Exposing CAFE Kool-Aid With Economic Analysis
From today's WSJ article "Don't Drink the CAFE Kool-Aid by Robert Crandall (Brookings Institution) and Hal Singer (Criterion Economics):
"If fuel economy improvements make economic sense, the market will achieve them on its own.
For example, if there was fuel-saving technology out there that cost $1,000 but generated $2,500 in the discounted present value of fuel savings over the life of the vehicle, carmakers would surely voluntarily embrace that technology. The carmaker could split the net benefits (equal to the difference between the discounted fuel savings and the cost of the technology) with the car buyer such that both parties to the transaction would be better off.
No need for regulation there. With large numbers of vehicle producers and well-informed consumers, the market is so efficient, in fact, that it ensures that all such transactions will occur, generating the socially optimal level of fuel economy.
When exposed to the piercing light of economic analysis, the alleged benefits of more stringent CAFE standards burn away. Unfortunately, aside from economists, whose voices often carry little weight in Washington, there is virtually no opposition to this form of regulation. Too bad these proposals will not be subjected to economic scrutiny before they become law."