American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Using Loopholes to Reveal the Marginal Cost of Regulation: The Case of Fuel-Economy Standards
American Economic Review
vol. 101,
no. 4, June 2011
(pp. 1375–1409)
Abstract
Estimating the cost of regulation is difficult. Firms sometimes reveal costs indirectly, however, when they exploit loopholes to avoid regulation. We apply this insight to fuel economy standards for automobiles. These standards feature a loophole that gives automakers a bonus when they equip a vehicle with flexible-fuel capacity. Profitmaximizing automakers will equate the marginal cost of compliance using the loophole, which is observable, with the unobservable costs of strategies that genuinely improve fuel economy. Based on this insight, we estimate that tightening standards by one mile per gallon would have cost automakers just $9-$27 per vehicle in recent years. (JEL L51, L62, Q48)Citation
Anderson, Soren T., and James M. Sallee. 2011. "Using Loopholes to Reveal the Marginal Cost of Regulation: The Case of Fuel-Economy Standards." American Economic Review, 101 (4): 1375–1409. DOI: 10.1257/aer.101.4.1375Additional Materials
JEL Classification
- L51 Economics of Regulation
- L62 Automobiles; Other Transportation Equipment
- Q48 Energy: Government Policy