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Coase and Car Repair: Who Should Be Responsible for Emissions of Vehicles in Use?

Part of the reason that new car manufacturers can choose to maintain prices on their new cars (and adjust market share instead) is that a manufacturer arguably has market power in the sale of a particular car. This means that the manufacturer should consider the elasticity of demand for that car before reducing prices. If there are enough inframarginal customers with inelastic demand for a low fuel e ciency vehicle, then the manufacturer may be better o leaving prices at their existing levels and losing the marginal sales when gasoline prices rise, rather than trying to lower prices in order to preserve sales volume. . | Coase and Car Repair Who Should Be Responsible for Emissions of Vehicles in Use Winston Harrington Virginia D. McConnell Discussion Paper 99-22 February 1999 RESOURCES FOR THE FUTURE 1616 P Street NW Washington DC 20036 Telephone 202-328-5000 Fax 202-939-3460 Internet http www.rff.org 1999 Resources for the Future. All rights reserved. No portion of this paper may be reproduced without permission of the authors. Discussion papers are research materials circulated by their authors for purposes of information and discussion. They have not undergone formal peer review or the editorial treatment accorded RFF books and other publications. Coase and Car Repair Who Should Be Responsible for Emissions of Vehicles in Use Winston Harrington and Virginia D. McConnell Abstract This paper examines the current assignment of liability for in-use vehicle emissions and suggests some alternative policies that may reduce the cost and increase the effectiveness. We first discuss the cost performance and incentives under current Inspection and Maintenance I M programs using the recently implemented Arizona Enhanced I M program as an example. These programs were designed to identify and repair vehicles with malfunctioning emission control systems. Since their inception however I M programs have been plagued by transaction costs that have drastically raised the cost of I M as well as limited its effectiveness. These transaction costs fall into three categories emission monitoring repair avoidance and non-transferability of emission reductions. We argue that most of these transaction costs can be attributed to the current assignment of liability for I M to motorists and we examine the potential for other liability assignments to reduce transaction costs and improve program efficiency. Among the alternative institutional arrangements discussed are greater imposition of liability on manufacturers emission repair subsidies repair liability auctions and vehicle leasing. Key Words mobile .