Paying for fuel efficiency

Date posted: June 26, 2013

It’s an understatement to say that people are very focused on gas prices, particularly when they rise. Of course, as gas prices increase, the value of vehicles getting more miles per gallon also increases. Is the extra that buyers are willing to pay for fuel efficient vehicles related to what they might save in fuel costs? N.C. State University economist Mike Walden responds.

“Well, conceptually you might think the answer is yes, but until recently, we really haven’t had any empirical evidence of that.

But recently, a couple of economists examined actually millions of auto transactions — auto purchases — and they used that examination to try to see if people are willing to pay, for example, a dollar more per vehicle in order to save a dollar in future fuel prices. And so without getting into details of how they calculated savings in future fuel prices because of course, that’s going to be related to forecasts, and you have to look at how long a person is going to drive a vehicle, etcetera; it’s a rather complicated process.

Anyway, they came to the conclusion that on average, buyers are willing to pay about 76 cents more for a vehicle today in order to save a dollar in fuel costs in the future. So, it’s not quite one for one. I would argue this is pretty close, because again, there is a lot of uncertainty in the calculation of what you’re going to save for fuel costs.

No one knows exactly what fuel prices are going to be. People are going to trade off saving money in the future for having that money today in different ways. Now, one other result from their study, they found that it took buyers about six months to adjust the value that they put on a fuel efficient vehicle in relationship to changes in gas prices.”

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