The welfare effects of misperceived product costs: Data and calibrations from the automobile market
Allcott uses new survey data on consumers' beliefs about the financial benefits of owning vehicles with higher fuel economy to test whether consumers underestimate them. They document what they call the MPG illusion: consumers appear to reason as if fuel costs fall in proportion to miles per gallon, when they fall in proportion to gallons per mile. Counterfactual simulations suggest the illusion lowers consumer welfare by less than 4 dollars per new vehicle, and the authors conclude that even at the most severe plausible level of underestimation it cannot explain the welfare gains that have been attributed to fuel economy standards.
Allcott uses new survey data on consumers' beliefs about the financial benefits of owning vehicles with higher fuel economy to test whether consumers underestimate them. They document what they call the MPG illusion: consumers appear to reason as if fuel costs fall in proportion to miles per gallon, when they fall in proportion to gallons per mile. Counterfactual simulations suggest the illusion lowers consumer welfare by less than 4 dollars per new vehicle, and the authors conclude that even at the most severe plausible level of underestimation it cannot explain the welfare gains that have been attributed to fuel economy standards.
Written from the abstract read 2026-10-27 via OpenAlex.
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Allcott, H. (2013). The welfare effects of misperceived product costs: Data and calibrations from the automobile market. American Economic Journal: Economic Policy, 5(3), 30-66. doi:10.1257/pol.5.3.30