Consumer Valuation of Fuel Costs and Tax Policy: Evidence from the European Car Market

Laura Grigolon, Mathias Reynaert, Frank Verboven
2018 American Economic Journal: Economic Policy  
To what extent do car buyers undervalue future fuel costs, and what does this imply for the e¤ectiveness and welfare impact of alternative tax policies? To address both questions, we show it is crucial to account for consumer heterogeneity in mileage and other dimensions. We use detailed product-level data for a long panel of European countries, and exploit variation in fuel costs by engine type. Although we ...nd there is modest undervaluation of fuel costs, fuel taxes are still more e¤ective
more » ... till more e¤ective in reducing fuel usage than product taxes based on fuel economy. They also perform much better in terms of total welfare even if usage demand is inelastic. The reason is that fuel taxes better target the right consumers, those with a high mileage, to purchase more fuel e¢ cient cars.
doi:10.1257/pol.20160078 fatcat:tv7z7yqzgjh27nulff3ubcseuq