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Consumer Valuation of Fuel Costs and the Effectiveness of Tax Policy - Evidence from the European Car Market

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  • Grigolon, Laura
  • Reynaert, Mathias
  • Verboven, Frank

Abstract

To what extent do car buyers undervalue future fuel costs, and what does this imply for the effectiveness and welfare impact of alternative tax policies' To address both questions, we show it is crucial to account for consumer heterogeneity in mileage and other dimensions. We use detailed product-level data for a long panel of European countries, and exploit variation in fuel costs by engine type. Although we find there is modest undervaluation of fuel costs, fuel taxes are still more effective in reducing fuel usage than product taxes based on fuel economy. Importantly, fuel taxes also perform better in terms of total welfare even when usage demand is held completely fixed. The reason is that fuel taxes better target the right consumers, those with a high mileage, to purchase more fuel efficient cars.

Suggested Citation

  • Grigolon, Laura & Reynaert, Mathias & Verboven, Frank, 2017. "Consumer Valuation of Fuel Costs and the Effectiveness of Tax Policy - Evidence from the European Car Market," TSE Working Papers 17-836, Toulouse School of Economics (TSE).
  • Handle: RePEc:tse:wpaper:31958
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    Cited by:

    1. Matsushima, Hiroshi & Khanna, Madhu, 2018. "Revealing Auto-Manufacturers’ Implicit Pricing Strategy under the Reformed CAFE Standard: A Reduced Form Approach," 2018 Annual Meeting, August 5-7, Washington, D.C. 274421, Agricultural and Applied Economics Association.
    2. Hunt Allcott & Christopher Knittel, 2017. "Are Consumers Poorly Informed about Fuel Economy? Evidence from Two Experiments," NBER Working Papers 23076, National Bureau of Economic Research, Inc.
    3. repec:eee:juecon:v:109:y:2019:i:c:p:27-40 is not listed on IDEAS
    4. Adenbaum, Jacob & Copeland, Adam & Stevens, John J., 2015. "Do long-haul truckers undervalue future fuel savings?," Finance and Economics Discussion Series 2015-118, Board of Governors of the Federal Reserve System (US).
    5. Bruno De Borger & Stef Proost, 2015. " Tax and regulatory policies for European Transport – getting there, but in the slow lane," Working Papers Department of Economics 497597, KU Leuven, Faculty of Economics and Business, Department of Economics.
    6. Reynaert, Mathias & Sallee, James M., 2016. "Who Benefits When Firms Game Corrective Policies?," TSE Working Papers 16-739, Toulouse School of Economics (TSE), revised Feb 2018.
    7. Nicolle, Ambre, 2016. "Are consumers myopic? Evidence from handset and mobile services choices," 27th European Regional ITS Conference, Cambridge (UK) 2016 148693, International Telecommunications Society (ITS).
    8. Sahari, Anna, 2017. "Electricity Prices and Consumers' Long-Term Technology Choices: Evidence from Heating Investments," Working Papers 95, VATT Institute for Economic Research.
    9. Donna, Javier D., 2018. "Measuring Long-Run Price Elasticities in Urban Travel Demand," MPRA Paper 90059, University Library of Munich, Germany.
    10. Kenneth Gillingham & Sebastien Houde & Arthur A. van Benthem, 2019. "Consumer Myopia in Vehicle Purchases: Evidence from a Natural Experiment," CER-ETH Economics working paper series 19/321, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    11. Pavan, Giulia, 2017. "Green Car Adoption and the Supply of Alternative Fuels," TSE Working Papers 17-875, Toulouse School of Economics (TSE).
    12. Grigolon, Laura & Leheyda, Nina & Verboven, Frank, 2016. "Scrapping subsidies during the financial crisis — Evidence from Europe," International Journal of Industrial Organization, Elsevier, vol. 44(C), pages 41-59.
    13. Mark R. Jacobsen & Christopher R. Knittel & James M. Sallee & Arthur A. van Benthem, 2016. "Sufficient Statistics for Imperfect Externality-Correcting Policies," NBER Working Papers 22063, National Bureau of Economic Research, Inc.
    14. Soren T. Anderson & James M. Sallee, 2016. "Designing Policies to Make Cars Greener: A Review of the Literature," NBER Working Papers 22242, National Bureau of Economic Research, Inc.
    15. Mulalic, Ismir & Rouwendal, Jan, 2015. "The impact of fixed and variable cost on automobile demand: Evidence from Denmark," Economics of Transportation, Elsevier, vol. 4(4), pages 227-240.
    16. REYNAERT, Mathias, 2014. "Abatement strategies and the cost of environmental regulation: Emission standards on the European car market," Working Papers 2014025, University of Antwerp, Faculty of Business and Economics.
    17. repec:eee:eneeco:v:74:y:2018:i:c:p:76-96 is not listed on IDEAS
    18. Gillingham, Kenneth & Munk-Nielsen, Anders, 2019. "A tale of two tails: Commuting and the fuel price response in driving," Journal of Urban Economics, Elsevier, vol. 109(C), pages 27-40.
    19. Arlan Brucal & Michael Roberts, 2016. "Do Energy Efficiency Standards Hurt Consumers? Evidence from Household Appliance Sales," Working Papers 201625, University of Hawaii at Manoa, Department of Economics.
    20. Davide Cerruti & Claudio Daminato & Massimo Filippini, 2019. "The Impact of Policy Awareness: Evidence from Vehicle Choices Response to Fiscal Incentives," CER-ETH Economics working paper series 19/316, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    21. D’Haultfœuille, Xavier & Durrmeyer, Isis & Février, Philippe, 2016. "Disentangling sources of vehicle emissions reduction in France: 2003–2008," International Journal of Industrial Organization, Elsevier, vol. 47(C), pages 186-229.
    22. Miravete, Eugenio J & Moral Rincón, Maria J & Thurk, Jeff, 2015. "Innovation, Emissions Policy, and Competitive Advantage in the Diffusion of European Diesel Automobiles," CEPR Discussion Papers 10783, C.E.P.R. Discussion Papers.
    23. Mathias Reynaert & James M. Sallee, 2016. "Corrective Policy and Goodhart's Law: The Case of Carbon Emissions from Automobiles," NBER Working Papers 22911, National Bureau of Economic Research, Inc.
    24. Sallee, James M. & West, Sarah E. & Fan, Wei, 2016. "Do consumers recognize the value of fuel economy? Evidence from used car prices and gasoline price fluctuations," Journal of Public Economics, Elsevier, vol. 135(C), pages 61-73.
    25. Davide Cerruti & Anna Alberini & Joshua Linn, 2017. "Charging Drivers by the Pound: The Effects of the UK Vehicle Tax System," CER-ETH Economics working paper series 17/271, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.

    More about this item

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment; Related Parts and Equipment

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