The Limits of Market-Oriented Regulatory Techniques: The Case of Automotive Fuel Economy

The search for more efficient, market-oriented regulatory techniques has produced significant recent advances in several areas. Among these would appear to be the corporate average fuel economy (CAFE) approach to reducing gasoline consumption by the domestic automobile fleet. The 1975 Energy Policy and Conservation Act required manufacturers to sell fleets with a sales-weighted average of 18 miles per gallon in the 1978 model year, 19 mpg in 1979, 20 mpg in 1980, and 27.5 mpg in 1985.1 The standards for the four intervening years were subsequently set by the National Highway Traffic Safety Administration at 22, 24, 26, and 27 miles per gallon. The advantages of the averaging approach over uniform vehicle standards or a "gas guzzler" tax are two-fold. First, CAFE permits each firm to increase its overall fuel efficiency in the cheapest manner, since the costs of mileage improvements for different vehicles may be rather different.2 And second, it permits the continuation of a diverse product mix to the consumer, since a uniform standard would probably result in the demise of certain models. These arguments for averaging are now so widely accepted that the principle is being proposed, inter alia, for automotive emissions standards as well. That is, instead of maximum allowable emissions for each and every model, manufacturers could produce models with various levels of pollutants