Hedonic Price Model for Light-Duty Vehicles: Consumers\u27 Valuations of Automotive Fuel Economy

Growing recognition of climate change, energy security, and rising fuel prices leads to the analyses of policy actions aimed at reducing the fuel use of light-duty vehicles in the United States. There are a variety of policy instruments including an eco-labeling program, Corporate Average Fuel Economy (CAFE) standards, a gasoline tax, and subsidies for research in the new vehicle technologies and fuels. The cost-effectiveness of these policies is in turn strongly dependent on consumers\u27 valuations of automobile attributes and fuel economy. Automotive fuel economy, which provides individual benefits in the form of cost savings by lowering fuel cost per mile driven, and confers external social benefits in the form of reducing fuel use and emissions, is the main focus of our study. Additionally, we explore the impact of demographic factors on consumers\u27 valuations of automotive fuel economy. We also examine the necessity of tightening CAFE standards based on consumers\u27 net benefits from increasing fuel economy to a higher level. Our study estimates consumers\u27 marginal willingness to pay for a unit increase of automotive fuel economy using a first-stage hedonic regression of prices of new vehicles sold in State of Maine during 2007. Results show that for one mile per gallon increase of fuel economy, car consumers are willing to pay $208, while truck buyers are willing to pay $233. Moreover, results indicate that consumers completely undervalue fuel savings in the life cycle of an automobile. However, at the discount rate of 7%, car consumers significantly value discounted fuel savings for the first three years of new cars\u27 ownership, while truck purchasers only value discounted fuel savings for the first year of trucks\u27 ownership. Car buyers significantly value lifetime fuel savings at a discount rate of 48%, and light truck consumers value lifetime fuel savings at a discount rate of 13%. Tightening CAFE standards might be warranted to the extent that consumers only value the short-term fuel savings and completely undervalue fuel savings in the long run (Parry and Fischer, 2005). A second-stage hedonic model is estimated to examine the impact of demographic and financial factors on consumers\u27 purchasing decisions, and to generate demand curves for automotive fuel economy. Results indicate that education and age are positively associated with fuel economy, while income is insignificant. Based on the shape of the demand curve for fuel economy and the measurement of consumers\u27 net benefits, the proposed higher CAFE standards that are 35 miles per gallon for the total fleet of passenger cars and light-duty trucks manufactured for sale in 2020 are reasonable. This thesis sheds light on the cost-effectiveness of tightening CAFE standards that promote higher fuel economy. The study, therefore, provides important information for policy makers both in the environmental and transportation arena