Question

Consider the following hypothetical natural experiment. The United States imposes a 25% tariff on imported automobiles (cars) in 2020 but does not do so on imported trucks. Canada does not impose such a tariff. In 2020 vehicles (cars+light trucks) in the U. S. (noncommercial) averaged 30 mpg while vehicles in Canada averaged 35 mpg. In 2025 vehicles in the US averaged 35 mpg while vehicles in Canada averaged 45 miles per gallon. Assume (this is a hypothetical natural experiment) that there are no differences between drivers and economic conditions in Canada and the U.S. In an actual analysis of such a situation any observable differences would be addressed using some matching algorithm. a. Using the difference in difference estimator calculate the yearly impact of the tariff on fuel efficiency for all vehicles. b. Assuming that there were 10 million vehicle (car and light truck) sales in the U.S. in 2025 and that each vehicle drives on average 10,000 miles per year, how much more gasoline would be consumed by U. S. drivers in 2025 due to the tariff?

Answer 1

Q a) Explanation-

Mileage increase in US over the period of 5 years= 35-30= 5 mpg

Mileage increase in Canada over the period of 5 years = 45-35= 10 mpg

Over these 5 years, Growth in mileage in Canada is twice compared to US.

Imposition of tariff in US has resulted in lower yearly growth in mileage in US compared to Canada.

Q b) Explanation-

Assuming that In absence of tariff, Mileage in US would have increased at same rate as of Canada.

Extra fuel per mile (in gpm) due to tariff= 0.02857- 0.0259= 0.00267 gpm

Total no of vehicles= 10000000

average distance traveled by vehicle in year 2025= 10000 miles

Extra fuel (in gallon) due to tariff= 100000000000*0.00267= 267000000 gallons