An opinion piece in the WSJ today makes an interesting point: does the presence of fuel efficient cars do anything to cut back on fuel consumption? It seems like a ridiculous proposition only if you believe that people only drive a fixed distance (say, to commute) and price is irrelevant.

But gas consumption is obviously not perfectly inelastic. As gas becomes more expensive, people will find other alternatives of transportation and/or drive less. By subsidizing things like electric cars, we are actually making driving cheaper. People can drive a longer distance using fuel efficient cars at the same cost as driving a shorter distance with status quo cars. In theory, people will use the same amount of gas but just drive more miles.

It won’t work exactly like that. Some people actually do have a pretty inelastic demand to gas: they drive to and from work and the grocery store and try to minimize their transportation costs otherwise. But there’s no denying that having a more fuel efficient car – ceteris paribus – means more miles will be driven.

What we really should do if we want to cut emissions, in my opinion, is to enact Pigouvian taxes on gasoline. This will shift demand to lower-emission transportation (to trains for example) without increasing the overall tax burden. People work on incentives. Fuel efficient cars can incentivize people in unintended ways and do insignificant things to solve the problem.

Advertisements