The Welfare Effects of Fuel Conservation Policies in a Dual-Fuel Car Market: Evidence from India

42 Pages Posted: 8 Sep 2014 Last revised: 29 May 2022

See all articles by Randy Chugh

Randy Chugh

Government of the United States of America - Department of Justice

Maureen Cropper

University of Maryland - Department of Economics; Resources for the Future

Multiple version iconThere are 2 versions of this paper

Date Written: September 2014

Abstract

We estimate a model of vehicle choice and kilometers driven to analyze the long-run impacts of fuel conservation policies in the Indian car market. We simulate the effects of petrol and diesel fuel taxes and a diesel car tax, taking into account their interactions with the pre-existing petrol fuel tax and car sales taxes. At levels sufficient to reduce total fuel consumption by 7%, the increased diesel and petrol fuel taxes both yield deadweight losses (net of externalities) of about 4 (2010) Rs./L. However, at levels sufficient to reduce total fuel consumption by 2%, the increased petrol fuel tax results in a deadweight loss per liter of fuel conserved that is greater than that caused by the diesel fuel tax. This reflects both the high pre-existing tax on petrol fuel and the high own-price elasticities of fuel demand in India. A tax on diesel cars that results in the same diesel market share as the large diesel fuel tax actually has a negative deadweight loss per liter of fuel conserved. The welfare effects of all three policy instruments are positive, once the external benefits of reducing fuel consumption are added to the excess burden of taxation.

Suggested Citation

Chugh, Randy and Cropper, Maureen L., The Welfare Effects of Fuel Conservation Policies in a Dual-Fuel Car Market: Evidence from India (September 2014). NBER Working Paper No. w20460, Available at SSRN: https://ssrn.com/abstract=2492971

Randy Chugh (Contact Author)

Government of the United States of America - Department of Justice ( email )

Maureen L. Cropper

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States

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