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Yes, We Can Be This Dumb

The upcoming rewrite of CAFE (fuel economy regulations) will actually incent carmakers to produce larger, heavier, vehicles than they do today. The Truth About Cars has the scoop here.

For those who think that higher gas prices will force people to change their behavior without us having to unwind existing subsidies towards suburban sprawl and automobile use - remember to factor in the political imperative to protect GM, Ford, and Chrysler. If anything, we're likely to see even MORE counterproductive rules like these as gas gets more and more expensive. I wouldn't bet against an actual gasoline subsidy (or elimination of the far-too-low-to-pay-the-road-bills gas tax, at least) in the next few years.


This entry was posted in the following categories: Economics


The whole premise of CAFE is stupid. We could get the same reduction in fuel use through gas taxes and tolls, but much more efficiently. Quantity demanded responds to price, even for gasoline. And isn't it the reduction in fuel use that is important? CAFE is inefficient because it makes drivers pay a fixed cost for extra fuel economy when the driver's cost-benefit decisions ought to be made at the margin. CAFE still leads to "too much" driving, in other words.

CAFE is politically palatable only because it doesn't show up on the books as a tax. The Congressional Research Service has said as much (see p. 15 of http://www.house.gov/delahunt/RL33413.pdf). The kind of gamesmanship going on now between Detroit, NHTSA and Congress is a hazard of any top-down regulation scheme. There are economic rents to distribute or protect.

PS, to those who think gas taxes are regressive, CAFE standards are also regressive, since they force everyone to pay for extra fuel economy whether they want it or not, mainly those who don't drive very much.

And to make one other pretty obvious point I should have made in the last comment:

By improving average fuel economy, CAFE reduces the average driver's cost of driving the next mile. But that will cause the average driver to drive more -- maybe a lot more. E.g., the driver's marginal cost per mile is now $0.10, but would have been $0.20 with CAFE. So you can't just say a 10% average improvement in fuel economy means 10% less gasoline used. Depending on demand curve, lowering marginal cost could actually increase total consumption of gasoline.

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