A Study of Emission Policy Effects on Optimal Vehicle Design Decisions

A methodology is presented for studying the effects of automobile emission policies on the design decisions of profit-seeking automobile producers in a free-entry oligopoly market. The study does not attempt to model short-term decisions of specific producers. Instead, mathematical models of engineering performance, consumer demand, cost, and competition are integrated to predict the effects of design decisions on manufacturing cost, demand, and producer profit. Game theory is then used to predict vehicle designs that producers would have economic incentive to produce at market equilibrium under several policy scenarios. The methodology is illustrated with three policy alternatives for the small car market: corporate average fuel economy (CAFE) regulations, carbon dioxide emissions taxes, and diesel fuel vehicle quotas. Interesting results are derived, for example, it is predicted that in some cases a stiffer regulatory penalty can result in lower producer costs because of competition. This mathematical formulation establishes a link between engineering design, business, and marketing through an integrated optimization model that is used to provide insight necessary to make informed environmental policy.