Purchase Opportunity Cost of Sport Utility Vehicle and It's Impact for the Owner

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Purchase Opportunity Cost Of Sport Utility Vehicle And It’s Impact For The Owner

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A few logical assumptions can be made from the purchase of large sport utility vehicle: the consumer that purchased the SUV is safer, more satisfied than a consumer that purchased a smaller vehicle and is better off than having not purchasing one at all.

Drivers of large sport utility vehicles, consequently, create two negative externalities on the public. The first: drivers of large SUVs place a cost on public welfare by emitting harmful carbon dioxide (CO2) pollution that damages the environment. The second: drivers of smaller automobiles experience a negative externality when drivers of large SUVs encroach on their overall safety. The decreased safety of drivers of smaller automobiles is exacerbated when they are involved in an accident with a driver of a large SUV as the former is more likely to deadly injury than the latter (Kockelman, 2002). The combination of increased pollution and decreased driver safety in smaller vehicles fits the definition of a negative externality as the public costs of the SUV purchased are not fully reflected in the price of the vehicle (Economist, 2012).

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Congress has taken repetitive action to address the negative externalities of pollution created by automobiles. The first came in 1975 with the enactment of the Corporate Average Fuel Economy (CAFE), the second in 1978 with the Gas Guzzler Tax (as part of the Energy Tax Act) and most recently the Green Vehicle Guide (published annually since 2000). CAFE required corporate vehicle manufacturers to produce average fuel economy for cars and trucks weighing less than 8500 pounds. The Gas Guzzler Tax addressed personal vehicles that do not meet the minimum miles per gallon standard. Both the CAFE and the Gas Guzzler Tax improve fuel economy standards set by the Environmental Protection Agency by sanctioning violators. At the time of enactment, however, large SUVs were not as common as in modern driving conditions. Also, these large vehicles were primarily used for commercial industrial purposes, not as personal vehicles (, 2009).

Half of the negative externalities of driving an SUV have been thwarted with federal taxation and regulation. The government has not, however, addressed the decreased safety of drivers of smaller automobiles involved in accidents with larger SUVs. This is a major concern for public safety.

Intended Outcomes

The intended outcome of CAFE and the Gas Guzzler Tax were to increase vehicle fuel economy by penalizing non-compliant producers and consumers. It was successful as both parties avoided the tax by manufacturing and purchasing vehicles that met the minimum fuel economy standards set by the EPA. Accordingly, the demand for gas guzzling vehicles decreased. The quantity and quality demanded of gas saving vehicles increased as did the purchase price. Vehicles became more fuel efficient after the tax and more of them were on the road.

As a latent affect, more gasoline was consumed too (which was also heavily taxed on both the state and federal levels to fund and maintain transportation costs). In gross retrospect, there were more small vehicles and more large SUVs on the road that got more miles per gallon and consumed more gasoline after the enactment of CAFE and the Gas Guzzler Tax, as a result. This suggests that overall consumer utility was much higher after the enactment of the tax.

Unintended Consequences

An automobile’s fuel efficiency can be improved in a number of different ways. First, engineers research and develop the performance of a vehicle’s engine and transmission. Second, engineers research and develop methods to reduce the vehicle’s size and weight. Finally, the vehicles are produced and sold in mass to the public.

Consequently, modern coupes and sedans are much smaller, weigh much less and are much more fuel efficient relative to the automobiles produced before the passage of CAFE and the Gas Guzzler Tax. Granted, contemporary SUVs are also more fuel efficient after the same regulations, however, they are just as large and weigh as much as they always did. Therefore, the overall safety of drivers in smaller, lighter automobiles is at greater risk ex post facto CAFE and the Gas Guzzler Tax, as large SUVs have remained the same absolute size and weight.

Specific Market Failure

One half of the specific market failure is the pollution created by driving an SUV. This negative externality has been countered with federal taxation and regulation which was successful. The government has not, however, addressed the second half of the market failure of SUVs: the negative externality created by the increased costs borne by drivers of smaller vehicles which are not included in the purchase price of an SUV. The tradeoffs of the regulation are that while all vehicle manufacturers have increased fuel economy standards, coupes and sedans have become smaller, lighter and more vulnerable relative to SUVs that have remained the same size and weight.


Currently, we are locked in an SUV arms race where the price of other driver’s safety is not accurately reflected in the purchase price of an SUV (Wheelan, Charles. 2010: 60). To correct the market failure stated above, three economic regulations are necessary. First, increase the costs of purchasing, registering, insuring and testing automobiles that weigh more than two tons with a higher tax. This government tool will penalize SUV drivers and in the long run will also lower the negative externalities of pollution. Secondly, enact a higher toll on highways, freeways and bridges for SUVs. This tax should be specific to vehicles that weigh more than two tons as well. Finally, increase the tax on purchasing, registering, insuring, testing and tolling highways, freeways and bridges for all vehicles that weigh less than two tons. This is may seem bizarre. However, by increasing the opportunity cost of driving all automobiles, drivers will choose a more efficient mode of travel; carpool, walk, ride a bike, take the bus or ride a plane.


The burdensome negative externalities of SUVs are borne by all drivers. Economic regulations have been successfully enacted to correct the specific market failure of inefficient fuel economy and pollution. However by correcting one market failure, another economic side effect arose: the negative externality of increased the safety costs of drivers in smaller vehicles involved in accidents with SUVs as these costs were not included in the purchase of the SUV. This market failure can be corrected by implementing a universal economic regulation that raises the opportunity cost of driving relative to the alternatives.

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