit loopholes to avoid regulation. We apply this insight to fuel economy standards for automobiles. These standards feature a loophole that gives automakers a bonus when they equip a vehicle with flexible-fuel capacity. Profitmaximizing automakers will equate the marginal cost of compliance using the loophole, which is observable, with the unobservable costs of strategies that genuinely improve fuel economy. Based on this insight, we estimate that tightening standards by one mile per gallon would have cost automakers just $9-$27 per vehicle in recent years. (JEL L51, L62, Q48)
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Bibliographic InfoArticle provided by American Economic Association in its journal American Economic Review.
Volume (Year): 101 (2011)
Issue (Month): 4 (June)
Other versions of this item:
- Soren T. Anderson & James M. Sallee, 2009. "Using Loopholes to Reveal the Marginal Cost of Regulation: The Case of Fuel-Economy Standards," Working Papers 0901, Harris School of Public Policy Studies, University of Chicago.
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment
- Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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