“Consumer Valuation of Fuel Costs and the Effectiveness of Tax Policy: Evidence from the European Car Market”
Abstract: To what extent do car buyers undervalue future fuel costs, and what does this imply for the effectiveness of alternative tax policies? To address both questions, we show it is crucial to account for consumer heterogeneity in mileage and other dimensions.We use detailed product-level data for a long panel of European countries, and exploit variation in fuel prices by engine type. Although we find there is modest undervaluation of fuel costs, fuel taxes are still more effective in reducing fuel usage than product taxes based on fuel economy. The reason is that fuel taxes better target the right consumers, those with a high mileage, to purchase more fuel efficient cars.