Document Type
Article
Publication Date
2021
Abstract
The Biden administration is currently seeking to bolster the federal government’s role in addressing climate change by reducing greenhouse gas emissions from the transportation sector, which is currently the largest source of these pollutants in the country. Federal fuel economy and vehicle emissions standards will thus be crucial tools in addressing climate change as well as improving the health of millions of Americans who are exposed to toxic tailpipe pollutants.
In addition to reducing pollution, these efforts can also save consumers money at the pump. Economists have long observed that consumers do not always select vehicles that will save them the most money over time, instead purchasing a slightly cheaper car or truck that will cost them more in the long run through greater fuel usage. This phenomenon is known as the “energy efficiency gap” or “energy efficiency paradox.” Certain industry groups, car manufacturers, and economists have argued that the energy efficiency gap can be explained by rational behavior. Under their theories, stronger federal vehicle standards could not produce real, net cost savings for individual Americans.
But as this report demonstrates, there is considerable economic research demonstrating that multiple market failures contribute to or exacerbate the energy efficiency gap in the markets for new passenger cars, SUVs, and pickup trucks, as well as for heavy-duty vehicles like tractor-trailers, motor homes, and buses. Key market failures include loss aversion, information costs and asymmetries, myopia and inattention, positional externalities, manufacturer market power, firstmover disadvantages, split incentives, and network externalities.
Given the plethora of evidence for these market failures, the Biden administration should continue the longstanding practice of incorporating private fuel savings in any evaluation of the costs and benefits of stronger standards for cars and trucks. In doing so, the federal government will not only be improving the health of Americans but keeping money in their pocket.
Recommended Citation
Rothschild, Rachel and Jason Schwartz. "Tune Up: Fixing Market Failures to Cut Fuel Costs and Pollution from Cars and Trucks." Institure for Policy Integrity (2021).
Comments
Copyright © 2021 by the Institute for Policy Integrity. All rights reserved. Reproduced with permission. Work published when author not on Michigan Law faculty and included by author request.