The simple economics of motor vehicle pollution: A case for fuel tax

Abstract

The volume of pollution produced by an automobile is determined by driver's behavior along three margins: (i) vehicle selection, (ii) kilometers driven, and (iii) on-road fuel economy. The first two margins have been studied extensively, however the third has received scant attention. How significant is this 'intensive margin'? What would be the optimal policies when it is taken into account? The paper develops and analyzes a simple model of the technical and behavioral mechanisms that determine the volume emissions produced by a car. The results show that an optimal fuel tax would provide drivers with appropriate incentives along all three margins and that only public information is needed for a fuel tax to be set optimally. In contrast, an optimal distance tax would require private information. Lastly, relative to the optimal fuel tax, a simple uniform fuel tax is shown to be progressive. Thus, being already deployed worldwide, a uniform fuel tax is an attractive second-best policy. These findings should be accounted for when designing new mechanisms to alleviate motor vehicle pollution.

Efficient Combination of Taxes on Fuel and Vehicles

“…A tax on fuel which equals the marginal damage of CO2 emissions, a tax on driving distance which equals the marginal damage of mileage-related externalities, and a zero tax on fuel-intensive vehicles, also implements the social planner solution. 2 Both these solutions lead to a more efficient allocation of vehicles and driving distance than the solution with a uniform tax on fuel combined with taxation of fuel-intensive vehicles; see also Ashley et al (2017) and Montag (2015). However, a GPS-based system is more costly to administer and is likely to impose information-processing costs and undesirable surveillance; see Parry et al (2007).…”

How Do Travellers Respond to Health and Environmental Policies to Reduce Air Pollution?

“…Some works have analysed the impact of air pollution policies on the structural changes at sectorial level and on energy use (Bollena and Brink, 2014;Naqvi and Zwickl, 2017). Others consider that the volume of pollution produced by an automobile is determined by drivers' behaviour vis--vis three criteria (vehicle selection, kilometres driven, and on-road fuel economy) and they study the optimal policies which could change the driver's behaviour (Montag, 2015). Agostinia and Jimnez (2015) have focused on the gasoline tax as the best instrument of climate policy.…”

Bounds and Bunching: Distributions of Air Pollutants Produced by New Automobiles

“…driven (Fischer, Harrington, and Parry, 2007;Parry and Small, 2005;Parry, Walls, and Harrington, 2007; see also Montag, 2015). This assumption implies bunching of measured emissions below the thresholds shown in Tab.…”

“…This means that producer has to compare costs on lowering the emissions with non-signifi cant gains. As a result, all new cars should produce a similar amount of air pollutants per kilometer 1 For recent medical literature see references in Montag (2015). Schwartz (2004) provides an excellent review of the literature on child-specifi c eff ects of air pollution.…”