Pass-Through and Welfare Effects of Regulations that Affect Product Attributes
We show that the relationship between pass-through and welfare changes does not hold for a regulation that affects production costs and product attributes.
A key finding in the literature is that the greater the pass-through of an input cost shock or tax to product prices, the larger the welfare loss to consumers. We show that the relationship between pass-through and welfare changes does not hold for a regulation that affects production costs and product attributes. An analytical model shows that the larger the willingness to pay (WTP) for the product attribute, the greater the pass-through but the smaller the welfare loss (or the larger the welfare gain) for consumers. We confi rm this intuition in the context of passenger vehicle fuel economy standards using new estimates of consumer demand and an equilibrium model. Pass-through and welfare changes are positively correlated with WTP for fuel economy across demographic groups and manufacturers. Accounting for WTP breaks the direct link between pass-through and welfare changes identifi ed in prior literature, and in the short run tightening standards is regressive.
Josh Linn is a senior fellow at RFF. His research centers on the effects of environmental policies and economic incentives for new technologies in the transportation, electricity, and industrial sectors.
On the Issues — Jul 7, 2023
On the Issues: Funding Clean Energy, Vehicle Fuel Standards, and More
A biweekly newsletter connecting global current events, pressing climate and energy policy news, and economics research from RFF scholars. This week: funding clean energy, vehicle fuel standards, and more.
Common Resources — Jul 5, 2023
New Proposed Emissions Standards for Passenger Vehicles: Who Benefits the Most?
Modeling efforts described in a new report show that the lowest-income consumers of new vehicles would benefit the most from new emissions standards for passenger vehicles, which have been proposed by the US Environmental Protection Agency.
Journal Article — Jan 6, 2023
How Much Do Consumers Value Fuel Economy and Performance? Evidence from Technology Adoption
This paper evaluates the welfare consequences of automakers forgoing performance increases to raise fuel economy.