Assessing Consumer Valuation of Fuel Economy in Auto Markets

Abstract

The need for and efficacy of CAFE standards for auto-makers depends largely on whether consumers properly value fuel efficiency in their vehicle purchases. In this paper we use data describing heterogeneous driving behavior and a hedonic model of new car prices to evaluate how well consumers value incremental changes in fuel economy in terms of avoided fuel costs. Results indicate car and SUV buyers mostly underpay for initial fuel economy investment while truck and van buyers dramatically overpay for fuel economy relative to avoided cost – implying that CAFE standards may be most necessary in car and SUV markets.