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 the effectiveness and welfare impact of alternative tax policies' To address both questions, we show it is crucial to account for consumer heterogeneity in mileage and other dimensions. We use detailed product-level data for a long panel of European countries, and exploit variation in fuel costs by engine type. Although we find there is modest undervaluation of fuel costs, fuel taxes are still more effective in reducing fuel usage than product taxes based on fuel economy. Importantly, fuel taxes also perform better in terms of total welfare even when usage demand is held completely fixed. The reason is that fuel taxes better target the right consumers, those with a high mileage, to purchase more fuel efficient cars.

Replaced by

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.

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”, TSE Working Paper, n. 17-836, August 2017.