The simple economics of motor vehicle pollution: A case for fuel tax

The volume of pollution produced by an automobile is determined by driver's behavior along three margins: (i) vehicle selection, (ii) kilometers driven, and (iii) on-road fuel economy. The first two margins have been studied extensively, however the third has received scant attention. How significant is this 'intensive margin'? What would be the optimal policies when it is taken into account? The paper develops and analyzes a simple model of the technical and behavioral mechanisms that determine the volume emissions produced by a car. The results show that an optimal fuel tax would provide drivers with appropriate incentives along all three margins and that only public information is needed for a fuel tax to be set optimally. In contrast, an optimal distance tax would require private information. Lastly, relative to the optimal fuel tax, a simple uniform fuel tax is shown to be progressive. Thus, being already deployed worldwide, a uniform fuel tax is an attractive second-best policy. These findings should be accounted for when designing new mechanisms to alleviate motor vehicle pollution. -- Highlights: •The paper analyzes motor vehicle pollution and optimal policy responses. •The intensive margin of vehicle use (on-road fuel consumption) is modeled explicitly. •An optimal fuel tax requires only public information, unlike an optimal distance tax. •Fuel taxes should remain the core instrument for car pollution control. •Other policies, such as a car tax, may complement fuel taxes but are not substitutes