Question

The Corporate Average Fuel Economy(CAFE) standards are regulations first enacted by theU.S Congress... The Corporate Average Fuel Economy(CAFE) standardsareregulations first enacted by theU.S Congress in 1975 toimprove the averagefuel economy of cars and light trucks (trucks, vans, and sport utility vehicles) produced for sale in theU.S.These standards are costly because auto manufacturers have to develop and install new technology to meet these standards. But the benefits of fuel economy standards include avoided damages from pollutants emitted when burning gasoline and diesel. The 2016 target fuel economy was 34.0 miles per gallon (MPG). The Obama Administration proposed increasingfuel economy standards. The Trump Administration has recentlyrolled back that proposal. You have been asked to weigh in. According to the auto industry, themarginal cost of fuel economy is $1 millionper MPG. Using nonmarket valuation techniques, you have determined that thedamages from pollutants emitted from automobiles(health impacts from particulatematter, impacts from greenhousegasses)is $100 million without thefuel economystandards AND that these damagesfall by $1 million for each MPG the standardis increased.

a)Graphically identify the efficient fuel economy standard.

b)Calculate the net benefits at the efficient fuel economy standard.

c) What are the net benefits of the two proposed fuel economy standards?

d)Which of the proposed fuel economy standards should be adopted according to benefit-cost analysis?

e)Which fuel economy standard imposes more costs on society? Which fuel economy standard imposes more costs on the auto industry?

Answer 1