Autos in Econ 331b

Agenda (2/1) Monday: Unified oil market Wednesday: Autos Friday: Review session on Hotelling and other (Ali) (2/8) Monday: The oil premium Problem set due Wednesday: Rebound and finale on energy policy Friday: Review session if necessary (2/15) Begin climate science 2

Reasons for Regulation of Oil-Using Capital 1.Externalities -Local pollution* -Climate change* -Congestion* -Road accidents* 2.Macroeconomic/trade -Impact of oil price on business cycle* -Optimal tariff* -Political/military* 3.Imperfect decisionmaking -Discounting* -Split incentives* -Poor information* 3

Pollution MB, MC Private MC MB Market PollutionEfficient Pollution Social MC Inefficient and efficient pollution

Pollution MB, MC Private MC MB Efficient Pollution= Market Social MC Pollution regulation

Pollution MB, MC Private MC MB Efficient Pollution= Market Social MC Pigovian tax Private MC+tax

Heavy energy/environment hitters in the Obama administration 7 Energy: Steven Chu Environment: Carol Browner Regulation: Cass Sunstein Budget/economics: Peter Orszag Economics and auto czar: Larry Summers

First-best policy options 8

Inefficiencies with using second-best energy-regulatory policies 1.Ineffective because so far from target of policy (example of CAFE standards and congestion). 2.Ineffective because of “rebound effect” which arises when target wrong input (capital instead of fuel). 3.Ineffective because covers such a small fraction of market (automobiles in global carbon market). 4.Not cost-beneficial if already have energy taxes. 9

We are heading into a major period of energy/climate-change regulations. Here are some of the major economic issues: 1.Rebound effect Energy efficiency standards affect the energy-intensity of new capital goods Because they lower the MC, they may increase utilization, leading to the rebound effect. 2.Oil premium Increase oil use leads to higher oil world price This leads to higher total imports costs and macro volatility 3.Public finance issues Regulation and energy taxes lead to higher prices These lead to dead-weight loss when P > MC This leads to “double dividend hypothesis” and to concern about using standards (with no revenues) instead of taxes (with revenues that can lower other taxes) 4.Cost of capital/discounting (later on this one) 10