Working Paper: CEPR ID: DP10301
Authors: Laura Grigolon; Mathias Reynaert; Frank Verboven
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. We find there is only modest undervaluation of fuel costs. As a consequence, fuel taxes are unambiguously more effective in reducing fuel usage than product taxes based on fuel economy, because fuel taxes better target high mileage consumers.
Keywords: Effectiveness of tax policy; European car market; Fuel cost valuation
JEL Codes: H23; L62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Consumer valuation of future fuel costs (Q47) | Effectiveness of fuel taxes (H23) |
| Consumer valuation of future fuel costs (Q47) | Effectiveness of product taxes (H23) |
| Mileage heterogeneity (R48) | Effectiveness of fuel taxes (H23) |
| Mileage heterogeneity (R48) | Effectiveness of product taxes (H23) |
| Fuel taxes (H29) | Shift towards more fuel-efficient cars (L62) |
| Undervaluation effect (D46) | Mileage heterogeneity effect (C21) |