Why the New Market for New Passenger Cars Generally Undervalues Fuel Economy
AbstractPassenger vehicles are a major source of greenhouse gas emissions and prodigious consumers of petroleum, making their fuel economy an important focus of energy policy. Whether or not the market for fuel economy functions efficiently has important implications for both the type and intensity of energy and environmental policies for motor vehicles. There are undoubtedly imperfections in the market for fuel economy but their consequences are difficult to quantify. The evidence from econometric studies, mostly from the US, is reviewed and shown to vary widely, providing evidence for both significant under- and over-valuation and everything in between. Market research is scarce, but indicates that the rational economic model, in general, does not appear to be used by consumers when comparing the fuel economy of new vehicles. Some recent studies have stressed the role of uncertainty and risk or loss aversion in consumers’ decision making. Uncertainty plus loss aversion appears to be a reasonable theoretical model of consumers’ evaluation of fuel economy, with profound implications for manufacturers’ technology and design decisions. The theory implies that markets will substantially undervalue fuel economy relative to its expected present value. It also has potentially important implications for welfare analysis of alternative policy instruments.
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Bibliographic InfoPaper provided by OECD Publishing in its series OECD/ITF Joint Transport Research Centre Discussion Papers with number 2010/6.
Date of creation: Jan 2010
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-11-27 (All new papers)
- NEP-ENE-2010-11-27 (Energy Economics)
- NEP-ENV-2010-11-27 (Environmental Economics)
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Markets under-value fuel economy for new cars
by Economic Logician in Economic Logic on 2011-01-04 15:21:00
- Maksim Belenkiy & Stefan Osborne, 2012. "The Effect of Changes in World Crude Oil Prices on U.S. Automobile Exports," International Journal of Energy Economics and Policy, Econjournals, vol. 2(3), pages 147-158.
- Aileen Lam, 2013. "Projections of future emissions and energy use from passenger cars as a result of policies in the EU with a dynamic model of technological change," 4CMR Working Paper Series 005, University of Cambridge, Department of Land Economy, Cambridge Centre for Climate Change Mitigation Research.
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