Paper Number: 2009-04

Document Date: 08/2009

Author(s): Gloria Helfand and Ann Wolverton

Subject Area(s): Motor Fuels; Economic Impacts

JEL Classification: Household Behavior and Family Economics: Consumer Economics: Theory; Consumer Economics: Empirical Analysis; Production and Organizations: Firm Behavior: Empirical Analysis; Transportation Economics: Transportation: Demand; Supply; and Congestion; Travel Time; Safety and Accidents; Transportation Noise

Keywords: consumer behavior; vehicle purchase decisions; fuel economy; energy paradox; vehicle choice

Abstract: How consumers evaluate trade-offs between the cost of buying additional fuel economy and the expected fuel savings that result is an important underlying determinant of the overall cost of national fuel economy standards. Models of vehicle choice are a means to predict the change in consumers’ vehicle purchase patterns, as well as the effects of these changes on compliance costs and consumer surplus. This paper surveys the literature on vehicle choice models and finds a wide range in methods and results. A large puzzle raised is whether automakers build into their vehicles as much fuel economy as consumers are willing to purchase. This paper examines possible reasons why there may be a gap between the amount consumers are willing to pay for fuel economy and the amount that automakers provide, though there is insufficient evidence on the relative roles of these various hypotheses. Further research on the role of fuel economy in consumer vehicle purchases is needed to assist in understanding the welfare effects of fuel economy regulation.

This paper is part of the Environmental Economics Working Paper Series.

• Evaluating the Consumer Response to Fuel Economy: A Review of the Literature (PDF)(62 pp, 336 K, 08/2009)