We investigate the market equilibrium and welfare effects of a fuel tax in China relative to an alternative policy instrument that rations the number of new automobile sales through auctioned quotas. Unlike those of previous studies, our modeling approach incorporates both household car purchase and utilization decisions, the latter of which have been ignored in previous studies on China's fuel tax. Ignoring this margin of choice will underestimate the fuel tax's ability to mitigate externalities. Using detailed household-level panel data and a fixed effects econometric specification, we estimate the fuel price elasticity of vehicle miles traveled is −0.59 on average. The results of the counterfactual analysis suggest that a 51% increase in tax-inclusive gasoline prices will reduce car sales by 24.9% but increase social welfare to a degree that depends on vehicles' lifetime. We find that compared to auctioned quotas, the fuel tax results in greater car sales but higher social welfare.
Bibliographical noteWe are indebted to Shanjun Li for providing us with the data of household driving patterns, Wei-Min Hu for the vehicle registration data and Heng Ju for the petrol price data. We thank Han Li, Lan Zhang, Bingyong Zheng, Haichun Ye, and all the other participants in the seminar at Shanghai University of Finance and Economics and Southwestern University of Finance and Economics, for their insightful comments and suggestions. Xiaolan Zhou gratefully acknowledges the financial support from the National Natural Science Foundation of China (grant #71603159) and the Fundamental Research Funds for the Central Universities (grant #2017ECNU-HLYT005). All remaining errors are ours.
- China automobile market
- Fuel tax
- Welfare analysis