The Relative Efficiency of Fuel Economy Standards Versus Taxes as Environmental Policy Instruments

Abstract

This paper explores the comparative effects of automotive fuel economy standards and taxation on the levels of average fuel efficiency, air quality, and welfare. Theoretical and applied analyses reveal that fuel economy standards can substantially improve average fuel efficiency without having much impact on air quality and welfare, and in contrast, taxation improves air quality and increases welfare without significantly affecting average fuel efficiency. Thus, the results suggest that average fuel efficiency is too indirect a target for reducing automobile-related pollution so that compared to taxation fuel economy standards are arelatively costly means ofenvironmental improvement. (Q2, D6)