Arthur van Benthen, Business Economics and Public Policy, The Wharton School
Abstract: The objective of this project is to document a striking example of government-induced innovation from air pollution policies for passenger transportation and advance knowledge on the effectiveness and efficiency of such policies. Economics textbooks describe optimal policy for such emissions—a Pigouvian tax equal to the marginal external cost of emissions. Taxing vehicle air pollution emissions, however, is technologically challenging. No economically viable technology can accurately measure individual pollution emissions at scale. Instead, the US, EU, Japan, China, India, Brazil, and many other countries rely heavily on new-vehicle exhaust standards to regulate air pollution. Exhaust standards set a maximum emissions rate per mile that applies to every vehicle. More recent standards also impose fleet-wide average requirements. This research provides the first comprehensive analysis of the effectiveness and efficiency of U.S. exhaust standards over several decades and provides empirical evidence that such government policies have induced enormous innovation in the automotive sector. We show that without the government’s involvement, these innovations likely would not have happened, or at a much slower pace.