Sustainable Transportation Energy Pathways (STEPS)
Delucchi, Mark A. (2007) Cost-Benefit Analysis of Fuel-Economy Improvements. Institute of Transportation Studies, University of California, Davis, Working Paper UCD-ITS-WP-07-01
Fuel economy improvements, such as provided by hybrid electric vehicles, increase the cost of making a motor vehicle, but reduce expenditures on fuel over the life of the vehicle. Generally, if the present value of the benefit of reduced fuel expenditures exceeds the extra cost of making the fuel economy improvements, then the improvements are economically worthwhile. This note discusses the proper way to perform a cost-benefit analysis of fuel economy improvements, using hybrid vehicles as a nominal example. It delineates the difference between the doing the analysis from the perspective of an individual consumer and doing the analysis from the perspective of society. It also shows that the high implicit discount rate that consumers appear to apply to fuel-economy-purchase decisions is best understood not as an explicit expectation of a very high rate of return on the investment foregone by spending money on fuel economy, but rather as the implicit equivalent of a series of “conservative” assumptions about fuel prices, fuel economy improvement, resale value, and so on, combined with an expectation of a normal rate of return on foregone investments.