The Welfare Effects of Misperceived Product Costs: Data and Calibrations from the Automobile Market

The Welfare Effects of Misperceived Product Costs: Data and Calibrations from the Automobile Market Abstract This analysis exploits new data from the Vehicle Ownership and Alternatives Survey, which elicits beliefs over the financial benefits of owning higher fuel economy vehicles. The data are used to test for underestimation and to document evidence of “MPG Illusion”: consumers think as if fuel costs scale linearly in miles per gallon instead of gallons per mile. Counterfactuals suggest that the MPG Illusion reduces welfare by less than $4 per new vehicle. Furthermore, even the most severe plausible underestimation of the financial benefits of fuel economy cannot account for the consumer welfare gains attributed to fuel economy standards. (JEL D12 , D83 , L62 ) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Economic Policy American Economic Association

The Welfare Effects of Misperceived Product Costs: Data and Calibrations from the Automobile Market

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Publisher
American Economic Association
Copyright
Copyright © 2013 by the American Economic Association
Subject
Articles
ISSN
1945-7731
eISSN
1945-774x
D.O.I.
10.1257/pol.5.3.30
Publisher site
See Article on Publisher Site

Abstract

Abstract This analysis exploits new data from the Vehicle Ownership and Alternatives Survey, which elicits beliefs over the financial benefits of owning higher fuel economy vehicles. The data are used to test for underestimation and to document evidence of “MPG Illusion”: consumers think as if fuel costs scale linearly in miles per gallon instead of gallons per mile. Counterfactuals suggest that the MPG Illusion reduces welfare by less than $4 per new vehicle. Furthermore, even the most severe plausible underestimation of the financial benefits of fuel economy cannot account for the consumer welfare gains attributed to fuel economy standards. (JEL D12 , D83 , L62 )

Journal

American Economic Journal: Economic PolicyAmerican Economic Association

Published: Aug 1, 2013

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