Do Consumers Recognize the Value of Fuel Economy? Evidence from Used Car Prices and Gasoline Price Fluctuations

By James M. Sallee, Sarah West and Wei Fan.

NBER Working Paper No. 21441
Issued in July 2015
NBER Program(s):Environment and Energy Economics, Public Economics

 

Debate about the appropriate design of energy policy hinges critically on whether consumers might undervalue energy efficiency, due to myopia or some other manifestation of limited rationality. We contribute to this debate by measuring consumers' willingness to pay for fuel economy using a novel identification strategy and high quality microdata from wholesale used car auctions. We leverage differences in future fuel costs across otherwise identical vehicles that have different current mileage, and therefore different remaining lifetimes. By seeing how price differences across high and low mileage vehicles of different fuel economies change in response to shocks to the price of gasoline, we estimate the relationship between vehicle prices and future fuel costs. Our data suggest that used automobile prices move one for one with changes in present discounted future fuel costs, which implies that consumers fully value fuel economy.