Autos in Econ 331b

Agenda

(2/1) Monday: Unified oil marketWednesday: AutosFriday: Review session on Hotelling and other (Ali)

(2/8) Monday: The oil premium Problem set due

Wednesday: Rebound and finale on energy policyFriday: Review session if necessary

(2/15) Begin climate science

2

Reasons for Regulation of Oil-Using Capital

1. Externalities- Local pollution*- Climate change*- Congestion*- Road accidents*

2. Macroeconomic/trade- Impact of oil price on business cycle*- Optimal tariff*- Political/military*

3. Imperfect decisionmaking - Discounting*- Split incentives*- Poor information*

3

Pollution

MB, MC

Private MC

MB

Market PollutionEfficient Pollution

Social MC

Inefficient and efficient pollution

Pollution

MB, MC

Private MC

MB

Efficient Pollution= Market

Social MC

Pollution regulation

Pollution

MB, MC

Private MC

MB

Efficient Pollution= Market

Social MC

Pigovian tax

Private MC+tax

Heavy energy/environment hitters in the Obama administration

7

Energy: Steven Chu

Environment: Carol Browner

Regulation: Cass Sunstein

Budget/economics: Peter Orszag

Economics and auto czar: Larry Summers

First-best policy options

8

Market failure First-best instrument

Externalities

Local pollution Locally determined regulations or feesClimate change Global carbon tax

Congestion Very complicated time and location specific congestion fees

Road accidents Very complicated engineering, training, DUI, etc.

Macroeconomic/trade/political

Impact of oil price on business cycle

Strategic oil reserve and variable oil taxes

Optimal tariff Tax on oil, probably global

Political/ military High tax on oil use plus complicated

Nuclear proliferation ?

Imperfect decisionmakingDiscounting Remove capital market imperfections

Split incentives "Meter" all uses (including Yale students!); peak-load pricing

Poor information Provide information stickers

Inefficiencies with using second-best energy-regulatory policies

1. Ineffective because so far from target of policy (example of CAFE standards and congestion).

2. Ineffective because of “rebound effect” which arises when target wrong input (capital instead of fuel).

3. Ineffective because covers such a small fraction of market (automobiles in global carbon market).

4. Not cost-beneficial if already have energy taxes.

9

We are heading into a major period of energy/climate-change regulations. Here are some of the major economic issues:

1. Rebound effect• Energy efficiency standards affect the energy-intensity of new

capital goods• Because they lower the MC, they may increase utilization,

leading to the rebound effect.

2. Oil premium• Increase oil use leads to higher oil world price• This leads to higher total imports costs and macro volatility

3. Public finance issues• Regulation and energy taxes lead to higher prices• These lead to dead-weight loss when P > MC• This leads to “double dividend hypothesis” and to concern

about using standards (with no revenues) instead of taxes (with revenues that can lower other taxes)

4. Cost of capital/discounting (later on this one) 10