The Welfare Effects of Misperceived Product Costs: Data and Calibrations from the Automobile Market

This analysis exploits new data from the Vehicle Ownership and Alternatives Survey, which elicits beliefs over the financial benefits of owning higher fuel economy vehicles. The data are used to test for underestimation and to document evidence of “MPG Illusion”: consumers think as if fuel costs scale linearly in miles per gallon instead of gallons per mile. Counterfactuals suggest that the MPG Illusion reduces welfare by less than 4 per new vehicle. Furthermore, even the most severe plausible underestimation of the financial benefits of fuel economy cannot account for the consumer welfare gains attributed to fuel economy standards. (JEL D12, D83, L62)