There is no doubt that consumers do care about fuel costs, do value fuel economy, and that their
interest in fuel economy increases when fuel prices increase. Past evidence of this has been
reviewed by Mahadi and Gallagher (2009) who also provide an analysis of the effects of gasoline
price increases since 2000 on consumers’ interest in fuel economy. The question is not whether
consumers value fuel economy but how much? The issue is not whether the market for fuel
economy responds to higher fuel prices but whether it responds efficiently. To be more precise,
does the market value fuel economy improvements at society’s discounted expected value of
future fuel savings over the lifetime of a new vehicle, or significantly less or more? Fischer,
Harrington and Parry (2007) have demonstrated that the answer to this question has profound
implications for public policy concerning automotive fuel economy and carbon dioxide
emissions. Considering only private costs and benefits, if consumers already fully value
expected lifetime fuel savings, fuel economy standards lead to private welfare losses.3
Studies
that assume efficient markets inevitably arrive at this conclusion (e.g., Austin and Dinan, 2005).
On the other hand, if consumers are myopic and consider only the first three years of fuel
savings, for example, fuel economy standards can increase welfare even based solely on private
costs and benefits.