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Technical Paper

Reasons for changes in MPG Estimates, Model Year 1978 to the Present

In model year 1983, new car MPG declined for the first time in ten years. Accompanying this decline in MPG, the size of the average car increased, car weights and engine sizes increased and diesel sales declined - all reversing their movements over the previous ten years. Using carline MPG estimates and sales figures, it is estimated that new car MPG declined 0.29 in 1983 after rising 6.70 MPG over the previous four years. Furthermore, it is estimated that actions by new car buyers would have lowered the 1983 MPG 0.40 MPG through the purchase of larger cars, cars with larger engines and fewer diesel engines if the manufacturers had not made some fuel economy improvements and introduced some new high-MPG cars. A simple model of future fuel use increases as a function of MPG levels below a specified level consistent with the CAFE standards shows that the costs of lower fuel economy will only gradually be felt, but that these costs will increase over time and persist for over a decade.

Consumer Behavior and Risk Aversion

Auto manufacturers have known and surveys confirm that consumers require short payback periods (2-4 years) for investments in fuel economy. Using societal discount rates, engineering-economic generally find substantial potential to increase fuel economy, cost-effectively. This phenomenon, often referred to as the ?energy paradox?, has been observed in nearly all consumers? choices of energy-using durable goods. Loss aversion, perhaps the most well established theory of behavioral economics, provides a compelling explanation. Engineering economic analyses generally overlook the fact that consumers? investments in fuel economy are not sure things but rather risky bets. Future energy prices, real world on-road fuel economy, and many other factors are uncertain. Loss aversion describes a fundamental human tendency to exaggerate the potential for loss relative to gain when faced with a risky bet. It provides a sufficient explanation for consumers?