Modelling strategic responses to car and fuel taxation

We develop a model to analyse the interactions between actors involved in car and fuel taxation: consumers, car producers, fuel producers and the government. Heterogeneous consumers choose between two versions of a car that differ in engine type (diesel or gasoline). Car manufacturers and fuel producers maximise profits taking into account the effects of their behaviour on each other and on consumers. In both the car and the fuel market we consider the monopoly and the full competitiveness cases. For each of the four possible combinations, we calculate the Nash equilibria conditional on tax rates. These tools are used to address issues of optimal fuel taxation for a government that has environmental as well as budgetary targets. In particular, we investigate the effects of a tax policy in which car taxes fully depend on car use.