Presentation by Dr. Arthur van Benthem (The Wharton School, Business Economics & Public Policy Dept.)
Many important policies aim to fix market failures due to the existence of an “externality” such as pollution. For a long time, economists have understood that market efficiency can be fully restored when pollution is taxed directly at its environmental damage. Yet, relatively few policies closely follow this prescription. Often it is administratively impossible, technologically too costly, or politically infeasible to price actions according to the externalities that they generate. In this presentation, I will focus on gasoline-saving policy in the United States. This is a clear example of how policy deviates from the textbook prescription, with many problematic unintended consequences as a result. I will discuss evidence that fuel-economy standards lead to a car fleet that is too large, too old, and driven too much. Also, the current standards (still) allow for many loopholes that manufacturers have successfully exploited for a long time.