Sunday, August 29, 2010

CAFE, s'il vous plait.

Suppose the government raises the fuel economy standard for automobiles from its current 27.5 MPG to 35 MPG by 2020. Will this necessarily mean that Americans will use less gasoline in 2020? Explain why or why not.

Congratulations to Yang Yang for identifying the often overlooked behavioral response that is likely to happen when fuel economy increases. While Tao Yuan correctly identifies a number of other factors that could influence the ultimate consumption choices of gasoline buyers, it was the impact of the rule itself that I was looking for.