The Economics of CAFE Reconsidered: A Response to CAFE Critics and A Case for Fuel Economy Standards
AbstractEconomists have long criticized the Corporate Average Fuel Economy (CAFE) standards as distortionary and costly ways to conserve fuel. Two recent analyses from the AEI-Brookings Joint Center argue that the costs of increasing the CAFE standards more than offset the modest conservation benefits.David Gerard and Lester Lavereview these studies and find that the cost estimates reflect pervasive problems with U.S. transportation policies. Specifically, the analyses estimate that externalities associated with safety, congestion, air pollution, greenhouse gas emissions, and national security range from eight to more than 10.4 cents per mile or more. Internalizing these existing distortions via a gasoline tax would more than double U.S. gasoline prices, which would reduce distortions in the product market and sharply reduce driving externalities. Thus,the authorsconclude that indictments of the CAFE program are actually arguments for sharp increases in gasoline taxes and other transportation policy reforms. Next,Gerard and Laverevisit the economic logic of minimum government fuel economy standards.They show that even rational, well-informed consumers will choose vehicles with fuel economies that are inconsistent with social preferences for fuel conservation. Therefore, there is a case for the CAFE standards even if existing problems with the transportation system are addressed.The authorsconclude that the CAFE critics have made a good case for increasing the gasoline tax $1.50 per gallon or more, but that they have not made a compelling argument against the CAFE program itself.
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Date of creation: Oct 2003
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