American Economic Review: Vol. 101 No. 3 (May 2011)


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Consumers' Perceptions and Misperceptions of Energy Costs

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Allcott, Hunt. 2011. "Consumers' Perceptions and Misperceptions of Energy Costs." American Economic Review, 101(3): 98-104.

DOI: 10.1257/aer.101.3.98


This paper presents three initial stylized facts from the Vehicle Ownership and Alternatives Survey (VOAS), a nationally representative survey that elicits consumers' beliefs about gasoline prices and the relative energy costs of autos with different fuel economy ratings. First, American consumers devote little attention to fuel costs when purchasing autos. Second, consistent with a cognitive bias called "MPG Illusion," consumers underestimate the fuel cost differences between low-MPG vehicles and overestimate the differences between high-MPG vehicles. Third, Americans' mean and median expected future gas prices were above current prices and predictions of the futures market at the time of the survey. Although it is often argued that misperceived energy costs justify policies to encourage the sale of energy efficient durable goods, these results show that misperceptions and expectations that differ from market information could either increase or decrease energy efficiency.

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Allcott, Hunt (MIT and NYU)

JEL Classifications

D12: Consumer Economics: Empirical Analysis
G13: Contingent Pricing; Futures Pricing; option pricing
L62: Automobiles; Other Transportation Equipment
Q41: Energy: Demand and Supply

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