In The Medium Run, CAFE Costs Decrease
February 3, 2011
From its inception in the late 1970s, Corporate Average Fuel Economy (CAFE) standards reduced the weight and power of vehicles on American roads in order to increase fuel economy. Now, with CAFE standards expected to increase by 40 percent by 2020, observers are wondering how much the changes will cost and how consumers will react to an increase in fuel economy.
Previous analytical models have looked at the short run (one to two years), using price changes to adjust to standards, and the long-run (10 years and over), when there was time for a large technology overhaul. In New Vehicle Characteristics and the Cost of the Corporate Average Fuel Economy Standard, Thomas Klier and Joshua Linn assess the medium run. Manufacturers redesign vehicles every four to five years, altering weight, power, and fuel economy to meet the new CAFE standards. The authors discover that in this model, modifications are indeed less costly than short-term adjustments to the sales mix. Will consumers pay for this increase in fuel economy? Klier and Linn find that consumers value an increase in power over an increase in fuel economy.