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Gasoline Prices, Fuel Economy Efficiency And Automobile Replacement Dynamics

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  • Yizao Liu

    ()
    (University of Connecticut)

Abstract

This paper evaluates how gasoline prices influences the average fuel econ- omy of the existing automobile fleet. Higher fuel price affects fleet composi- tion in two ways: immediate purchase decisions of new, more fuel efficient, vehicles and scrappage of old fuel inefficient gas-guzzlers. Gasoline costs ac- count for 65% of the total operating costs of driving an automobile. Rational forward-looking consumers will account for both current and expected future gasoline prices to decide not only what vehicle to purchase but also when to purchase it. Scrappage of old cars will also be driven by the same considera- tions, plus their increasing maintenance cost, and improved features of new models. In order to account for all these dynamic effects on the composition of the automobile fleet I specify and estimate a structural dynamic model of consumer demand for new and used vehicles as in Gowrisankaran and Rysman (2009). However, my model not only predicts the market shares of each vehicle sold in every period but also the survival probability for each model-vintage for each sample period. I estimate the model using a rich dataset combining vehicle registration and current fleet composition of sev- eral cities between 2003 and 2009 that include vehicle characteristics, price, gasoline price, and demographics for all market-years. Parameters are esti- mated by matching the predicted market shares and survival rates of every model-vintage with the corresponding empirical moments over the time span of the sample. Parameter estimates are then used to evaluate substantial fuel tax increases that have never been implemented before for being considered controversial and/or politically risky. Preliminary results for the Houston and San Francisco markets indicate that a permanent increase of gasoline price to $4 per gallon has stronger (and stable) long term effects than just doubling the current gasoline tax, which leads only to a temporary increase of the average fuel economy of the automobile fleet.

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File URL: http://www.zwickcenter.uconn.edu/documents/wp2.pdf
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Bibliographic Info

Paper provided by University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy in its series Working Papers with number 02.

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Length: 40 pages
Date of creation: Nov 2010
Date of revision:
Handle: RePEc:zwi:wpaper:02

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Related research

Keywords: Dynamic Demand Estimation; Gasoline Tax; Automobile Fuel Efficiency;

References

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  1. Lucas W. Davis & Lutz Kilian, 2011. "Estimating the effect of a gasoline tax on carbon emissions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(7), pages 1187-1214, November.
  2. Shanjun Li & Roger von Haefen & Christopher Timmins, 2008. "How Do Gasoline Prices Affect Fleet Fuel Economy?," NBER Working Papers 14450, National Bureau of Economic Research, Inc.
  3. Ashley Langer & Nathan H. Miller, 2008. "Automobile Prices, Gasoline Prices, and Consumer Demand for Fuel Economy," EAG Discussions Papers 200811, Department of Justice, Antitrust Division.
  4. Christopher Knittel & Daniel Sperling, 2006. "Evidence of a Shift in the Short-Run Price Elasticity of Gasoline Demand," Working Papers 625, University of California, Davis, Department of Economics.
  5. Jonathan Haughton & Soumodip Sarkar, 1996. "Gasoline Tax as a Corrective Tax: Estimates for the United States, 1970-1991," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 103-126.
  6. Ian W. H. Parry & Kenneth A. Small, 2005. "Does Britain or the United States Have the Right Gasoline Tax?," American Economic Review, American Economic Association, vol. 95(4), pages 1276-1289, September.
  7. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
  8. Bento, Antonio M. & Goulder, Lawrence H. & Jacobsen, Mark R. & von Haefen, Roger H., 2007. "Distributional and Efficiency Impacts of Increased U.S. Gasoline Taxes," Working Papers 127021, Cornell University, Department of Applied Economics and Management.
  9. Alan Greenspan & Darrel Cohen, 1999. "Motor Vehicle Stocks, Scrappage, And Sales," The Review of Economics and Statistics, MIT Press, vol. 81(3), pages 369-383, August.
  10. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
  11. Susanna Esteban & Matthew Shum, 2007. "Durable-goods oligopoly with secondary markets: the case of automobiles," RAND Journal of Economics, RAND Corporation, vol. 38(2), pages 332-354, 06.
  12. Sivak, Michael & Tsimhoni, Omer, 2009. "Fuel efficiency of vehicles on US roads: 1923-2006," Energy Policy, Elsevier, vol. 37(8), pages 3168-3170, August.
  13. Dubin, Jeffrey A & McFadden, Daniel L, 1984. "An Econometric Analysis of Residential Electric Appliance Holdings and Consumption," Econometrica, Econometric Society, vol. 52(2), pages 345-62, March.
  14. Austin, David & Dinan, Terry, 2005. "Clearing the air: The costs and consequences of higher CAFE standards and increased gasoline taxes," Journal of Environmental Economics and Management, Elsevier, vol. 50(3), pages 562-582, November.
  15. Andrew N. Kleit, 2004. "Impacts of Long-Range Increases in the Fuel Economy (CAFE) Standard," Economic Inquiry, Western Economic Association International, vol. 42(2), pages 279-294, April.
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