Obama and Regulation vs. Pricing

I opened my New York Times this morning to see that President Obama wants to raise fuel economy standards by twofold over the next 14 years. I have no doubt that the goal of reducing fuel consumption is a good one, but doing it using regulation is clumsy and could be counterproductive.

First, such regulations could hurt welfare in three ways: if it drives up production costs, it will reduce the number of cars sold and hence have an adverse impact on employment. Second, it could lead to cars that people don’t want, and so consumer welfare is reduced. Third, if cars get high mileage, people will drive them more–not enough, in all likelihood, for total fuel consumption to go up, but enough to create other negative externalities, such as congestion.

But what of the fact that fuel consumption produces negative externalities? That it leads to greenhouse gas emissions and endangers our security? The best way to deal with a negative externality is to impose a Pigou tax–one that requires consumers to pay for both the private and social costs of their actions. If the US had gas prices more similar to what we observe in other parts of the developed world, it is likely that people would generally choose more fuel efficient cars, but that those who wanted big cars even in the face of higher gas prices would be able to buy them. At the same time, such a policy would discourage driving (better fuel economy encourages driving), and would therefore help relieve congestion a bit. The revenue raised by a gas tax could also be used to fund transit and provide a tax cut to those most hurt by higher gas prices–those at the lower end of the income distribution.

About Richard K. Green 102 Articles

Affiliation: University of Southern California

Richard K. Green, Ph.D., is the Director of the USC Lusk Center for Real Estate. He holds the Lusk Chair in Real Estate and is Professor in the School of Policy, Planning, and Development and the Marshall School of Business at the University of Southern California.

Prior to joining the USC faculty, Dr. Green spent four years as the Oliver T. Carr, Jr., Chair of Real Estate Finance at The George Washington University School of Business. He was Director of the Center for Washington Area Studies and the Center for Real Estate and Urban Studies at that institution. Dr. Green also taught real estate finance and economics courses for 12 years at the University of Wisconsin-Madison, where he was Wangard Faculty Scholar and Chair of Real Estate and Urban Land Economics. He also has been principal economist and director of financial strategy and policy analysis at Freddie Mac.

His research addresses housing markets, housing policy, tax policy, transportation, mortgage finance and urban growth. He is a member of two academic journal editorial boards, and a reviewer for several others.

His work is published in a number of journals including the American Economic Review, Journal of Economic Perspectives, Journal of Real Estate Finance and Economics, Journal of Urban Economics, Land Economics, Regional Science and Urban Economics, Real Estate Economics, Housing Policy Debate, Journal of Housing Economics, and Urban Studies.

His book with Stephen Malpezzi, A Primer on U.S. Housing Markets and Housing Policy, is used at universities throughout the country. His work has been cited or he has been quoted in the New York Times, The Wall Street Journal, The Washington Post, the Christian Science Monitor, the Los Angeles Times, Newsweek and the Economist, as well as other outlets.

Dr. Green earned his Ph.D. and M.S. in economics from the University of Wisconsin-Madison. He earned his A.B. in economics from Harvard University.

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