To what extent do car buyers undervalue future fuel costs, and what does this imply for tax policy? To address both questions, we show it is crucial to account for consumer mileage heterogeneity. We use product-level data for a panel of European countries and exploit fuel cost variation by engine. Despite a modest undervaluation of fuel costs, fuel taxes are more effective in reducing fuel usage than product taxes. They also perform better in terms of welfare, even when usage demand is held fixed. The reason is that fuel taxes better target high mileage consumers to purchase fuel efficient cars.
Grigolon, Laura, Mathias Reynaert, and Frank Verboven.
"Consumer Valuation of Fuel Costs and Tax Policy: Evidence from the European Car Market."
American Economic Journal: Economic Policy,
Consumer Economics: Empirical Analysis
Business Taxes and Subsidies including sales and value-added (VAT)
Fiscal Policies and Behavior of Economic Agents: Household
Automobiles; Other Transportation Equipment; Related Parts and Equipment
Mining, Extraction, and Refining: Hydrocarbon Fuels