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Car notches: Strategic automaker responses to fuel economy policy

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Author Info

  • 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

Related research

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

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References

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  1. James M. Sallee, 2011. "The Taxation of Fuel Economy," Tax Policy and the Economy, University of Chicago Press, vol. 25(1), pages 1 - 38.
  2. 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.
  3. 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.
  4. 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.
  5. Emmanuel Saez, 2010. "Do Taxpayers Bunch at Kink Points?," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 180-212, August.
  6. Parry, Ian W.H. & Walls, Margaret & Harrington, Winston, 2007. "Automobile Externalities and Policies," Discussion Papers dp-06-26, Resources For the Future.
  7. Thomas H. Klier & Joshua Linn, 2008. "New vehicle characteristics and the cost of the corporate average fuel economy standard," Working Paper Series WP-08-13, Federal Reserve Bank of Chicago.
  8. 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.
  9. Christopher R. Knittel, 2011. "Automobiles on Steroids: Product Attribute Trade-Offs and Technological Progress in the Automobile Sector," American Economic Review, American Economic Association, vol. 101(7), pages 3368-99, December.
  10. Gloria Helfand & Ann Wolverton, 2011. "Evaluating the Consumer Response to Fuel Economy: A Review of the Literature," NCEE Working Paper Series 200904, National Center for Environmental Economics, U.S. Environmental Protection Agency, revised Apr 2011.
  11. Meghan R. Busse & Christopher R. Knittel & Florian Zettelmeyer, 2009. "Pain at the Pump: The Differential Effect of Gasoline Prices on New and Used Automobile Markets," NBER Working Papers 15590, National Bureau of Economic Research, Inc.
  12. 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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Citations

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Cited by:
  1. Sara LaLumia & James M. Sallee & Nicholas Turner, 2013. "New Evidence on Taxes and the Timing of Birth," NBER Working Papers 19283, National Bureau of Economic Research, Inc.
  2. Small, Kenneth A., 2012. "Energy policies for passenger motor vehicles," Transportation Research Part A: Policy and Practice, Elsevier, vol. 46(6), pages 874-889.
  3. 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.
  4. Xavier d'Haultfoeuille & Pauline Givord & Xavier Boutin, 2012. "The environmental Effect of Green Taxation : The case of the french "Bonus/Malus"," Working Papers 2012-13, Centre de Recherche en Economie et Statistique.
  5. Ian W.H. Parry & John Norregaard & Dirk Heine, 2012. "Environmental Tax Reform: Principles from Theory and Practice to Date," IMF Working Papers 12/180, International Monetary Fund.

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