Power point

Economics 190/290 Lecture 4

Transportation Economics:

The Costs of Driving, II

Fuel Economy and Auto Safety

Regulation of Fuel Economy

• A history of government intervention to conserve energy, raise fuel efficiency

• Did these policies work?

• Should we care about fuel economy if consumers don’t?

• Policy alternatives

The Oil Shocks

• The Oil Embargo of 1973

• The Second Oil Shock of 1979

• The Collapse of the OPEC cartel, 1981-1985

The Initial Policy Debate

• What to Do?– Nothing: cartels generally do not last long, and

increases in fuel prices will induce manufacturers and consumers to change their consumption in the optimal way

– Intervene: Consumers and manufacturers will not change their purchasing/manufacturing fast enough to meet the threat to national security

The U.S. Government Reaction

• Reaction to the Embargo: the Energy Policy and Conservation Act of 1975– Mandated a series of higher fuel economy standards

(CAFE standards)

– Carefully structured to give automakers long lead times to meet specific goals

– Specified that average car produced had to meet standards

– Allowed manufacturers to accumulate CAFE credits

The U.S. Government Reaction

• The CAFE standards– Passenger cars must get 18.5 mpg by 1978,

27.5 by 1985; thereafter, standards would be set by Secretary of Transportation

– Standards for light trucks, minivans, SUVs set starting in 1979

– Standards relaxed in 1986-89, raised to 27.5 mpg for cars in 1990, currently at 20.2 mpg for light trucks

The U.S. Government Reaction

• The CAFE standards– Separate standards are set for manufacturer’s

domestic cars, imported cars, domestic light trucks, imported light trucks

– Credits can be carried backwards of forwards– Fines of $5 per 0.1 mpg per vehicle are levied

for failing to meet the standard – manufacturer incurs a penalty of $50 per car for every mpg shortfall

The U.S. Government Reaction

• The CAFE standards– Fuel economy for new cars rose from 15.8 to 23.5 mpg

from 1975 to 1980 as consumers, manufacturers responded to high gas prices – CAFE standard only increased to 20.2

– After 1981, as motor fuel prices fell, CAFE became a binding constraint for auto manufacturers

– In recent years, pressure to increase CAFE in order to reduce greenhouse gas emissions

What CAFE Targets

• Petroleum accounts for 41% of U.S. energy consumption

• Motor vehicles responsible for 50% of petroleum consumption

• Passenger cars consume 55% of motor vehicle fuel

• Passenger cars responsible for 11% of U.S. energy consumption

What CAFE Targets• In 1990, 193 million motor vehicles on the

road• New passenger car sales 8-11.5 million per

year• Average model year’s new cars account for

7% of all cars, 9% of passenger-car miles, 2% of annual petroleum consumption

• Including light trucks, one model-year’s vehicles subject to CAFE account for 3.2% of petroleum consumption, 3.8% of carbon emissions

What CAFE Targets• Consumers have substituted from

new cars to old cars

• Consumers have substituted from cars to light trucks

• Total fuel consumption began to accelerate again after 1985

Impact of CAFE

Fuel Consumption Real Fuel Price

Vehicle Miles Traveled

Year

Total Pass. Cars

(1982-4=100) Total Pass. Cars

1970 109.0 76.4 71.9 1109.7 916.7

1975 115 71.9 83.8 1327.7 1034

1980 121.3 69.3 118.2 1527.3 1111.6

1985 125.2 71.2 91.7 1774.2 1260.6

1990 131.6 72.4 77.4 2147.5 1515.4

Impact of CAFE

Passenger car fuel economy Light truck fuel economy

Year

All cars on Road

New cars

Passenger CAFE

Standard

New car weight (lbs)

All trucks on road

New trucks

Light truck CAFE

standard

New truck weight (lbs)

1970 13.5 14.8 --- 3877 10.0 N.A. --- ---

1975 13.5 15.8 --- 4058 11.2 13.7 --- 4072

1980 15.5 23.5 20.0 3101 12.3 18.6 15.5 3869

1985 18.2 27.0 27.5 3093 12.9 20.6 19.5 3795

1990 20.9 27.8 27.5 3180 13.5 20.8 20 4016

Arguments For CAFE

• Consumers undervalue increases in fuel efficiency

• Dependency on foreign sources of petroleum poses a national security threat

• CAFE can also function as a mechanism for reducing greenhouse gas emissions, which private agents have no incentive to do

Alternative Instrument: Gas Taxes

• Gas taxes increase the marginal costs of operating all vehicles, including old ones

• Gas taxes induce consumers to purchase more fuel efficient vehicles

• Gas taxes encourage the retirement of older, less fuel-efficient vehicles

• Gas taxes generate revenue, which could be allocated to socially productive uses (including offsetting tax reductions on income or estate taxes)

CAFE vs. Gas Taxes

• CAFE requires manufacturers to supply cars consumers do not want

• Gas taxes induce consumers to want more fuel efficient vehicles

• CAFE only effects part of the vehicle fleet, even in the long run

• Gas taxes impact the entire fleet, and they impact miles traveled as well as mpg.

How Detroit Cheats on CAFE

• Auto manufacturers produce flex-fuel vehicles which earn CAFE credits without really reducing gasoline consumption

• Ford is bringing out 3-ton, 20-foot van; so large it is no longer classified as a light truck and therefore not subject to CAFE standards!

How Costly is CAFE?

• Estimating total social welfare loss depends on assumptions about the impact of CAF on fuel consumption

• Estimates of welfare loss range from $30.8 billion to $0.7 billion

• Crandall (92) suggests that CAFE costs 7 to 10 times as much as a gas tax that would achieve the same reductions in fuel consumption/greenhouse emissions

Welfare Loss from CAFE

Optimistic

(Greene)

Pessimistic

(Kleit)

Mid-Range

(Leone&Parkinson)

Discounted value of fuel saved (billion gallons)

103.4 -0.4 6.8

Consumer welfare loss (billion $)

30.8 0.7 3.9

Producer welfare loss (billion $)

N.A. 0.3 0.1

Total welfare loss

(billion $)

-1.1 1.0 4.0

Welfare cost per gallon saved ($)

0.3 No savings 0.59

Welfare cost per gallon saved*

0.41 -- 0.63

Auto Safety: An Introduction

• The U.S. has the lowest highway death rate per VMT of any country, but one of the highest highway death rates per capita (40,000-50,000 per year)

• This number has remained roughly constant over past 25 years, despite a doubling of number of licensed drivers, number of registered vehicles, number of VMT

• Lifetime death risk of average American is 1/100

The Theory of Highway Death

Smeed’s Law (R.J. Smeed, 1949)

cb NaVD 3/23/10003.0 NVD

3/2)/(0003.0/ NVVD

Smeed’s Law and U.S. Data

• Fits data reasonably well

• Note that there is a “trend break” in late 1960s in rate of deaths per vehicle

• Note that all points below Smeed curve from 1975 on

But, Smeed Fails in U.S. Cross-Section

• For 1993, cross-section data, highway death rates are below Smeed predictions except for one state

• No “downward tilt” in state data

Explaining Smeed’s Law

• Why do death rates per vehicle decline as number of vehicles increases and as time goes by?– Learning. Pedestrians and drivers recognize

importance of safe driving, learn how to do it

– Opulence. As income goes up, and the number of cars goes up, congestion increases and highway speeds decrease; roads become better, cars become safer, doctors and hospitals become more numerous

History of Auto Safety Regulation

• The Unregulated Era, 1920-1950s– Manufacturers steadily improved safety of vehicles,

adding headlights, windshield wipers, rearview mirrors, etc.

– State regulators did little more than formalize these existing practices

– The highway death rate declined steadily

– In the 1960s, highway death rate began to rise, Ralph Nader’s Unsafe at Any Speed stimulated public awareness of auto safety

History of Auto Safety Regulation

• The National Traffic and Motor Vehicle Safety Act (1966) and the Highway Safety Act (1966)– Empowered the National Highway Traffic Safety

Administration (NHTSA) to force manufacturers to build safer vehicles

– Between 1966 and 1974, NHTSA set dozens of standards

– Starting in 1969, the highway death rate began to decline again

The Costs and Benefits of Safety

• Estimating the costs generated by safety regulation– The initial manufacturing and installation cost

of each new piece of safety equipment– The greater fuel cost due to the weight of the

equipment added to vehicles– A downward adjustment of those costs to allow

for a learning curve

The Costs and Benefits of Safety

• Estimating the costs generated by safety regulation– Between 1966 and 1975, the “heyday” of new

regulations, the cost of a new car rose by $1,000 because of newly mandated safety equipment

– The present value of fuel and maintenance costs raises total cost of additional safety to $1,500

– Learning curve estimates are harder to estimate

The Costs and Benefits of Safety

• Estimating the benefits of safety regulation– Lives saved– Injuries avoided– Must control for the long-run tendency toward

safer cars even in the complete absence of any regulatory initiative

– An attempt to do this in Table 8.1

Benefit-Cost Analysis of Safety Regulation

LL NV2

VV NC

Benefits

Costs

Nv=100 million

Cv=$750 to $1500

VL=$1 million to $5 million

NL=?

Risk Compensation

• Most studies of auto safety find that the program saved lives inside safer cars, but those on the highway outside cars suffered increased death rates

• General principle: safer cars will be driven less safely

Evidence on Risk Compensation

• In North Carolina in the late 1960s, 27% of the autos with the newest safety equipment accounted for 34% of the accidents, but 15% of occupant deaths

• In Virginia in 1993, 44% of cars had driver-side airbags. The State Police determined that airbag-equipped cars initiated 73% of multiple-car accidents resulting in a fatality

• Cars with air bags run up higher insurance claims for personal injuries than those without

Evidence on Risk Compensation

• Drivers of smaller cars are more likely to die in multi-car crashes, but they have fewer accidents, and are less likely to die in single-car crashes

• ABS-equipped cars do not have lower rates of accidents and fatalities

• Canadian evidence on accidents by model year suggests that newer (safer) cars are driven more aggressively – and get into more accidents

• Highway accidents in Sweden reached an all-time low when they switched to driving on the right hand side! The same drop occurred in Iceland when the same switch was made.

NHTSA Recalls and Auto Safety

• From mid 1970s through mid 1990s, NHTSA ordered recall of 5-10 million automobiles per year

• Costs of recalls great, benefits small– Only 50% of owners respond to recall notices

– Dealer repair of defects often imperfect

– Most accidents caused by “vehicle failure” are the result of inadequate maintenance rather than inherent defects in the vehicle

The Benefits and Costs of Seat Belts

• Seat belts – Available as optional extra equipment in the 1950s– Half the states required their installation before

NHTSA was formed– In 1967, NHTSA mandated lap belts in all new models

and lap/shoulder belts for the front seats soon afterward– In the early 1970s, the mix of cars with differing

degrees of seat-belt equipment gives us a “natural experiment” in seat belt effectiveness

– The evidence: seat belts are very cost-effective life saving equipment

The Benefits and Costs of Seat Belts

• A quick B/C calculation

3$))()(045(. LVp

Let p=.0001

Seat belts meet B/C test for life as cheap as $67,000!

The Benefits and Costs of Seat Belts

• So, why don’t we use them?– In 1983, when no states had mandatory seat belt

laws, only 14% of drivers, front-seat passengers used them

– Are we irrational? Or are their plausible values for which the additional safety might not be work the time cost?

tL PV )3600/1)(10)(365)(5(3$))(0001.0)(45.0(

The Benefits and Costs of Air Bags

• Invented in the 1950s• Only added to most U.S. cars

starting in late 80s due to expense• Auto manufacturers are adding them

at a faster pace than government has mandated, suggesting that consumers want them and are willing to pay extra for them

The Benefits and Costs of Air Bags

• What kind of person would refuse to belt up, but would pay an extra $150 or so for each air bag?

• Consider a person who values life at $5 million, time at $50/hour

tL PV )3600/1)(10)(365)(5(3$))(0001.0)(45.0(

15$)5)($0001.0)(15.0( million

Mandating Seat Belt Use

• Why do this?– Non-users are stupid– Non-users generate negative externalities

• How to do this?– Technical solution #1: the interlock– Technical solution #2: “automatic” seat belts– Behavioral solution: force drivers to buckle up

The Impact of Seat Belt Laws

• They quickly more than double seat belt usage

• The cost is lower than an interlock system or the automatic seatbelt

• Few enforcement resources required• The adoption of such laws at

different times provides a natural experiment

Mandating Air Bags

• Do mandatory air bags pass a B/C test?

15$))(0001.0()70.0)(05.0()30.0)(15.0( LV

Only if VL is $2 million or higher, and air bagscan cost lives as well as save them!

Speed Limits

• In response to the OPEC oil increases, Congress passed the Emergency Highway Conservation Act of 1973, lowered speed limit on Interstate highways to 55 mph

• Experts predicted this would result in little fuel savings – they were right (fuel savings of 1% - .2%)

• But, there was a noticeable decline in highway deaths

• This decline had multiple causes

Benefits of Speed Limits

• National Research Council (1984) attempted to evaluate the impact of the 1974 reduction on safety – produced a “guestimate” of 2,000-3,000 lives per year

• Econometric studies by Lave (1985) suggest no strong relationship between average speed and collision fatalities – rather it is variance in speed that kills

• Lave’s results confirm the “Solomon curve”

B/C Analysis of Speed Limits

• Speed limits cost conscientious drivers time – are they worth it?

• (450)VL><(413 million person-hours)Pt

• At a Pt of $4/hr, only works if VL is greater than $4 million

Raising National Speed Limits

• After years of motorists’ griping, the Surface Transportation and Uniform Relocation Act of 1987 authorized states to return to a 65 mph limit on rural interstates

• Evidence indicates that death rates rose modestly as a result