Accident externality and energy: Essays on the U.S. auto industry

The U.S. auto industry represents over three percent of GDP and remains the largest manufacturing industry in the United States. This dissertation, composed of two chapters, studies two interrelated questions with important policy implications: accident externalities from Sport Utility Vehicles (SUVs) and the effect of gasoline prices on the fuel economy of vehicle fleet.;The first chapter quantifies the social costs of the "Arms Race" on American roads based on automobile demand. The growing popularity of sport utility vehicles has been characterized as an "arms race" on American roads. Because SUVs can cause more damage to passenger cars in crashes, drivers may choose to buy SUVs preemptively for self-protection. The incentive to buy SUVs may become stronger as more of them enter the road. This paper offers, to my knowledge, the first measurement of the spillover effect arising from safety concerns in vehicle demand and the social welfare impacts of the arms race. I estimate a market equilibrium model composed of a demand side and a supply side based on both market level data and a household survey. The estimation results provide evidence of the arms race in vehicle demand. I find that, in the long run, the arms race accounted for at least 4.97% of SUV sales in 2005. The arms race caused a social welfare loss of ;The second chapter addresses the question of whether and to what extend gasoline prices affect fleet fuel economy. Using a rich data set consisting of all registered automobiles in 20 U.S. metropolitan statistical areas from 1997 to 2005, we estimate the effect of gasoline prices on the automotive fleet's composition by examining what vehicle scrappage and new vehicle purchase decisions go into the creation of the vehicle fleet. We find that higher gasoline prices increase fleet fuel economy through two channels: (1) by speeding the retirement of older, less fuel efficient used vehicles, and (2) by shifting new auto demand towards more fuel efficient vehicles. These results are statistically significant but relatively modest in magnitude. The short-run and the long-run fuel economy elasticities with respect to gasoline prices are estimated at 0.017 and 0.15, respectively. We conclude that politically feasible increments to the federal gasoline tax will not generate substantial increases in fleet fuel economy and is not likely to dramatically reduce fuel consumption. We argue that additional government programs may be necessary.