Using Loopholes to Reveal the Marginal Cost of Regulation: The Case of Fuel-Economy Standards

@article{Anderson2011UsingLT,
  title={Using Loopholes to Reveal the Marginal Cost of Regulation: The Case of Fuel-Economy Standards},
  author={Soren T. Anderson and James M. Sallee},
  journal={The American Economic Review},
  year={2011},
  volume={101},
  pages={1375-1409}
}
Corporate Average Fuel Economy (CAFE) regulations constrain automakers to produce vehicles whose average efficiency exceeds a minimum standard. A “loophole" in the program allows firms to relax this constraint by producing gasoline-ethanol flexible-fuel vehicles, which are credited with far better mileage than they actually achieve. In this paper, we demonstrate that when firms use this loophole, they reveal the marginal cost of complying with the standard. This is because firms equate the… Expand
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