Illinois Sustainable Technology Center - University of Illinois

An Economic Perspective on Fuel Economy Policy

Presented by James Sallee, The Harris School of Public Policy Studies, University of Chicago

April 26, 2011

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Consumers inflict a variety of externalities on others when they drive automobiles, ranging from greenhouse gas emissions to increased congestion. Economic theory offers simple solutions to correct such market failures, namely taxation of fuel and driving. In contrast, actual policies aimed at these social concerns generally focus on fuel economy of new automobiles, not fuel consumption or driving. Targeting fuel economy has important differences from the theoretical ideal and creates various unintended consequences. This talk explores these unintended consequences, with a particular focus on how automakers respond to the details of fuel economy policy in ways that cause inefficiency.

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