Fixed and variable cost of automobiles

Ismir Mulalic, Jan Rouwendal

Research output: Contribution to conferencePaperResearchpeer-review

Abstract

Recent empirical analyses have found strong reactions of car prices to changes in fuel costs. We develop a model of car quality choice to further investigate this relationship. We show that in the empirically relevant case quality characteristics increase fixed as well as variable costs, and our model focuses on that situation. Quality aspects must then be an argument of the utility function and we introduce them in a general way. In equilibrium the marginal willingness to pay for these aspects must be equal to their margi nal impact on fixed as well as variable costs. We estimate the marginal costs of various quality aspects using an extensive Danish data set. We show that under suitable assumptions the marginal willingness to pay for quality aspects is a structural parameter of the consumer’s preference. We use our results to investigate this structural parameter and study its relationship with household characteristics. Finally, we use our results to compute the change in the willingness to pay for quality characteristics that results from a 1% change in the fuel price.
Original languageEnglish
Publication dateSep 2014
Number of pages38
Publication statusPublished - Sep 2014
Externally publishedYes
EventRe - Considering Motor Fuel Taxes – Options for Reforming the Taxation of Vehicle Use and Ownership - KTH Royal Institute of Technology, Stockholm, Sweden
Duration: 18 Sep 201419 Sep 2014

Conference

ConferenceRe - Considering Motor Fuel Taxes – Options for Reforming the Taxation of Vehicle Use and Ownership
LocationKTH Royal Institute of Technology
CountrySweden
CityStockholm
Period18/09/201419/09/2014

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