In 2007, new EPA regulations that mandate cleaner diesel enginestook effect. The new engines reduce particle emissions by up to 98% over the previous generation and cut Nitrogen-oxide emissions in half.
But they increase the cost of trucks by $12,000, or about 10%. In addition, truckers (consumers of the new engines) expect higher maintenance costs and worse fuel mileage.
Predictably, the new regulations caused a big increase in demand for 2006 engines and trucks,
For policy makers, this points out yet another disadvantage of a command-and-control approach to clean air. Mandates from Washington have to be phased in, and this gives consumers an incentive to stockpile old, cheap, but dirty engines so they can use them in the future. Instead of telling producers what to produce, or consumers what to consume (by picking technologies, like ethanol, to subsidize), tax what you don't want (pollution) and let the market decide how best to reduce it.
Bottom line: How many economists does it take to screw in a light bulb? None--the market will do it.
But they increase the cost of trucks by $12,000, or about 10%. In addition, truckers (consumers of the new engines) expect higher maintenance costs and worse fuel mileage.
Predictably, the new regulations caused a big increase in demand for 2006 engines and trucks,
Both the 2006 boom, and the 2007 bust were predictable with simple supply-demand analysis, especially since a similar regulatory change occurred in 2002.Truckers seeking to beat the price increases made 2006 a record year for truck makers. More than 373,000 big-rig trucks were built in North America, says Ken Vieth of A.C.T. Research, which follows truck sales trends. The tally easily topped the previous record of 330,000 trucks in 1999.But next year, Vieth predicts "a production drought," with sales falling by more than 40% to 220,000 as trucking firms hold off buying to see how the new clean-diesel trucks perform. ...The cost to truckers goes beyond new big-rig purchases, according to Moskowitz. The new fuel costs 5 cents to 10 cents more per gallon to refine and may produce lower fuel mileage. The new engines weigh more, further cutting mileage. "Over the long run, their increased costs will be passed on to the shippers and ultimately, the consumers," Moskowitz says.
For policy makers, this points out yet another disadvantage of a command-and-control approach to clean air. Mandates from Washington have to be phased in, and this gives consumers an incentive to stockpile old, cheap, but dirty engines so they can use them in the future. Instead of telling producers what to produce, or consumers what to consume (by picking technologies, like ethanol, to subsidize), tax what you don't want (pollution) and let the market decide how best to reduce it.
Bottom line: How many economists does it take to screw in a light bulb? None--the market will do it.
The truckers were savvy to stay on top of the up and coming regulations. They looked for the cost savings in the older engines that included lower maintenance costs and higher fuel savings, beneficial to the accounting bottom line, but not the environment, an unintended consequence (Froeb et all. 2016. p. 18). The opportunity cost of the decision to purchase older trucks and engines meant giving up the environmental benefits, which is difficult to measure the future cost of environmental issues. “The new engines, in combination with low-sulfur diesel fuel that began selling nationwide in October, will reduce particulate emissions by up to 98% over the previous generation, the Diesel Technology Forum says. Nitrogen-oxide emissions will fall by half” (Woodyard. 2006).
ReplyDeleteThe boom of 2006 and bust of 2007 were driven by the law of supply and demand. While truck dealers were happy about the record sales in 2006, if they were as savvy as the truckers, they would have realized that when the laws took effect that they would not get sales in 2007. The records sales were far more than they knew they would get in 2007. I would think knowing the demand would dry up in 2007, truck dealer would set aside reserves for the anticipated sales drought in 2007 to cover fixed costs in their respective businesses.
As for the command-and-control approach, the government economists had to realize that their upcoming mandatory requirements would cause the truckers and dealers to seek alternatives around the immediacy of the mandate. Eventually the trucks would be sold in compliance with new regulations but it would take some years for the older trucks and engines to cycle out of use. Ultimately the increased costs of purchases and diesel fuel will be passed on to consumers.
References
Froeb, L. M., Shor, M., McCann, B. T. and Ward, M. (2016). Managerial economics: A problem solving approach. (4th ed.). Boston: Cengage Learning.
Woodyard, C. (2006, December 29). Cleaner diesel engine rules take effect. USA Today. Retrieved on October 7, 2017 from https://usatoday30.usatoday.com/money/industries/energy/2006-12-28-diesel-usat_x.htm