Benjamin Leard (Resources for the Future), Joshua Linn (Resources for the Future), Yichen Christy Zhou (Resources for the Future and Clemson University)
The recent literature has shown that tighter passenger vehicle fuel economy standards cause manufacturers to trade vehicle performance for fuel economy. This paper is the first to evaluate the welfare consequences of these changes by estimating consumer valuation of higher fuel economy and foregone performance. Using a unique data set and novel statistical techniques to account for the endogeneity of vehicle attributes, we estimate the welfare cost of foregone performance to be approximately equal to expected fuel savings benefits. Therefore, the recently tightened standards have had approximately zero net effect on private consumer welfare, contrasting with the analysis by the U.S. regulatory agencies that does not include lower performance and suggests large consumer benefits.