Consumer Valuation of Fuel Costs and Tax Policy: Evidence from the European Car Market
- American Economic Journal: Economic Policy (Forthcoming)
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.
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