Fuel Efficiency, Gas Tax, and Externalities

Econbrowser is an economics blog by a couple of people with advanced degrees (one, I believe, is a professor). It addresses a Bush Administration proposal to reduce American gasoline consumption by tinkering with the CAFE standards.

This is a typical political way of addressing the problem, because the taxpayer doesn't directly see the cost - the world is a better place and (as far as I know) it doesn't cost me a dime. But as a guy who has to have a $1,000 repair job done on my car purley because of an issue with the oxygen sensors and catalytic converter (another regulatory mandate), I can tell you that the true cost does in fact hit us in the pockets.

The whole blog is worth reading, but here's an excerpt:
Overall, Jacobsen estimates that a one-mile-per-gallon increase in the required average corporate fuel efficiency would increase the average fuel-efficiency of all new cars sold by 2.5%. However, since most of the older cars would still be on the road, Jacobsen estimates that during the first year, total U.S. gasoline consumption would decline by only 0.8%. He estimates the costs of this 1 mpg tightening of CAFE would be $20 billion in the first year, with these first-year costs shared about equally between U.S. consumers and producers. For comparison, Jacobsen claims that a gasoline tax could accomplish the same first-year effect at an efficiency cost of significantly less than $1 billion.

Over time, the fuel savings from tightening CAFE would of course increase, but even after 10 years, Jacobsen concludes that that a gasoline tax could accomplish the same thing at 1/6 the cost.