Environmental Economics Seminar: Pass-Through and Welfare Effects of Regulations that Affect Product Attributes
Date and TimeWednesday 03/06/2019 10:00AM to 11:30AM EST
Contact: Carl Pasurka, 202-566-2275
Presenter: Joshua Linn (Resources for the Future)
Description: A key finding in the literature is that the greater the pass-through of an input cost shock or tax to product prices, the larger the welfare loss to consumers. We show that the relationship between pass-through and welfare changes does not hold for a regulation that affects production costs and product attributes. An analytical model shows that the larger the willingness to pay (WTP) for the product attribute, the greater the pass-through but the smaller the welfare loss (or the larger the welfare gain) for consumers. We confirm this intuition in the context of passenger vehicle fuel economy standards using new estimates of consumer demand and an equilibrium model. Pass-through and welfare changes are positively correlated with WTP for fuel economy across demographic groups and manufacturers. Accounting for WTP breaks the direct link between pass-through and welfare changes identified in prior literature.