Using Loopholes to Reveal the Marginal Cost of Regulation: The Case of Fuel-Economy Standards
Anderson, Soren T., and
James M. Sallee. 2011. "Using Loopholes to Reveal the Marginal Cost of Regulation: The Case of Fuel-Economy Standards."
American Economic Review,
Estimating the cost of regulation is difficult. Firms sometimes reveal
costs indirectly, however, when they exploit loopholes to avoid regulation.
We apply this insight to fuel economy standards for automobiles.
These standards feature a loophole that gives automakers a
bonus when they equip a vehicle with flexible-fuel capacity. Profitmaximizing
automakers will equate the marginal cost of compliance
using the loophole, which is observable, with the unobservable costs
of strategies that genuinely improve fuel economy. Based on this
insight, we estimate that tightening standards by one mile per gallon
would have cost automakers just $9-$27 per vehicle in recent years.
(JEL L51, L62, Q48)
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Anderson, Soren T. (MI State U)
Sallee, James M. (U Chicago)
L51: Economics of Regulation
L62: Automobiles; Other Transportation Equipment
Q48: Energy: Government Policy