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Consumer Valuation of Fuel Costs and Tax Policy: Evidence from the European Car Market

Laura Grigolon (), Mathias Reynaert () and Frank Verboven

American Economic Journal: Economic Policy, 2018, vol. 10, issue 3, 193-225

Abstract: To what extent do car buyers undervalue future fuel costs, and what does this imply for tax policy? To address both questions, we show it is crucial to account for consumer mileage heterogeneity. We use product-level data for a panel of European countries and exploit fuel cost variation by engine. Despite a modest undervaluation of fuel costs, fuel taxes are more effective in reducing fuel usage than product taxes. They also perform better in terms of welfare, even when usage demand is held fixed. The reason is that fuel taxes better target high mileage consumers to purchase fuel efficient cars.

JEL-codes: D12 H25 H31 L62 L71 (search for similar items in EconPapers)
Date: 2018
Note: DOI: 10.1257/pol.20160078
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