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Why the New Market for New Passenger Cars Generally Undervalues Fuel Economy

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  • David Greene

    (Oak Ridge National Laboratory)

Abstract

Passenger vehicles are a major source of greenhouse gas emissions and prodigious consumers of petroleum, making their fuel economy an important focus of energy policy. Whether or not the market for fuel economy functions efficiently has important implications for both the type and intensity of energy and environmental policies for motor vehicles. There are undoubtedly imperfections in the market for fuel economy but their consequences are difficult to quantify. The evidence from econometric studies, mostly from the US, is reviewed and shown to vary widely, providing evidence for both significant under- and over-valuation and everything in between. Market research is scarce, but indicates that the rational economic model, in general, does not appear to be used by consumers when comparing the fuel economy of new vehicles. Some recent studies have stressed the role of uncertainty and risk or loss aversion in consumers’ decision making. Uncertainty plus loss aversion appears to be a reasonable theoretical model of consumers’ evaluation of fuel economy, with profound implications for manufacturers’ technology and design decisions. The theory implies that markets will substantially undervalue fuel economy relative to its expected present value. It also has potentially important implications for welfare analysis of alternative policy instruments.

Suggested Citation

  • David Greene, 2010. "Why the New Market for New Passenger Cars Generally Undervalues Fuel Economy," OECD/ITF Joint Transport Research Centre Discussion Papers 2010/6, OECD Publishing.
  • Handle: RePEc:oec:itfaaa:2010/6-en
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    File URL: http://dx.doi.org/10.1787/5kmjp68qtm6f-en
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    1. Markets under-value fuel economy for new cars
      by Economic Logician in Economic Logic on 2011-01-04 21:21:00

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    Cited by:

    1. Berggren, Christian & Magnusson, Thomas, 2012. "Reducing automotive emissions—The potentials of combustion engine technologies and the power of policy," Energy Policy, Elsevier, vol. 41(C), pages 636-643.
    2. Aileen Lam, 2013. "Projections of future emissions and energy use from passenger cars as a result of policies in the EU with a dynamic model of technological change," 4CMR Working Paper Series 005, University of Cambridge, Department of Land Economy, Cambridge Centre for Climate Change Mitigation Research.
    3. Adamos Adamou & Sofronis Clerides & Theodoros Zachariadis, 2011. "Designing Carbon Taxation Schemes for Automobiles: A Simulation Exercise for Germany," Working Papers 2011.96, Fondazione Eni Enrico Mattei.
    4. Simmons, Richard A. & Shaver, Gregory M. & Tyner, Wallace E. & Garimella, Suresh V., 2015. "A benefit-cost assessment of new vehicle technologies and fuel economy in the U.S. market," Applied Energy, Elsevier, vol. 157(C), pages 940-952.
    5. Maksim Belenkiy & Stefan Osborne, 2012. "The Effect of Changes in World Crude Oil Prices on U.S. Automobile Exports," International Journal of Energy Economics and Policy, Econjournals, vol. 2(3), pages 147-158.
    6. Kågeson, Per, 2013. "Dieselization in Sweden," Energy Policy, Elsevier, vol. 54(C), pages 42-46.
    7. Heutel, Garth, 2015. "Optimal policy instruments for externality-producing durable goods under present bias," Journal of Environmental Economics and Management, Elsevier, vol. 72(C), pages 54-70.
    8. Hackbarth, André & Madlener, Reinhard, 2016. "Willingness-to-pay for alternative fuel vehicle characteristics: A stated choice study for Germany," Transportation Research Part A: Policy and Practice, Elsevier, vol. 85(C), pages 89-111.
    9. Bonilla, David & Schmitz, Klaus E. & Akisawa, Atsushi, 2012. "Demand for mini cars and large cars; decay effects, and gasoline demand in Japan," Energy Policy, Elsevier, vol. 50(C), pages 217-227.
    10. Voltes-Dorta, Augusto & Perdiguero, Jordi & Jiménez, Juan Luis, 2013. "Are car manufacturers on the way to reduce CO2 emissions?: A DEA approach," Energy Economics, Elsevier, vol. 38(C), pages 77-86.

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