Date of Award

5-2002

Degree Type

Dissertation

Degree Name

Doctor of Philosophy

Major

Economics

Major Professor

Matthew Murray

Committee Members

Steve Stewart, Milton Russell, Paul Jakus

Abstract

The primary purpose of this study was to compare two common emissions based taxes by implementing a mathematical approach to consumer demand estimation for new vehicles. The model developed allows the researcher to derive demand from observed firm output and market prices using assumptions about firm and consumer behavior, and market structure. The advantage of this revealed demand approach is that it does not require the specification of the consumer’s utility function or any firm’s production function. In addition, the own price and cross price elasticities of vehicle demand are determined without statistical regression.

The model developed in this paper assumes Cournot-Nash behavior and divides the automobile market into five homogenous segments. Then, a global optimization program is used to mathematically determine the range of values the coefficients of demand must take in each segment to satisfy market equilibrium. These coefficients are then used to estimate own and cross price elasticities of demand and construct demand equations.

From these demands, simulations were performed to examine the comparative impact on social welfare of both the per mile emission tax (PMET) and the lump sum emission tax (LSET) in the automotive and travel markets. In the simulations, a global optimization program was used to allow market conditions to change while holding constant the level of pollution reduction and satisfying the other constraints of the model.

The simulation, performed without discounting future gains from trade, found that in five of the thirty-two quarters examined, and regardless of market conditions, that the LSET produced more gains from trade. In the remaining quarters and in the other simulations performed, the outcomes varied depending upon the cross price elasticity of vehicle demand and upon the sensitivity of consumers to vehicle operating cost.

When vehicle prices are not sensitive to vehicle operating costs, and consumers view vehicles in different segments as good substitutes, the simulations indicate that the PMET reduces pollution by the desired amount with more gains from trade than the LSET. On the other hand, when vehicle prices are sensitive to vehicle operating costs, and vehicles in different segments are not very close substitutes, the LSET reduces pollution by the desired amount with more gains from trade than the PMET.

The simulations also show that an approximately 20 percent reduction in emissions from new vehicles is achieved by the LSET with a median tax rate of $155.74 per gram of average CO emissions per mile. Consequently, a vehicle that emits an average of two grams of CO per mile would pay a one-time fee of $311.48. The median tax rate required by the PMET is $ 0.00666 per gram per mile. Accordingly, a vehicle that emits two grams of CO per mile on average would pay $0.0103 per mile or $1332.46 for every 100,000 miles traveled. The difference between the two tax rates, required to achieve the same pollution reduction goal, is likely the result of consumers highly discounting the PMET’s future payments.

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