Novo: To Alter, Transportation and Feebates

Posted: March 30, 2014 in Uncategorized

Incentivize the good and punish the bad. A pretty normal concept that we see used in just about every aspect of life. In the economy, this tool could also be used to improve the way we function as society. A feebate could be one of these tools, and we will explore it through being incorporated with vehicles and transportation.

So what is a feebate? For our purposes, it is a system that would provide a rebate for the purchase of a fuel economy car, and a fee for the purchase of a poor fuel performance car. The idea would be that by utilizing this tool, we could shift the demand of vehicles away from the poor MPG cars to more efficient vehicles. By doing this, we would see a shift in the manufacturing of vehicles as well, and over time the cars we drove would be much more fuel efficient.

In terms of a policy that steps in the try to adjust demand and supply, it is pretty reasonable. I have discussed the pigovian tax for gasoline, which I think is a reasonable policy if implemented slowly over time, but a feebate has some benefits to it over a tax. It does not tax the poor more so than others, which a pigovian tax essentially does. In fact, it can provide a rebate to those that choose to purchase more efficient cars. It also is not a regulation that prevents certain vehicles from existing. If someone wants a Hummer they can still get it, and just pay some additional cost for it.

It can act as a tool to adjust the price signal in the market to increase the incentives for efficient cars. I do want to mention that is not a clear and easy thing to artificially adjust market price signals, but I tend to think that this system would be effective and fairly efficient. France has implemented the system and have seen market shares for efficient vehicles just about double, while the very poor fuel performing fell by even more. The French example also points out a potential issue, in that if rebates are much more predominant than the fee, then we can see a deficit in the program. So the policy needs to be designed with care so that we can facilitate that happening.

Now of course when thinking about this tool, there would have to be a regulation that determines what the efficient rate would be. Also, we would want to think about how often we would need to change the rate. This would be because if the efficient rate was set to 40 MPG, then what would happen as the average car approached that level. Would we want to ratchet up the efficient rate to incentivize the increase in efficiency? While I don’t think it would be perfectly smooth as a policy, I do think it would help to generate large scale manufacturing of efficient cars and in time, we would see some impressive changes in fuel economy which would make a huge difference in our government spending for oil and oil related security. Think about what price would make you think hard about purchasing a efficient car and let me know. Of course, any system would be tiered according to the fee or rebate for different levels of fuel economy. So I’d be interested in your thoughts.

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