Do consumers recognize the value of fuel economy? Evidence from used car prices and gasoline price fluctuations

• Published in: Journal of public economics Vol. 135; pp. 61 - 73
• Main Authors: Sallee, James M., West, Sarah E., Fan, Wei
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.03.2016
• Subjects: Auctions; Consumer behavior; Energy efficiency; Energy policy; Fuel economy; Fuel economy standards; Gasoline prices; Undervaluation; Used automobiles; Willingness to pay; Fuel economy; Energy efficiency; Gasoline prices; Undervaluation
• ISSN: 0047-2727; 1879-2316
• DOI: 10.1016/j.jpubeco.2016.01.003

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. •We measure consumers' willingness to pay for fuel economy using a novel identification strategy and high quality microdata from wholesale used car auctions.•Our strategy uses differences in future fuel costs across otherwise identical vehicles that have different current mileage, and therefore different remaining lifetimes.•Our data suggest that used automobile prices move one for one with changes in present discounted future fuel costs.•We interpret this as evidence that consumers fully value fuel economy, which has implications for the design of energy policy.