IDEAS home Printed from https://ideas.repec.org/a/eee/pubeco/v96y2012i11p981-999.html
   My bibliography  Save this article

Car notches: Strategic automaker responses to fuel economy policy

Author

Listed:
  • Sallee, James M.
  • Slemrod, Joel

Abstract

Notches – where marginal changes in behavior lead to discrete changes in a tax or subsidy – figure prominently in many policies. In this paper, we analyze notches in fuel economy policies, which aim to reduce negative externalities associated with fuel consumption. We provide evidence that automakers respond to notches in the Gas Guzzler Tax and mandatory fuel economy labels by precisely manipulating fuel economy ratings so as to just qualify for more favorable treatment. We then describe the welfare consequences of this behavior and derive a welfare summary statistic applicable to many contexts. In brief, notches are an inefficient substitute for smooth policies because they create marginal incentives that vary among decision makers and induce some individual actions that have negative net social benefits.

Suggested Citation

  • Sallee, James M. & Slemrod, Joel, 2012. "Car notches: Strategic automaker responses to fuel economy policy," Journal of Public Economics, Elsevier, vol. 96(11), pages 981-999.
    • Handle: RePEc:eee:pubeco:v:96:y:2012:i:11:p:981-999
    DOI: 10.1016/j.jpubeco.2012.06.005
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0047272712000680
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jpubeco.2012.06.005?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Soren T. Anderson & James M. Sallee, 2011. "Using Loopholes to Reveal the Marginal Cost of Regulation: The Case of Fuel-Economy Standards," American Economic Review, American Economic Association, vol. 101(4), pages 1375-1409, June.
    2. de Bovenberg, A Lans & Mooij, Ruud A, 1994. "Environmental Levies and Distortionary Taxation," American Economic Review, American Economic Association, vol. 84(4), pages 1085-1089, September.
    3. G. M.P. Swann, 2009. "The Economics of Innovation," Books, Edward Elgar Publishing, number 13211.
    4. James M. Sallee, 2014. "Rational Inattention and Energy Efficiency," Journal of Law and Economics, University of Chicago Press, vol. 57(3), pages 781-820.
    5. Blinder, Alan S & Rosen, Harvey S, 1985. "Notches," American Economic Review, American Economic Association, vol. 75(4), pages 736-747, September.
    6. Meghan R. Busse & Christopher R. Knittel & Florian Zettelmeyer, 2009. "Pain at the Pump: The Differential Effect of Gasoline Prices on New and Used Automobile Markets," NBER Working Papers 15590, National Bureau of Economic Research, Inc.
    7. Soren T. Anderson & Ian W. H. Parry & James M. Sallee & Carolyn Fischer, 2011. "Automobile Fuel Economy Standards: Impacts, Efficiency, and Alternatives," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 5(1), pages 89-108, Winter.
    8. Carolyn Fischer & Winston Harrington & Ian W.H. Parry, 2007. "Should Automobile Fuel Economy Standards be Tightened?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 1-30.
    9. Blundell, Richard, 2000. "Work Incentives and 'In-Work' Benefit Reforms: A Review," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 16(1), pages 27-44, Spring.
    10. Turrentine, Thomas S. & Kurani, Kenneth S., 2007. "Car buyers and fuel economy?," Energy Policy, Elsevier, vol. 35(2), pages 1213-1223, February.
    11. Emmanuel Saez, 2010. "Do Taxpayers Bunch at Kink Points?," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 180-212, August.
    12. Arnold Harberger, 1995. "Tax Lore for Budding Reformers," NBER Chapters, in: Reform, Recovery, and Growth: Latin America and the Middle East, pages 291-310, National Bureau of Economic Research, Inc.
    13. Ian W. H. Parry & Margaret Walls & Winston Harrington, 2007. "Automobile Externalities and Policies," Journal of Economic Literature, American Economic Association, vol. 45(2), pages 373-399, June.
    14. Knittel, Christopher R., 2009. "Automobiles on Steroids: Product Attribute Trade-O�s and Technological Progress in the Automobile Sector," Institute of Transportation Studies, Working Paper Series qt2nt1r1x1, Institute of Transportation Studies, UC Davis.
    15. Helfand, Gloria & Wolverton, Ann, 2011. "Evaluating the Consumer Response to Fuel Economy: A Review of the Literature," International Review of Environmental and Resource Economics, now publishers, vol. 5(2), pages 103-146, May.
    16. Raj Chetty & John N. Friedman & Tore Olsen & Luigi Pistaferri, 2011. "Adjustment Costs, Firm Responses, and Micro vs. Macro Labor Supply Elasticities: Evidence from Danish Tax Records," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(2), pages 749-804.
    17. Dubin, Jeffrey A & McFadden, Daniel L, 1984. "An Econometric Analysis of Residential Electric Appliance Holdings and Consumption," Econometrica, Econometric Society, vol. 52(2), pages 345-362, March.
    18. James M. Sallee, 2011. "The Taxation of Fuel Economy," Tax Policy and the Economy, University of Chicago Press, vol. 25(1), pages 1-38.
    19. Rudiger Dornbusch & Sebastian Edwards, 1995. "Reform, Recovery, and Growth: Latin America and the Middle East," NBER Books, National Bureau of Economic Research, Inc, number dorn95-1.
    20. Christopher R. Knittel, 2011. "Automobiles on Steroids: Product Attribute Trade-Offs and Technological Progress in the Automobile Sector," American Economic Review, American Economic Association, vol. 101(7), pages 3368-3399, December.
    21. Dreyfus, Mark K & Viscusi, W Kip, 1995. "Rates of Time Preference and Consumer Valuations of Automobile Safety and Fuel Efficiency," Journal of Law and Economics, University of Chicago Press, vol. 38(1), pages 79-105, April.
    22. Thomas Klier & Joshua Linn, 2012. "New‐vehicle characteristics and the cost of the Corporate Average Fuel Economy standard," RAND Journal of Economics, RAND Corporation, vol. 43(1), pages 186-213, March.
    23. Turrentine, Tom & Kurani, Kenneth S, 2007. "Car buyers and fuel economy?," Institute of Transportation Studies, Working Paper Series qt56x845v4, Institute of Transportation Studies, UC Davis.
    24. James A. Kahn, 1986. "Gasoline Prices and the Used Automobile Market: A Rational Expectations Asset Price Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(2), pages 323-339.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. James M. Sallee, 2011. "The Taxation of Fuel Economy," Tax Policy and the Economy, University of Chicago Press, vol. 25(1), pages 1-38.
    2. Sallee, James M. & West, Sarah E. & Fan, Wei, 2016. "Do consumers recognize the value of fuel economy? Evidence from used car prices and gasoline price fluctuations," Journal of Public Economics, Elsevier, vol. 135(C), pages 61-73.
    3. Soren T. Anderson & Ian W. H. Parry & James M. Sallee & Carolyn Fischer, 2011. "Automobile Fuel Economy Standards: Impacts, Efficiency, and Alternatives," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 5(1), pages 89-108, Winter.
    4. James M. Sallee, 2014. "Rational Inattention and Energy Efficiency," Journal of Law and Economics, University of Chicago Press, vol. 57(3), pages 781-820.
    5. Anderson, Soren T. & Kellogg, Ryan & Sallee, James M., 2013. "What do consumers believe about future gasoline prices?," Journal of Environmental Economics and Management, Elsevier, vol. 66(3), pages 383-403.
    6. Huse, Cristian, 2014. "Fast and Furious (and Dirty): How Asymmetric Regulation May Hinder Environmental Policy," MPRA Paper 48909, University Library of Munich, Germany.
    7. Soren T. Anderson & James M. Sallee, 2016. "Designing Policies to Make Cars Greener: A Review of the Literature," NBER Working Papers 22242, National Bureau of Economic Research, Inc.
    8. Wu, Jingwen & Zhang, Tong & Liao, Hua, 2024. "Fuel economy standards: Regulatory loopholes and firms’ heterogeneous responses," Journal of Environmental Economics and Management, Elsevier, vol. 123(C).
    9. Shanjun Li & Joshua Linn & Erich Muehlegger, 2014. "Gasoline Taxes and Consumer Behavior," American Economic Journal: Economic Policy, American Economic Association, vol. 6(4), pages 302-342, November.
    10. Whistance, Jarrett & Thompson, Wyatt, 2014. "The role of CAFE standards and alternative-fuel vehicle production credits in U.S. biofuels markets," Energy Policy, Elsevier, vol. 74(C), pages 147-157.
    11. Greene, David L. & Greenwald, Judith M. & Ciez, Rebecca E., 2020. "U.S. fuel economy and greenhouse gas standards: What have they achieved and what have we learned?," Energy Policy, Elsevier, vol. 146(C).
    12. Hunt Allcott & Nathan Wozny, 2014. "Gasoline Prices, Fuel Economy, and the Energy Paradox," The Review of Economics and Statistics, MIT Press, vol. 96(5), pages 779-795, December.
    13. Koichiro Ito & James M. Sallee, 2018. "The Economics of Attribute-Based Regulation: Theory and Evidence from Fuel Economy Standards," The Review of Economics and Statistics, MIT Press, vol. 100(2), pages 319-336, May.
    14. Anna Alberini & Markus Bareit & Massimo Filippini, 2016. "What is the Effect of Fuel Efficiency Information on Car Prices? Evidence from Switzerland," The Energy Journal, , vol. 37(3), pages 315-342, July.
    15. Weber, Sylvain, 2019. "Consumers' preferences on the Swiss car market: A revealed preference approach," Transport Policy, Elsevier, vol. 75(C), pages 109-118.
    16. Alberini, Anna & Di Cosmo, Valeria & Bigano, Andrea, 2019. "How are fuel efficient cars priced? Evidence from eight EU countries," Energy Policy, Elsevier, vol. 134(C).
    17. Todd D. Gerarden & Richard G. Newell & Robert N. Stavins, 2017. "Assessing the Energy-Efficiency Gap," Journal of Economic Literature, American Economic Association, vol. 55(4), pages 1486-1525, December.
    18. McConnell, Virginia, 2013. "The New CAFE Standards: Are They Enough on Their Own?," RFF Working Paper Series dp-13-14, Resources for the Future.
    19. Rik L. Rozendaal & Herman R. J. Vollebergh, 2021. "Policy-Induced Innovation in Clean Technologies: Evidence from the Car Market," CESifo Working Paper Series 9422, CESifo.
    20. Mathias Reynaert, 2021. "Abatement Strategies and the Cost of Environmental Regulation: Emission Standards on the European Car Market," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(1), pages 454-488.

    More about this item

    Keywords

    Notches; Fuel economy; Externalities; Corrective taxation;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:pubeco:v:96:y:2012:i:11:p:981-999. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505578 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.