OECD/ITF Joint Transport Research Centre Discussion Papers
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- Is continued by :
- International Transport Forum Discussion Papers
The International Transport Forum at the OECD is an intergovernmental organisation with 52 member countries. It acts as a strategic think tank for transport policy and organizes an annual summit of ministers. Our work is underpinned by economic research, statistics collection and policy analysis, often undertaken in collaboration with many of the world's leading research figures in academia, business and government. This series of Discussion Papers is intended to disseminate the International Transport Forum’s research findings rapidly among specialists in the field concerned.
- ISSN: 20708270 (online)
- https://doi.org/10.1787/20708270
Why the New Market for New Passenger Cars Generally Undervalues Fuel Economy
Passenger vehicles are a major source of greenhouse gas emissions and prodigious consumers of
petroleum, making their fuel economy an important focus of energy policy. Whether or not the market
for fuel economy functions efficiently has important implications for both the type and intensity of
energy and environmental policies for motor vehicles. There are undoubtedly imperfections in the
market for fuel economy but their consequences are difficult to quantify. The evidence from
econometric studies, mostly from the US, is reviewed and shown to vary widely, providing evidence
for both significant under- and over-valuation and everything in between. Market research is scarce,
but indicates that the rational economic model, in general, does not appear to be used by consumers
when comparing the fuel economy of new vehicles. Some recent studies have stressed the role of
uncertainty and risk or loss aversion in consumers’ decision making. Uncertainty plus loss aversion
appears to be a reasonable theoretical model of consumers’ evaluation of fuel economy, with profound
implications for manufacturers’ technology and design decisions. The theory implies that markets will
substantially undervalue fuel economy relative to its expected present value. It also has potentially
important implications for welfare analysis of alternative policy instruments.
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