Consumer Valuation of Fuel Costs and the Effectiveness of Tax Policy: Evidence from the European Car Market

49 Pages Posted: 23 Jan 2015

See all articles by Laura Grigolon

Laura Grigolon

KU Leuven - Faculty of Business and Economics (FEB)

Mathias Reynaert

University of Leuven; University of Antwerp

Frank Verboven

KU Leuven - Faculty of Business and Economics (FEB)

Multiple version iconThere are 2 versions of this paper

Date Written: December 2014

Abstract

To what extent do car buyers undervalue future fuel costs, and what does this imply for the effectiveness of alternative tax policies? To address both questions, we show it is crucial to account for consumer heterogeneity in mileage and other dimensions. We use detailed product-level data for a long panel of European countries, and exploit variation in fuel prices by engine type. We find there is only modest undervaluation of fuel costs. As a consequence, fuel taxes are unambiguously more effective in reducing fuel usage than product taxes based on fuel economy, because fuel taxes better target high mileage consumers.

Keywords: effectiveness of tax policy, European car market, fuel cost valuation

JEL Classification: H23, L62

Suggested Citation

Grigolon, Laura and Reynaert, Mathias and Verboven, Frank, Consumer Valuation of Fuel Costs and the Effectiveness of Tax Policy: Evidence from the European Car Market (December 2014). CEPR Discussion Paper No. DP10301, Available at SSRN: https://ssrn.com/abstract=2554376

Laura Grigolon (Contact Author)

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

HOME PAGE: http://www.econ.kuleuven.be/public/N07082/

Mathias Reynaert

University of Leuven ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

HOME PAGE: http://www.econ.kuleuven.be/public/N10109/

University of Antwerp ( email )

Prinsstraat 13
Antwerp, 2000
Belgium

Frank Verboven

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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