Consumer Valuation of Fuel Costs and the Effectiveness of Tax Policy - Evidence from the European Car Market

Abstract

To what extent do car buyers undervalue future fuel costs, and what does this imply for tax policy? To address both questions, we show it is crucial to account for consumer mileage heterogeneity. We use product-level data for a panel of European countries and exploit fuel cost variation by engine. Despite a modest undervaluation of fuel costs, fuel taxes are more effective in reducing fuel usage than product taxes. They also perform better in terms of welfare, even when usage demand is held fixed. The reason is that fuel taxes better target high mileage consumers to purchase fuel efficient cars.

Replaces

Laura Grigolon, Mathias Reynaert, and Frank Verboven, “Consumer Valuation of Fuel Costs and the Effectiveness of Tax Policy - Evidence from the European Car Market”, TSE Working Paper, n. 17-836, August 2017.

Reference

Laura Grigolon, Mathias Reynaert, and Frank Verboven, “Consumer Valuation of Fuel Costs and the Effectiveness of Tax Policy - Evidence from the European Car Market”, American Economic Journal: Economic Policy, vol. 10, n. 3, August 2018, pp. 193–225.