New Motor Vehicle Fuel Economy Standards, Part 3:
How important is fuel economy to consumers?
25 Jun 2007 in Regulatory Economics
The Senate has voted to raise corporate average fuel economy standards. Today we follow up with a post on the relative importance of fuel economy to motor vehicle purchasers.
Some commentators imply that passage of more stringent CAFE standards demonstrates that a majority in Congress is economically illiterate. But it's also possible that Congress understands CAFE economics clearly, that it desires an outcome that an unregulated market will not produce, and that it is unconcerned about real but indirect effects. Support for this alternative hypothesis can be gleaned from a more comprehensive look at the cost of operating a motor vehicle. In short, the cost of gasoline may be too small a fraction of the cost of owning a motor vehicle to induce consumers to voluntarily make the changes in behavior that Congress wants.
Edmuncs.com is a popular resource for car shoppers. It has a list of the Top 10 Most Fuel-Efficient Cars for 2006. These cars are listed in the table below with their EPA estimated mileage values, an unweighted average of ciy and highway values, the cost of gasoline per mile at $3.00 per gallon, and the total cost of ownership per mile as estimated by Edmunds. (A total of 12 cars are in Edmunds' "Top Ten" list because of ties. Estimated cost of ownership is not available for the Scion xA because it is too new.)
| The Cost of Owning a Fuel-Efficient Car 'Top Ten Most Fuel-Efficient Cars for 2006' from Edmunds.com |
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| Make & Model | EPA MPG City/Hwy |
Unweighted Avg MPG |
$ / Mile For Gas |
$ / Mile Total |
Gas $ / Mile Total $ / Mile |
| Honda Insight | 60/66 (1) | 63 | .05 | .43 (6) | 12% |
| Toyota Prius* |
60/51 (2) | 55 | .05 | .45 (9) | 11% |
| Honda Civic Hybrid* |
49/51 (3) | 50 | .06 | .42 (3) | 14% |
| Volkswagen Golf TDI |
37/44 (4) | 41 | .07 | .45 (9) | 16% |
| Volkswagen New Beetle TDI |
37/44 (4) | 42 | .07 | .50 (11) | 14% |
| Toyota Corolla |
32/41 (6) | 37 | .08 | .42 (3) | 19% |
| Scion xA |
32/37 (7) | 35 | .09 | NA | NA |
| Hyundai Accent |
32/35 (8) | 34 | .09 | .40 (2) | 23% |
| Kia Rio |
32/35 (8) | 34 | .09 | .38 (1) | 24% |
| Honda Civic |
30/40 (10) | 35 | .09 | .42 (3) | 21% |
| Pontiac Vibe |
30/36 (11) | 33 | .09 | .43 (6) | 21% |
| Toyota Matrix | 30/36 (12) | 33 | .09 | .44 (8) | 21% |
| Mean Variance |
41 9.47 |
.077 2.53 |
.43 .029 |
18% 4.37 |
|
| * Hybrid |
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Several features of the data are worth noting.
First, gas mileage ranges by a factor of two even at the high end of fuel economy. Consumers determined to get high mileage have a surprisingly wide range of choices. Moreover, these vehicles have many differences; some, for example, are two-seaters.
Second, the cost of gas is a small fraction of the total cost of ownership. In the Edmunds list, this ranges from 11% to 24% of total cost. It makes sense for manufactures to compete on gas mileage in this vehicle category, but it also makes sense for consumers not to weight such claims too highly. For those consumers who care only about conserving gas, the Honda Insight and Toyota Prius are easy choices. But for consumers whose objective is minmize total cost of ownership, six of 10 remaining vehicles are equal or less expensive to own that the Insight and eight of 10 are equal or less expensive to own than the Prius. (Hybrids like the Prius have other advantages not available to conventional vehicles that achieve similar fuel efficiency -- most notably, a "green" cachet [which signals the owner's environmental sensitivity] and preferred access to high occupancy vehicle [HOV] lanes [which reflects the political power of signaling one's environmental sensitivity]. For long-distance commuters, the economic benefits of HOV lane access could swamp all other factors in the purchase decision.)
Third, the range in estimated gas mileage (2.0x) is much less than the range in estimated total cost of ownership (1.3x). Looking only at gas mileage gives an exaggerated picture of differences in total cost of ownership. Consumers who pay attention to total cost -- such as by perusing websites like Edmunds.com -- will care less about fuel efficiency as an attribute than those who listen only to manufacturers' advertising.
Edmunds also publishes a list of recommended SUVs, and while they are not necessarily representative, they offer interesting insights. We've done the same calculations below. (Some models are too new to have total cost of ownership estimates.)
| The Cost of Owning an SUV
'SUVs Recommended by Edmunds.com' |
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| Make & Model | EPA MPG City/Hwy |
Unweighted Avg MPG |
$ / Mile For Gas |
$ / Mile Total |
Gas $ / Mile Total $ / Mile |
| Acura MDX | 17/23 | 20 | $0.15 | $0.70 | 21% |
| Chevrolet Suburban | 14/19 | 17 | $0.18 | $0.66 | 27% |
| Chevrolet Tahoe | 16/20 | 18 | $0.17 | $0.63 | 27% |
| Honda CR-V | 23/29 | 26 | $0.12 | $0.47 | 26% |
| Mazda CX-7 ('07) | 19/24 | 22 | $0.14 | NA | NA |
| Mazda CX-9 (''07) | 18/24 | 21 | $0.14 | NA | NA |
| Mercedes Benz GL ('07) | 15/19 | 17 | $0.18 | NA | NA |
| Toyota FJ Cruiser ('07) | 19/22 | 21 | $0.14 | NA | NA |
| Toyota Land Cruiser | 13/17 | 15 | $0.20 | $0.97 | 21% |
| Toyota RAV4 | 24/30 | 27 | $0.11 | $0.47 | 23% |
| Mean Variance |
20 3.69 |
$0.15 0.03 |
$0.65 0.17 |
24% 2.61 |
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The two small SUVs (Honda CR-V and Toyota RAV4) cost about as much to own as the most fuel efficient cars in the previous table, and of course, they have many other attributes that "high fuel economy" cars do not. The range in gas mileage is similar (1.8x) to the range among top fuel-efficient cars (2.0x), but the share of cost attributable to gasoline shows very little variation (CV = 0.11 versus 0.24 for fuel economy cars).
For the SUVs, the cost of gasoline is about one-fourth of the total cost of ownership despite wide differences in SUV size and price. For consumers who buy SUVs, other factors besides the cost of of gasoline probably dominate purchase decisions, and no amount of jawboning by Congress seems likely to have any perceptible effect.
Which brings us back to the new fuel economy standards passed by the Senate. Congress understands that consumers like SUVs. The new CAFE standards are intended to make them scarce, if not extinct. Only small SUVs, like the Honda CR-V and the Toyota RAV4, can reliably be expected to survive. If consumers dislike the choices they face once the new standards come into effect, they will hold manufacturers accountable for failing to produce products they ant to buy.
Prior to the establishment of CAFE standards, the SUV category did not exist. Manufacturers developed SUVs (and minivans) in large part to escape CAFE standards for passenger cars; they were subject to the lower standards applicable to light trucks. That is, they exploited a loophole in the law to maximize their now-constrained ability to produce the kinds of vehicles consumers wanted to buy.
It's not clear whether there is a loophole in the Senate-passed CAFE bill. But if there is, manufacturers will do everything they can to find it and exploit it. That's the only way they can succeed in building vehicles that consumers want, rather than the vehicles Congress wants them to drive instead.
