Imperfect Competition, Consumer Behavior, and the Provision of Fuel Efficiency in Light-Duty Vehicles
AbstractThis study explores the role of market power on the cost-effectiveness of policies to address fuel consumption. Market power gives manufacturers an incentive to under- (over-) provide fuel economy in classes whose consumers, on average, value it less (more) than in others. Adding a second market failure in consumer valuation of fuel economy, a policy trade-off emerges. Minimum standards can address distortions from price discrimination but, unlike average standards, do not provide broad-based incentives for improving fuel economy. Increasing fuel prices raises demand for fuel economy but exacerbates undervaluation and incentives for price discrimination. A combination policy may be preferred. For modelers of fuel economy policy, failure to capture consumer heterogeneity in preferences for fuel economy can lead to significant errors in predicting the distribution of effort in complying with regulation, as well as the calculation and distribution of the benefits.
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Bibliographic InfoPaper provided by Resources For the Future in its series Discussion Papers with number dp-10-60.
Date of creation: 01 Dec 2010
Date of revision:
fuel economy; regulation; imperfect competition; price discrimination;
Find related papers by JEL classification:
- D4 - Microeconomics - - Market Structure and Pricing
- L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment
- Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
This paper has been announced in the following NEP Reports:
- NEP-AGR-2011-01-30 (Agricultural Economics)
- NEP-ALL-2011-01-30 (All new papers)
- NEP-COM-2011-01-30 (Industrial Competition)
- NEP-ENE-2011-01-30 (Energy Economics)
- NEP-REG-2011-01-30 (Regulation)
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- Anderson, Soren & Parry, Ian & Sallee, James M. & Fischer, Carolyn, 2010.
"Automobile Fuel Economy Standards: Impacts, Efficiency, and Alternatives,"
dp-10-45, Resources For the Future.
- Soren T. Anderson & Ian W. H. Parry & James M. Sallee & Carolyn Fischer, 2011. "Automobile Fuel Economy Standards: Impacts, Efficiency, and Alternatives," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 5(1), pages 89-108, Winter.
- Soren T. Anderson & Carolyn Fischer & Ian Parry & James M. Sallee, 2010. "Automobile Fuel Economy Standards: Impacts, Efficiency, and Alternatives," NBER Working Papers 16370, National Bureau of Economic Research, Inc.
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