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.

3 comments:

TAO YUAN said...

We can examine the demand shifters for this question.

1.Income: Even if automobiles are more energy-saving in 2020, people may consume more gasoline if people's income increase.
2.Price of related goods: If the price of automobiles is lower in 2020, more people will own automobiles. As a result, more gasoline may be consumed.
3.Consumer tastes: If the main energy is still gasoline for automobiles in 2020, consumers may prefer to continue to consume gasoline instead of other types of energy, like electric power and solar power.
4.Market size: the market size in 2020 would be greater than it is due to the prevalence of vehicle, so the consumption of gasoline may increase.
5.Expectation of price: the price may also be regarded as “rational price” when people are getting richer in the future. Thus, they may buy more gasoline.

In conclusion, the increase in MPG is good news, and maybe leads to a decline in the consumption of gasoline. However, there are so many demand shifters and any one of them has the possibility of offsetting the effect brought by increase in MPG, or even changing the trend. Thus, the increase in MPG may, but not necessarily, reduce the consumption in gasoline in 2020.

Submitted by Yuan Tao

TAO YUAN said...

Please allow me to do some revision to the “price expectation”.
When people think the price of gasoline will go up in a short time, they may increase the consumption of gasoline before the price rising.

Thanks ^_^

Yang Yang said...

I don't think so, because People will react to incentives.
This standard make cars be more economy,so may be people will use car instead of other public transportation and drive more,then Americans will use more gasoline in 2020.It is similar with "seat belt laws" on the textbook.