Product Design Response To Industrial Policy: Evaluating Fuel Economy Standards Using An Engineering Model Of Endogenous Product Design

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Executive Summary

Policies designed to improve industrial environmental performance are increasing in scope and stringency. These policies can significantly influence engineering design decisions as firms re-optimize their products and processes to meet compliance requirements at minimum cost. This paper demonstrates the importance of accounting for these design responses in the analysis of industrial policy impacts. As a case in point, the authors model automotive firms' medium-run compliance choices under the reformed Corporate Average Fuel Economy (CAFE) regulation. Physics-based simulations are used to characterize the potential for improving fuel efficiency through medium-run design changes. These engineering simulation results are coupled with a partial-equilibrium, static oligopoly model in which firms choose prices and key vehicle design attributes.

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