The Effect of Gasoline Price Changes on Consumer Demand for Fuel Economy: Empirical Estimates and Policy Implications James M. Sallee, The Harris School The consumption of petroleum in the personal transportation sector is central to energy and climate policy. In the United States, personal transportation alone accounts for 40% of the petroleum consumed and 20% of the greenhouse gases emitted. Hydrogen fuel cells are a distant solution, electric vehicles remain unproven, and there are doubts on the climate value of biofuels as an alternative. All of this puts great emphasis on the role of conservation through efficiency. To spur conservation, economists favor policies that increase the price of fuel (a gas tax) over regulatory structures (fuel economy standards). How consumer demand for fuel economy responds to fuel price changes is, however, not well understood. In this project, Sallee proposes to estimate how consumer demand for fuel economy responds to fuel price changes by examining how the prices of used cars with differing fuel economies have responded to gasoline prices over the last 20 years. Sallee’s research is aimed at answering two related empirical questions. First, what is the elasticity of demand for fuel economy with respect to the price of fuel? Estimates of this parameter will be directly useful to researchers interested in forecasting how consumer demand for fuel economy and petroleum demand will respond to policy and economic shocks. The second question is: how does the observed response of used vehicle prices to gasoline prices compare to a theoretical benchmark? A gasoline price shock changes the operating cost of a vehicle over the remainder of its lifetime by a specific amount. This means that observed price changes of used cars can be compared to a specific prediction. Sallee will test whether or not observed price responses differ significantly from the theoretical benchmark and interpret this as a test of whether or not consumers properly calculate the present discounted value of fuel economy when purchasing a vehicle. The answer has important policy implications regarding fuel economy standards.