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Car notches: Strategic automaker responses to fuel economy policy

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  • Sallee, James M.
  • Slemrod, Joel

Abstract

Notches – where marginal changes in behavior lead to discrete changes in a tax or subsidy – figure prominently in many policies. In this paper, we analyze notches in fuel economy policies, which aim to reduce negative externalities associated with fuel consumption. We provide evidence that automakers respond to notches in the Gas Guzzler Tax and mandatory fuel economy labels by precisely manipulating fuel economy ratings so as to just qualify for more favorable treatment. We then describe the welfare consequences of this behavior and derive a welfare summary statistic applicable to many contexts. In brief, notches are an inefficient substitute for smooth policies because they create marginal incentives that vary among decision makers and induce some individual actions that have negative net social benefits.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 96 (2012)
Issue (Month): 11 ()
Pages: 981-999

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Handle: RePEc:eee:pubeco:v:96:y:2012:i:11:p:981-999

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Web page: http://www.elsevier.com/locate/inca/505578

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Keywords: Notches; Fuel economy; Externalities; Corrective taxation;

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References

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  1. James M. Sallee, 2010. "The Taxation of Fuel Economy," NBER Chapters, in: Tax Policy and the Economy, Volume 25, pages 1-37 National Bureau of Economic Research, Inc.
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  4. Christopher R. Knittel, 2009. "Automobiles on Steroids: Product Attribute Trade-Offs and Technological Progress in the Automobile Sector," NBER Working Papers 15162, National Bureau of Economic Research, Inc.
  5. Parry, Ian W.H. & Walls, Margaret & Harrington, Winston, 2007. "Automobile Externalities and Policies," Discussion Papers dp-06-26, Resources For the Future.
  6. Kahn, James A, 1986. "Gasoline Prices and the Used Automobile Market: A Rational Expectations Asset Price Approach," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 323-39, May.
  7. Anderson, Soren & Parry, Ian & Sallee, James M. & Fischer, Carolyn, 2010. "Automobile Fuel Economy Standards: Impacts, Efficiency, and Alternatives," Discussion Papers dp-10-45, Resources For the Future.
  8. Raj Chetty & John N. Friedman & Tore Olsen & Luigi Pistaferri, 2009. "Adjustment Costs, Firm Responses, and Micro vs. Macro Labor Supply Elasticities: Evidence from Danish Tax Records," NBER Working Papers 15617, National Bureau of Economic Research, Inc.
  9. 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.
  10. Arnold Harberger, 1995. "Tax Lore for Budding Reformers," NBER Chapters, in: Reform, Recovery, and Growth: Latin America and the Middle East, pages 291-310 National Bureau of Economic Research, Inc.
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  12. Emmanuel Saez, 1999. "Do Taxpayers Bunch at Kink Points?," NBER Working Papers 7366, National Bureau of Economic Research, Inc.
  13. de Bovenberg, A Lans & Mooij, Ruud A, 1994. "Environmental Levies and Distortionary Taxation," American Economic Review, American Economic Association, vol. 84(4), pages 1085-89, September.
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  15. Blundell, Richard, 2000. "Work Incentives and 'In-Work' Benefit Reforms: A Review," Oxford Review of Economic Policy, Oxford University Press, vol. 16(1), pages 27-44, Spring.
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Cited by:
  1. X. D'Haultfoeuille & P. Givord & X. Boutin, 2011. "The Environmental Effect of Green Taxation: the Case of the French "Bonus/Malus"," Documents de Travail de la DESE - Working Papers of the DESE g2011-14, Institut National de la Statistique et des Etudes Economiques, DESE.
  2. Sara LaLumia & James M. Salle & Nicolas Turner, 2013. "New Evidence on Taxes and the Timing of Birth," Department of Economics Working Papers 2013-06, Department of Economics, Williams College.
  3. Kenneth Small, 2011. "Energy Policies for Passenger Motor Vehicles," Working Papers 101108, University of California-Irvine, Department of Economics.
  4. James M. Sallee, 2013. "Rational Inattention and Energy Efficiency," NBER Working Papers 19545, National Bureau of Economic Research, Inc.
  5. Boomhower, Judson & Davis, Lucas W., 2014. "A credible approach for measuring inframarginal participation in energy efficiency programs," Journal of Public Economics, Elsevier, vol. 113(C), pages 67-79.
  6. Adriaan Perrels & Tarja Tuovinen, 2012. "The Effectiveness of Differentiation of the Finnish Car Purchase Tax according to Carbon Dioxide Emission Performance," Research Reports 168, Government Institute for Economic Research Finland (VATT).
  7. Thomas H. Klier & Joshua Linn, 2012. "Using vehicle taxes to reduce carbon dioxide emissions rates of new passenger vehicles: evidence from France, Germany, and Sweden," Working Paper Series WP-2012-09, Federal Reserve Bank of Chicago.
  8. Ian W.H. Parry & John Norregaard & Dirk Heine, 2012. "Environmental Tax Reform," IMF Working Papers 12/180, International Monetary Fund.

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