How Consumers Value Fuel Economy: A Literature Review (EPA-420-R-10-008, March 2010)

The extent to which consumers value the expected future fuel savings from fuel economy improvements to new passenger cars and light trucks is a key determinant of the levels of fuel economy achieved in unregulated markets and the effects of regulatory standards on consumers’ surplus. This paper reviews 28 recent quantitative analyses of consumers’ willingness to pay for automotive fuel economy. Some of the studies estimate discrete choice models with random or fixed coefficients, some are based on aggregate market data while others use disaggregate survey data. Other studies make use of hedonic price analysis or other methods. Their inferences about willingness to pay span a very broad range with roughly equal numbers finding significant under-valuing, significant over-valuing or approximately valuing the full present value of expected fuel savings over the lifetime of a typical vehicle. Although the methodologies or model formulations of a few of the studies are questionable, there do not appear to be clear associations among methods or data sources and the resulting inferences. It is suggested that such conflicting results may be attributable to the statistical problems caused by omitted variables, errors in variables and correlated variables, the complexity of consumers’ vehicle choice decisions, and the likelihood that the rational economic consumer model does not adequately describe the decision-making of consumers in the real world. Additional, empirical behavioral research appears to be needed to resolve the issue.