Thursday, September 06, 2007

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."


At 9/06/2007 1:07 PM, Blogger Unknown said...

We already have fuel efficient technology. Most cars come with an option, either a 4 cylinder or a V6. The V6 costs more and burns more fuel, but people buy it anyway. Sure, the car will drive differently, but it will work the same.

At 9/06/2007 3:43 PM, Anonymous Anonymous said...

I agree with you that a lot of this all depends on consumer choice. But I think its bad for all for Washington to think they can regulate consumers into changing their habits. I think this article shows pretty well that it is not the best approach - but it seems that new CAFE standards are all but certain today.

There are some who are behind the approach where cars and trucks are under separate standards which after working with the AAM I think is definitely the best way to go. It would probably decrease the cost to consumers in the long run and lessen the burden on the auto makers as well.

But the larger issue is that we really need to deal with consumer demand - and just raising and raising CAFE standards does nothing to address that. Consumers need trucks, consumers want SUVs, etc, and until that changes Washington needs to understand the issue isn't with the industry

At 9/06/2007 5:06 PM, Anonymous Anonymous said...

"Drive differently" and "work the same" are mutually exclusive.

Gasoline is the second most abundant liquid on earth...third, if you want to count oil. I'll keep my 8-cylinder pick-up truck, thanks. It definitely doesn't "work the same" as all of my friends' small foreign cars, since I help them move crap almost every weekend.

Using the flawless (!) logic of some nanny statists, we should all be "driving" pedal cars, since, you know, those have 4 wheels and "work the same" as an internal combustion-engine-powered vehicle.


At 9/07/2007 3:08 PM, Anonymous Anonymous said...

That sounds about right - Americans need trucks and SUVs and they use them for different reasons than people who drive cars. They shouldn't be penalized for having a job that requires a truck or wanting a larger vehicle. And actually - DriveCongress has a ton of great info on these standards.


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