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Car notches: Strategic automaker responses to fuel economy policy

  • Sallee, James M.
  • Slemrod, Joel

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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  1. 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.
  2. Christopher R. Knittel, 2009. "Automobiles on Steroids: Product Attribute Trade-Offs and Technological Progress in the Automobile Sector," NBER Working Papers 15162, National Bureau of Economic Research, Inc.
  3. 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.
  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. 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.
  6. 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.
  7. Turrentine, Thomas S. & Kurani, Kenneth S., 2007. "Car buyers and fuel economy?," Energy Policy, Elsevier, vol. 35(2), pages 1213-1223, February.
  8. 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.
  9. Emmanuel Saez, 1999. "Do Taxpayers Bunch at Kink Points?," NBER Working Papers 7366, National Bureau of Economic Research, Inc.
  10. James Sallee, 2010. "The Taxation of Fuel Economy," NBER Working Papers 16466, National Bureau of Economic Research, Inc.
  11. Raj Chetty & John N. Friedman & Tore Olsen & Luigi Pistaferri, 2009. "Adjustment Costs, Firm Responses, and Micro vs. Macro Labor Supply Elasticities: Evidence from Danish Tax Records," NBER Working Papers 15617, National Bureau of Economic Research, Inc.
  12. Parry, Ian W.H. & Walls, Margaret & Harrington, Winston, 2007. "Automobile Externalities and Policies," Discussion Papers dp-06-26, Resources For the Future.
  13. 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.
  14. 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.
  15. James M. Sallee, 2013. "Rational Inattention and Energy Efficiency," NBER Working Papers 19545, National Bureau of Economic Research, Inc.
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