Maybe it’s not all just about dollars and cents

I am a pretty hardcore neoclassical economist. I do think that people generally try and make themselves as happy as possible given budgetary and other physical constraints. I do think firms try to maximize profits. I do believe that smart government policy can correct market failures (e.g. negative externalities like pollution, inadequate provision of public goods, asymmetric information). I do believe that markets are an incredible way to allocate scarce resources.

Underlying this belief system is an assumption that participants in markets have easy access to reliable information about pretty much everything. This is clearly not true in many settings, but when it comes to bigger purchases individuals tend to go to great lengths to gather as much information about possible alternative options. So when it came to buying a new car, I tried to channel my inner Zettelmeyer/Knittel and got every piece of information I could find on hybrid, Diesel, and plugin hybrid vehicles in my price range. I test drove all of them. I had spreadsheets that took into account basic things like the number of miles driven, depreciation, fuel cost, changes in electric rates, length of average trip taken etc., etc.

I settled on the Ford C-Max Plug-in hybrid. Even though I complained that even under reasonable increases in gas prices the plugin had similar if not worse costs per mile, the subsidies were just too good. Even if I did not plug it in, I would not be worse off than had I bought the regular hybrid.

Now it’s a month later and my neoclassical soul is deeply in love. It’s got nothing to do with my a priori dollars and cents calculations. Here is what I have learned:

  • I literally feel like I am a better person driving down the road. If I dim my configurable cabin lighting, and squint my eyes, I can see my own halo. Watch me snicker at those earth crushing SUVs and their clearly non-haloed drivers.
  • My Teutonic road rage tendencies have disappeared. Why? My car is so quiet. At the traffic light, all I hear is some quiet Schubert oozing out of the speakers reaching for my halo. And while I am driving, the absence of that Rambo-esque roar from my former turbo engine lowers my testosterone levels by a lot.
  • I am no longer maximizing quarter mile speed on the on ramp. I am trying to squeeze every last mile out of that battery pack in the back. Those AB32 covered kWhs I pumped in there better last all the way to Berkeley.
  • My kid loves (un)plugging the car every day. It makes me feel like I am investing in a future generation’s appreciation for low carbon transport. OK, maybe I am taking this a bit too far.
  • I don’t spend time at gas stations. The weekly trip has turned into a monthly trip. That will surely diminish my Snickers consumption as well.

So while I could squeeze all of the above into some fancy economic model, which involves learning by using, this did not enter my financial calculations that made me choose this car. I would like to end 2014 by saying that I sometimes tend to take the net present value calculations a card carrying neoclassical economist is supposed to base every decision on a bit too seriously. I may just use 2015 to go and live a little. Who knows, maybe I’ll even install some solar PV on my roof (which actually might be the right decision purely based on a NPV calculation).

I wish all of you a very good start into 2015 and we will see you back here next year. There are many exciting developments in the world of energy and we will blog about them right here!

About Maximilian Auffhammer

Maximilian Auffhammer is the George Pardee Professor of International Sustainable Development at the University of California Berkeley. His fields of expertise are environmental and energy economics, with a specific focus on the impacts and regulation of climate change and air pollution.
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17 Responses to Maybe it’s not all just about dollars and cents

  1. Camille Watts-Zagha says:

    charming commentary

  2. Mark Trexler says:

    Maximilian, welcome to real world!🙂 An important variable worth mentioning. When we leased our Leaf almost 3 years ago it had absolutely nothing to do with economics – the economics were TERRIBLE, and the range during winter leaves a lot to be desired. But someone has to buy this generation of EV’s if we’re going get to the next generation where both functionality and economics are a lot more obvious. We’re now starting to think about what to do when the lease expires in May. New Leaf? Another EV? Retreat to a hybrid (what we had before)? But the reality is there are a lot of people who could afford an EV without batting an eye – and who could help move the technology forward. We should be using social media much more actively to reach out to them, and to get them to ignore the NPV spreadsheets (at least for now). Happy New Year!

  3. In your considerations, prior to purchase, did you weigh the plusses and minusses of the status quo, i.e. maintaining your current automobile? I brought this up in your prior thread and it fell on deaf ears. Where is the prior auto today? Is it still on the road, somewhere, not maintained as well as you might have maintained it? Possibly creating more pollutants than when you maintained it?

    • Maximilian Auffhammer says:

      You have a point. And also I did not meant to ignore your previous remark. My now used car replaces an older (an most likely) dirtier car somewhere else, which replaces and even older dirtier car somewhere else which…. retires a really old and dirty car somewhere else. Kahn and Davis have a nice paper that shows that the used cars we sell to Mexico result in improved air quality here and there. But from a life cycle perspective I frankly do not know the answer to your question. Anyone?

      • Bill Henry says:

        Much simpler if you go cash for clunkers style and retire the old car for good when you upgrade… but otherwise perhaps we need a default really-old-car emissions factor that can be claimed to be taken off the road due to an efficient car purchase.

  4. Azmat says:

    Hi Maximilian Auffhammer: So you were a “road rage”, “Rambo-esque roar from my former turbo engine lowers my testosterone levels”, etc, now looking down upon the “earth crushing SUVs and their clearly non-haloed drivers”.
    We got a German diesel car about a year ago; felt rather halo’s about it; but now that diesel is about 30% more expensive than gas that halo has shrunk a bit. No matter what halo we have, in the end there is a ‘I am so smart I am saving so much money’ component, which is no longer true. And in the case of the hybrid or electric car one pays a more upfront so the savings don’t really add up — unless you factor in the HOV-lane time savings.

    There is a lot more efficiency to be squeezed out of the internal combustion engine yet — electrics and hybrids are fine, but at that scale when I do an all-in comparison the halo tends to shrink a bit. As well as my economics thinking.

    Happy Halo’d 2015.

    • Maximilian Auffhammer says:

      I did not opt for the Diesel due to the price wedge and the fact that they don’t do that well on other criteria pollutants in the long run (apparently).

    • Bill Henry says:

      I suspect it would be hard to beat a tiny car with a tiny conventional engine in an all-in comparison if purchaser requirements can be met with such a car. If only the variety of small cars (and engine choices) were offered here that are available in many other markets…but that’s changing.

  5. Max,

    There’s nothing like the feeling that you are not paying the various bad actors in {choose your country: Russia, Iran, Saudi Arabia, etc} whenever you fill up. Or at least you are paying them less than you otherwise would. This is another way of saying that the externalities associated with oil use are high, even not counting the greenhouse gas emissions reductions associated with your plugin car in California (a low emissions intensity state). Your previous post (before you bought the car) didn’t really take these externalities into account if memory serves, but perhaps if you redid your calculations using the best estimates of those externalities you would be even happier (as a person and as an economist). Basing your calculations on how externalities SHOULD be priced is how you can bring the Kantian categorical imperative to bear on the economic problem of buying a new car (http://en.wikipedia.org/wiki/Categorical_imperative , “Act only according to that maxim whereby you can, at the same time, will that it should become a universal law”).

    We have a plug in Prius, which has allowed us to replace about 1/3 of our mileage with electricity. Melissa has a 12 mile round trip commute, so most of those miles are electric, but sometimes we take road trips, and then the Prius reliably gets 50mpg+ on the freeway. We still use our minivan for big road trips, but the Prius now replaces it for many weekend and evening trips, thus saving more gasoline.

    Happy driving!

    Jon

  6. Jim McMahon says:

    Did you consider EVs? If not, why not?
    You refer to your price range. Did that include operating and maintenance costs?

    • Maximilian Auffhammer says:

      I did consider EVs, but I have range anxiety (I go to Sacramento and back a lot). And a Tesla is out of my price range.

  7. Mark Cooper says:

    Its about time. Fifteen years ago, Elizabeth Anderson summarized the dismal state of the the “Homo economicus, instrumental rationality and self-interest” hypothesis saying “There is probably no other hypothesis about human behavior so thoroughly discredited on empirical grounds that still operates as a standard working assumption in any discipline. This is not for lack of alternatives. Theories of bounded rationality, prospect theory, social rationality, and other alternatives are on hand.” The discrediting of the hypothesis has increased by an order of magnitude since she wrote that.

    • Maximilian Auffhammer says:

      I agree with the fact that basic Econ 1 does not explain every individual’s behavior. No economist would dispute this. Bounded rationality, prospect theory, game theory, Bayesian learning are standard fare in a good economics curriculum these days. I am not willing to proclaim Homo Economicus dead. We have a lot to learn about human behavior, but the basic supply and demand model and its behavioral underpinnings do describe how humans interact in markets amazingly well.

  8. Shuwei Zhang says:

    A far lower gasoline price currently (at least 30% lower,right?) would change your choice or not, if I understand your choice right?

  9. Edward Kokkelenberg says:

    Good to read that you are in full form Max. Your comment on the chain of used car replacements does take the social or economy wide situation into account which the classic replacement problem avoids concentrating solely on after tax cash flows to the firm or individual. All else is an externality. The EIA rarely takes such a poetical analysis in its search for models. But your halo doth shine and I am glad for you.
    Edward Kokkelenberg

  10. Joe Far says:

    OK, I read some of the comments and I am glad you all feel good about reducing pollution. But why make me (the tax payer) subsidize your good feelings. I actually do not believe much of the hype and would rather not pay for your halo effect. Take the subsidies away and if you all can afford your halos, go for it.

  11. Hi Max.

    My wife has been investigating replacing her 2000 Acura with something nicer to the planet, but also fun! This weekend we test drove a 2015 C-MAX Energi (20 mi plugin), and were intrigued. Are you still happy with your 2014 version? Do you worry at all about its rather low reliability ratings?

    BTW: I put together a slightly clunky web worksheet that attempts to compute full lifetime costs of different cats, wherein one chooses various per gallon (and per kwh) externality (i.e.; carbon) costs. Dealing with the “externalities” of producing a new car is non-trivial — my rather simple calculations suggest it can be 20% of the lifetime cost (enough to make keeping a 25mpg car with a lot of maintenance costs a better choice than any plugin even at a $80/ton carbon tax). There are other questions (such as what does it mean to buy a used car?) that I don’t have any easy answer for.

    http://danielh.org/carcosts/carcosts2.html

    BTW2; Joe Far makes a point about subsidies; which are also made about home PV subsidies. However: one should keep in mind that in the hoped for world of tomorrow, the cost realities will make it foolish to have invested now. That is: as citizens we fervently hope that electric car (and PV) prices will drop so much in price, that in the future we will regret that we bought in so soon (“we should of waited”). Yet achieving this hope is most likely when there are economies of scale in production. Such economies won’t happen without sufficient purchases now.

    In other words: subsidies represent a sharing of risk between private purchaser and society; so that the private purchaser is induced into making a positive externality producing decision (the positive externality of improving technologies).

    BTW3: Pet peeve on rants about how Solyndra proves that government shouldn’t choose “winners”. Solyndra was a hedging strategy — it would have paid off in a world of expensive silicon. Thankfully, that wasn’t the world that happened!

    Daniel Hellerstein

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