Tuesday, August 28, 2012

54.5 MPG is Not About Gas Prices

Photo by: TL Davis

So, if all automobiles in the US improve fuel efficiency to 54.5 mpg and, let's assume that people aren't cutting back on transportation at the current fuel prices, then in the future quantity demanded for fuel will be less because of fuel efficiency and assuming supply stays the same, then fuel prices will increase.

Because there are economists at the Gas companies I would assume that the decrease in quantity demanded will result in an increase of price that results in P*Q=Profits that are similar to profits now.

So, 1) the future price of gas will not pay for innovation and cost of more efficient engines because prices will increase and 2) gas prices seems like a poor argument to justify improved fuel efficiency.

Decreased negative externalities is justification enough for improving automobile fuel efficiency but fuel prices aren't.

Thoughts? The hive is smarter than I am. Surely you can resolve this.

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