ABSTRACT
In 1974 the fuel economy of new US passenger cars hit its lowest point in recent history: 14 miles per gallon (MPG). At the same time, the Organization of Petroleum Exporting Countries exercised its new found market power by tripling world oil prices. Since gasoline prices increased and the standards were enacted at about the same time, the relative importance of the regulations versus the market response to higher prices is not obvious. In the presence of government fuel economy regulation, the manufacturer faces the problem of balancing the need to comply with the law against the need to provide the level of fuel economy and other vehicle characteristics that the market demands. As fuel prices fluctuate, market demand for fuel efficiency should rise and fall. The general trend of automobile MPG over the past fifteen years suggests a strong relationship to the fuel economy standards. Gasoline prices rose sharply twice, declined gradually twice, and fell sharply once.
