ABSTRACT
In 1975 the US government enacted legislation regulating the fuel efficiency of new motor vehicles. The apparent objective of this law is to reduce American dependence on foreign oil. After large increases in the price of petroleum in the late 1990s, and with continued conflict in the Middle East, corporate average fuel economy (CAFE) standards once again became a topic of interest. The CAFE program, as enacted in 1975, called for all manufacturers selling more than 10,000 autos per year in the United States to reach the mandated CAFE levels. CAFE levels rose from 19.0 MPG in 1978 to 27.5 MPG in 1985 and later years. At the margin, consumers equate the price of gasoline with the marginal value of its consumption. In the absence of any externality, the marginal value of the use of a gallon of gas equals its price, and there is no public benefit from reducing the consumption of gasoline.
