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Fuel Efficiency and the Economy

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Figure 1. Long lines at the gas pump...Click to Enlarge Image

One result of the 1973 oil embargo was the Energy Policy and Conservation Act of 1975, which established corporate-average fuel economy (CAFE) standards for vehicles sold in the United States. As a result of this law, the fuel efficiency of a typical car rose from roughly 15 miles per gallon to about 28 miles per gallon in little more than a decade. Although technology continued to improve, since the late 1980s automakers have chosen to increase vehicle weight and improve performance, letting the fuel efficiency of their vehicles remain static. Still, average fuel efficiency has slowly declined over the past 15 years, because manufacturers and consumers have grown increasingly fond of light trucks, which are treated more leniently under the law. Imposing stricter fuel-efficiency standards would certainly help combat America’s dependency on foreign oil, but would it cost jobs, as many automakers contend? The authors' economic modeling suggests that tougher standards would, in fact, give the economy a boost.

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