Estimating Consumer Substitution Between New and Used Passenger Vehicles
The application of a method for estimating the market price elasticity of demand for new vehicles shows that tightening fuel economy standards have modest impacts on new vehicle sales.
Key Findings
- This paper presents a simple method for estimating consumer substitution between new and used passenger vehicles.
- The method is applied to simulate the effect of tightening fuel economy standards for cars and light trucks on new vehicle sales.
- The simulation results show that applying the estimated elasticity to evaluating the SAFE vehicles rules significantly reduces the net benefits of the rule.
Abstract
Recent literature has shown the importance of modeling consumer demand for assessing the effects of new passenger vehicle fuel economy and greenhouse gas emissions standards. A relevant feature of demand for making this assessment is how vehicle buyers substitute between new vehicles and other options, such as a used vehicle. In this paper, I estimate this substitution using market-level and second choice data. I estimate a long run market-price elasticity of demand for new vehicles equal to −0.34. I then explore the implications of this elasticity for assessing the welfare effects of 2021-2026 SAFE Vehicles Rule. The simulation results show that applying the estimated elasticity significantly reduces the net benefits of the rule.
