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Could We Make Fuel Efficiency a Selfish Act?

May 25th, 2008 . by economistmom

A few interesting pieces in this morning’s news that relate to the demand for fuel-efficient vehicles.

First, Senator Obama says he owns a hybrid vehicle but doesn’t drive it much, but if fuel prices continue to rise, it will encourage more people to buy (and use) hybrid or other fuel-efficient vehicles.

Second, this Washington Post story citing a Consumer Reports study says it doesn’t make financial sense for a household to switch from a gas-guzzling SUV to a hybrid even at today’s $4.00/gallon price of gas.

They are consistent stories, because it’s true that the private financial incentive to buy a hybrid vehicle depends on the price of gasoline, but at $4/gallon, we’re just not yet near the point where the scales would tip toward the hybrid for a typical, purely selfish consumer. 

This goes back to the fact that we have unusually low gasoline prices in the U.S.–yes, we still do, even at $4+ per gallon.  Go look at this graph I found on the Energy Department’s website, which really puts things in international perspective (I can’t copy it well here):

Weekly Retail Premium Motor Gasoline Prices Including Taxes 

(The US is that bottom line that’s less than half the height of all the other lines.)

And the market price for a gallon of gasoline still falls far below where most economists would estimate the social cost of consuming a gallon of gasoline, after trying to account for the social costs of pollution, congestion, and yes, global warming.  (If you are interested in the rather complicated math, read this nice Resources for the Future survey.)

And speaking of gasoline prices being too low, here’s a third item from today’s (Sunday) news that I just picked up through the Environmental Economics blog:  Cornell economist Robert Frank argues (in today’s NY Times) that gasoline taxes are too low, and wouldn’t it be nice if we could use higher energy taxes to reduce the deficit (emphasis added):

Gasoline is one of a host of goods whose production or consumption generates costs that fall on outsiders. Noisy goods, like leaf blowers, for example, can jolt whole neighborhoods from calm. And goods that don’t biodegrade readily, like many plastic bags, can generate costly waste streams. The list goes on.

That the invisible hand often breaks down is actually good news. After all, we need to tax something to pay for public services. By taxing forms of consumption that generate negative side effects, we could not only generate enough revenue to eliminate budget deficits, but also help steer resources toward their most highly valued uses.

Hooray for environmentalist deficit hawks!  (You know I’ll keep pushing this idea of “going green” with our taxes to “get out of the red”…)

So with gasoline prices still “too low”, it’s not a shock that purchasing a hybrid doesn’t pass the individual consumer’s cost-benefit test, if one measures the “benefit” of a hybrid on pure “gas dollars saved” terms.

We all know people who already own hybrid vehicles, and we know they don’t own them to save money for themselves.  They own them to save the environment and to do their small part to reduce global warming.  They were willing to pay more for a hybrid vehicle not because the savings in gasoline purchases outweighed the extra cost of the hybrid (because it doesn’t), but because they’re socially conscious people.  Any personal savings in their own fuel expenditures is just a bonus to them.

It’s a little like when people donate to public television or radio and get sent a little bonus gift–you know, the DVD set of a documentary series, a tote bag, etc.  (Many years ago I was happy to get a stuffed Barney from PBS.) 

There will always be these socially-conscious people out there to buy and support the things that don’t make sense from a purely private, selfish perspective, and thank goodness for them.  But if we’re ever going to see more than the socially-conscious people buying fuel-efficient vehicles, then the price of gasoline will need to keep rising, and the cost of purchasing those fuel-efficient vehicles will have to fall.  Or we need to make driving hybrids a “hip” thing to do, even for those who aren’t already hip “tree huggers.” 

More on this idea later this week… I have selfish as well as socially-conscious reasons for my interest in this topic.

4 Responses to “Could We Make Fuel Efficiency a Selfish Act?”

  1. comment number 1 by: Larry

    Great article.(OK I am a Prius owner)

  2. comment number 2 by: Mark Thoma

    Kind of the same idea:

    http://meganmcardle.theatlantic.com/archives/2008/05/give_me_your_diamonds.php

  3. comment number 3 by: economistmom

    How timely–on today’s (Monday) front page of the Washington Post (below the fold), a story about how fuel efficiency can get competitive:
    http://www.washingtonpost.com/wp-dyn/content/article/2008/05/25/AR2008052502764.html

    Now that’s a great idea–make it like a video game. We could go even further and make public (on a website) the “high scorers” roll.

    And related to the column Mark pointed to, I was recently told there’s a South Park episode where the Prius is called the “Pious”… I am not a big South Park fan but am going to have to look up that episode.

  4. comment number 4 by: economistmom

    Leave it to Wikipedia! Here’s a description of (and link to the clip of) that South Park episode, called “Smug Alert!”
    http://en.wikipedia.org/wiki/Smug_Alert!