The Cost of Fuel Economy in the Indian Passenger Vehicle Market
Investigators: Randy Chugh, Maureen Cropper and Urvashi Narain
(NBER Working Paper 16987, April 2011; published in Energy Policy November 2011)
As a result of India's economic boom, India’s car market is the fastest growing in the world. The associated increase in fuel consumption, which is of concern for both energy security and environmental reasons, has led to calls for implementing fuel economy standards for passenger vehicles in India. One argument for fuel economy standards (as opposed to higher fuel taxes) is that consumers undervalue fuel savings: they fail to buy a more fuel-efficient vehicle even though the additional purchase price is less than the present value of fuel savings.
In this paper we ask whether car buyers in India are willing to spend an extra dollar when purchasing a new car to save a dollar in future fuel costs. Using data for 4 market segments (petrol hatchbacks, diesel hatchbacks, petrol sedans, and diesel sedans) we compute 95 percent confidence intervals for the marginal cost to the consumer of an increase in fuel economy. We find that the associated present value of fuel savings falls within the 95 percent confidence interval for the price of fuel economy, in all market segments, for the years 2002 through 2006. Thus, we fail to reject the hypothesis that consumers appropriately value fuel economy. This finding suggests that India may not need to implement fuel economy standards, at least not due to consumer myopia.