Full Title: Do Consumers Recognize the Value of Fuel Economy?
Author(s): James M. Sallee and Sarah West
Publisher(s): Cato Institute
Publication Date: 11/2015

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Description (excerpt):

One of the great questions facing policymakers in the 21st century is whether and how to mitigate greenhouse gas emissions so as to limit climate change. Automobiles are a critical part of this policy problem—in the United States, personal transportation accounts for 28 percent of greenhouse gas emissions. Gasoline consumption maps neatly into greenhouse gas emissions. This means that a tax on emissions (in the form of a gasoline tax) is feasible. Such a tax can fully restore market efficiency, and alternative policies, such as fuel economy standards, will have inferior welfare properties provided that the environmental externality is the only market failure leading to inefficiencies.

Many have argued, however, that another market failure exists, which is that consumers undervalue energy efficiency in a variety of choice situations, including automobile markets. This hypothesis arises from the observation that engineering estimates of the cost of deploying fuel-saving technologies suggest that privately cost-effective technologies are often not adopted: the “energy paradox.” If markets substantially undervalue energy efficiency, then the dominance of a gasoline tax over regulatory approaches may be broken because alternative policies may be better able to correct for inefficiencies from consumer undervaluation of energy efficiency.