The purpose of this project is to extend a new generation of empirical economic models to evaluate the impacts of alternative environmental policies on the emissions of the U.S. car fleet. The models are empirically implementable models of both static and dynamic market equilibria. They allow one to address a wide range of environmental policies such as emission standards and environmentally motivated taxes by predicting the effects of these policies on prices,
quantities, and characteristics of automobiles as well as on technological changes within the automotive industry. The techniques under development are not specific to the automotive industry and can potentially be applied to a variety of industries and policy issues. The first stage of the proposed research is an extension of prior work on estimating static differentiated products models of the automobile market. The proposed extensions include (1) incorporating used cars into the current static equilibrium framework and (2) doing a direct analysis of the relationship between production costs and product characteristics. A second stage of research will involve an analysis of the response of this cost characteristic surface to firm-level research and development expenditures. Further stages of research will incorporate recent advances in empirical models of firm dynamics. This stage of research will analyze how firms choose the characteristics of marketed cars and will endogenize the R & D expenditures of the firms. Finally, the project considers methodology that allows the researcher to use the estimated parameters to compute the dynamic equilibrium responses of the market to changes in policy. The project will consider in detail several specific environmental policy changes and will show how various stages of the overall research agenda can provide insight into the effects of the policy. Also provided are preliminary results on estimating static equilibrium models and on the environmentally directed research expenditures of automobile firms.