From the WSJ Weekly Micro Review:
Linking Mileage to Pump Price
by: Josh Mitchell
Apr 22, 2011
Click here to view the full article on WSJ.com
TOPICS: Regulation
SUMMARY: Auto makers are pushing to link federal fuel-economy and emissions targets to the price of gasoline, saying consumers won't pay enough for fuel-efficient cars to make them profitable if gas prices aren't high.
CLASSROOM APPLICATION: The Corporate Average Fuel Economy (CAFE) standard is the sales-weighted harmonic mean fuel economy, expressed in miles per gallon. The auto industry contends that with CAFE standards in place, lower fuel prices result in lower profits. Suppose to meet a fuel-economy standard that a monopoly manufacturer must sell at least one fuel-efficient auto for every gas guzzler. The monopolist optimally sets the output of each of the autos where the sum of the marginal revenues equals the sum of the marginal costs. Therefore, it is possible that the monopolist will sell one of the autos where its marginal revenue is less than its marginal cost. It is even possible that the price of this auto is less than marginal cost. With regard to demand, the demand for the fuel-efficient car is increasing, and the demand for the gas guzzler is decreasing, in the price of gasoline. If the demand for the fuel-efficient auto is sufficiently low (and price elastic), then it is possible that the monopolist will operate at a loss.
QUESTIONS:
1. (Advanced) Why are auto manufacturers more accepting of CAFE standards during periods of high gasoline prices?
2. (Introductory) Does the introduction of CAFE standards in place lead to the increased manufacturing and sales of fuel-efficient autos?
3. (Advanced) Should the federal government tie CAFE standards to gasoline prices?
Reviewed By: James Dearden, Lehigh University
Here is an excerpt from the article:
The Alliance of Automobile Manufacturers, the industry's main trade group, is proposing that regulators periodically review gas prices and other market factors, and scale back fuel-mileage and emissions requirements if gas prices don't hit certain targets.
As if the goal of the regulation was for car companies to make more money. At least they aren't exacerbating the rebound effect!
