To investigate how fuel economy is valued in the Indian car market, we compute the cost to Indian consumers of purchasing a more fuel-efficient vehicle and compare it to the benefit of lower fuel costs over the life of the vehicle. We use hedonic price functions for four market segments (petrol hatchbacks, diesel hatchbacks, petrol sedans, and diesel sedans) to compute 95 percent confidence intervals for the marginal cost to the consumer of an increase in fuel economy. We find that the associated present value of fuel savings falls within the 95 percent confidence interval for some specifications, in all market segments, for the years 2002 through 2006. Thus, we fail to consistently reject the hypothesis that consumers appropriately value fuel economy. When we reject the null hypothesis, the marginal cost of additional fuel economy exceeds the present value of fuel savings, suggesting that consumers may, in fact, be overvaluing fuel economy.

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We estimate a model of vehicle choice and kilometers driven to analyze the long-run impacts of fuel conservation policies in the Indian car market. We simulate the effects of petrol and diesel fuel taxes and a diesel car tax, taking into account their interactions with the pre-existing petrol fuel tax and car sales taxes. At levels sufficient to reduce total fuel consumption by 7%, the increased diesel and petrol fuel taxes both yield deadweight losses (net of externalities) of about 4 (2010) Rs./L. However, at levels sufficient to reduce total fuel consumption by 2%, the increased petrol fuel tax results in a deadweight loss per liter of fuel conserved that is greater than that caused by the diesel fuel tax. This reflects both the high pre-existing tax on petrol fuel and the high own-price elasticities of fuel demand in India. A tax on diesel cars that results in the same diesel market share as the large diesel fuel tax actually has a negative deadweight loss per liter of fuel conserved. The welfare effects of all three policy instruments are positive, once the external benefits of reducing fuel consumption are added to the excess burden of taxation.

We estimate a model of vehicle choice and kilometers driven to analyze the long-run impacts of fuel conservation policies in the Indian car market. We simulate the effects of petrol and diesel fuel taxes and a diesel car tax, taking into account their interactions with the pre-existing petrol fuel tax and car sales taxes. At levels sufficient to reduce total fuel consumption by 7%, the increased diesel and petrol fuel taxes both yield deadweight losses (net of externalities) of about 4 (2010) Rs./L. However, at levels sufficient to reduce total fuel consumption by 2%, the increased petrol fuel tax results in a deadweight loss per liter of fuel conserved that is greater than that caused by the diesel fuel tax. This reflects both the high pre-existing tax on petrol fuel and the high own-price elasticities of fuel demand in India. A tax on diesel cars that results in the same diesel market share as the large diesel fuel tax actually has a negative deadweight loss per liter of fuel conserved. The welfare effects of all three policy instruments are positive, once the external benefits of reducing fuel consumption are added to the excess burden of taxation.