Question

The Obama administration has pushed for increases in vehicle gas mileage per gallon by the year 2016. If we increase the requirement by 30% would we expect the use of gasoline to fall by 30%? Analyze this question using the market forces discussed in this chapter.

Answer 1

No

This is because an improvement in gas mileage definitely gets converted into reduced consumption of gasoline, but it is not by the same amount. The demand for gasoline falls but by a smaller proportion. This is because the exact fall of 30% in gasoline demand is overset by an increased demand for gasoline by new drivers and new car owners who have started demanding and driving more cars because of the increased mileage.

For e.g. a person who was earlier using public transport to commute to office would now taking his own car to work as it would cost less now