The Government Doesn’t Need To Mandate Efficiency

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Written By:
Rob Port

Apr 7, 2012
10:21am

The higher gas prices go, the more fuel efficiency becomes an important factor in vehicle purchases (via Mark Perry).

It’s almost as though consumers react to prices in the market.

U.S. new light vehicles achieved record fuel-efficiency for the third month in a row in March, according to the WardsAuto Fuel-Economy Index (see chart above). Cars and light trucks sold in the month had a combined 24.1 mpg rating, a 1% improvement on the previous record set in February. It was the first time the index has risen above 24 mpg.

The new benchmark represents a 15% increase in fuel efficiency over the index’s base rating of 20.9 mpg, established in fourth-quarter 2007. March light vehicle sales signified a continued movement toward smaller fuel-efficient vehicles that dominated the first quarter.

Some might be tempted to credit government efficiency mandates, specifically the Corporate Average Fuel Economy (CAFE) standards set by Congress, for this increase in fuel mileage. But mandate doesn’t correlate well with fuel efficiency.

Here are the historic CAFE standards going back to inception. Here is a chart showing the fuel economy index:

And here are gas prices for roughly the same timeline (via Gas Buddy):

What this means is that the market reacts rationally to changes in price. When price goes higher, citizens will ration themselves by seeking out greater efficiency. Thus, government rationing in the form of efficiency mandates are unnecessary.

This is a lesson not just for the fuel/vehicle markets, but also for areas like health care, where the government would seek to control cost by imposing efficiency laws. That’s not the solution. The solution is for individual customers for health care/health insurance to feel the real cost, and allow them to react to that cost rationally.