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Gasoline Prices, Inattentive Consumers, and the Energy Paradox

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Principal Investigator(s):

Hunt Allcott
New York University
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Sample size: 2000
Field period: 8/16/2009-11/11/2010


Are consumers' beliefs about automobile fuel costs systematically biased?

Experimental Manipulations:

We varied the fuel economy difference between the respondent's current vehicle and a hypothetical replacement vehicle. We then elicited beliefs about fuel cost differences given that fuel economy difference.

We also varied parts of the survey questionnaire in order to test whether the framing of the survey affected responses.

Key Dependent Variables:

Beliefs about differences in fuel costs.

Summary of Findings:

This analysis exploits new data from the Vehicle Ownership and Alternatives Survey, which elicits beliefs over the financial benefits of owning higher-fuel economy vehicles. The data are used to test for underestimation and to document evidence of "MPG Illusion": consumers think as if fuel costs scale linearly in miles per gallon instead of gallons per mile. Counterfactuals suggest that the MPG Illusion reduces welfare by less than four dollars per new vehicle. Furthermore, even the most severe plausible underestimation of the financial benefits of fuel economy cannot account for the consumer welfare gains attributed to fuel economy standards.


Allcott, Hunt (2012). ""The Welfare Effects of Misperceived Product Costs: Data and Calibrations from the Automobile Market."" Forthcoming, American Economic Journal: Economic Policy.

Allcott, Hunt (2011). “Consumers’ Perceptions and Misperceptions of Energy Costs.” American Economic Review, Papers and Proceedings, Vol. 101, No. 3 (May), pages 98-104.

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