Gasoline Prices, Fuel Economy, and the Energy Paradox

Policymakers often assert that consumers undervalue future gasoline costs when they buy automobiles. We test this by measuring whether relative prices of vehicles with different fuel economy ratings fully adjust to variation in gasoline prices. Vehicle prices move as if consumers are indifferent between $1.00 in discounted future gas cost and $0.76 in vehicle purchase price. We show how corrections for endogenous market shares and utilization, measurement error, and different gasoline price forecasts affect the results. We also provide unique evidence of sticky information: vehicle markets respond to changes in gasoline prices with up to a six-month delay.