Question

1. The Corporate Average Fuel Economy (CAFÉ) standards was originally set to reduce

America’s dependency on foreign oil by increasing fuel efficiency. How was the program

designed? How did different standards for different vehicle types affect the goals and

outcomes of the CAFE program?

2. While fuel taxes and fuel economy standards can both be effective in increasing the

number of miles per gallon in new vehicles, clearly explain why fuel taxes are superior

means of reducing emissions from automobiles.

3. Using demand and supply graphs for road space (where Q = quantity of road space and

P= price of roadspace), clearly explain road congestion. Secondly, show how an increase

in the supply of roadspace does not permanently solve the road congestion problem.

Answer 1

Answer:

1) The CAFE standards are regulations in the United Sates, first enacted by the US Congress in 1975, after the 1973-74 Arab Oil Embatgo, in order to improve the average fuel economy of cars and light trucks produced for sale in the US. CAFE has seperate standards for 'passenger cars' and 'light trucks' even if the majority of 'light trucks' grew steadily from 9.7% - 47% in 1979-2001 respectively. and remained at 50% numbers up to 2011. More than 500000 vehicles in the 1999 model year exceeded the 3500 kg GVWR cutoff and were thus omitted from CAFE calculations.

More recently, coverage of medium duty trucks has been added to the CAFE regulations starting in 2012 and heavy duty commercial trucks started in 2014.

Some evidence shows that fuel economy standards have succeeded in reducing carbon dioxide emmission from passenger cars. Some of the studies indicates that they force carmakers to offer more fuel efficient cars and sell fewer gas guzzlers. In short time consumers benefit from lower fuel expenses. According to the American government an average middle class family will only have to spend about $2000 more on a new car that will save them $6000 in fuel cost. As an added bonus, lower fuel consumption makes the economy less dependent on unfriendly foreign regimes and all this happens without anyone writing a tax check to the government.

2) Traditionally vehicles have been taxed on the basis of variables such as production year, engine output and weight. Previously, there was a certain link between the taxes and the vehicles' carbon emission, beacuse the size and performance of the vehicles are important in determining the size of their emissions.

However, after the restructuring the taxes are directly linked to the emissions themselves and not to other variables. In different words, the incentives for consumers to choose environmentally friendly vehicles become stronger.

3)

As shown in the diagram above,

road space supply is fixed since roads are fixed and requires time and space to be expanded thats why it is vertical. If the road price is free then demand would exceed supply hence, roadspace is public goods as in that its non rival and we can not exclude it and no charge of using roadspace will lead to externality or overriding problem.

As we can see in diagram above that supply cuve shifts to the right side as roadspace increases. But this does not solve the problem of congestion if it's free as demand will still exceed supply. As population increases if price of roadspace is eual to 0 then demand exceeds the supply.