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Gasoline Prices, Fuel Economy, and the Energy Paradox

Author

Listed:
  • Hunt Allcott

    (New York University and NBER)

  • Nathan Wozny

    (NBER)

Abstract

Policymakers often assert that consumers undervalue future gasoline costs when they buy automobiles. We test this by measuring whether relative prices of vehicles with different fuel economy ratings fully adjust to variation in gasoline prices. Vehicle prices move as if consumers are indifferent between $1.00 in discounted future gas cost and $0.76 in vehicle purchase price. We show how corrections for endogenous market shares and utilization, measurement error, and different gasoline price forecasts affect the results. We also provide unique evidence of sticky information: vehicle markets respond to changes in gasoline prices with up to a six-month delay.

Suggested Citation

  • Hunt Allcott & Nathan Wozny, 2014. "Gasoline Prices, Fuel Economy, and the Energy Paradox," The Review of Economics and Statistics, MIT Press, vol. 96(5), pages 779-795, December.
    • Handle: RePEc:tpr:restat:v:96:y:2014:i:5:p:779-795
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    JEL classification:

    • R4 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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