Euro, where is the total fuel consumption by car . Note that fuel consumption is allowed to vary within cars as
individual-level factors, such as driving style, load, cold start, or urban and extra-urban driving, do affect it (see
Stock 2004). As a result, two identical cars will have different fuel consumption, unless they are driven under same
conditions. Allowing fuel consumption to be a choice variable is a conceptual difference from the existing literature,
which treats fuel consumption as fixed by car design (Fischer, Harrington, and Parry 2007; Fullerton and West
2002; Innes 1996; Parry and Small 2005). Driver’s behavior thus affects the total externality through three channels,