In “Liberation Day for Gas-Powered Cars,” Wall Street Journal, May 22, 2025 (print edition), the Journal editors make a strong case for getting rid of the California government’s mandate that requires an increasing number, year by year, in the percentage of auto makers’ sales that must be “zero-emission vehicles.” For the year 2026, that number must be 35 percent. In 2023, I wrote about why we won’t come close and why it’s good that we won’t.
Along the way, though, the Journal editors make a basic price theory mistake. They write:
Auto makers warn the quotas would force them to produce fewer gas cars. Prices would almost certainly rise to offset their EV losses.
No. They’re right about the effect on prices of gasoline-powered cars, but they’re wrong about the causation. Profit-maximizing firms don’t typically raise prices in one segment to offset losses in another. The reason: if raising prices in that segment increases profits, then they would already be doing it.
Nevertheless, they would raise prices on gas-powered vehicles. The reason is not that dong so would increase profits to offset losses elsewhere. Since they’re already at the profit-maximizing price, raising prices of gas-powered cars further would reduce profits. So why would they raise them? To reduce sales. There are two ways of hitting the percentage target: reduce prices artificially on zero-emission vehicles to increase sales of those vehicles and raise prices artificially on gas-powered cars to reduce sales of those vehicles. They would do both.
In 1985, I wrote about the distorting effects on the mix of cars sold, when auto companies were figuring how to comply with the Corporate Average Fuel Economy (CAFE) regulations. Those regulations required each company to meet a stringent average fuel economy standard for all their cars sold in a given model year. To hit their targets, the companies needed to sell more small cars and fewer large cars. I thought I had been more explicit about the pricing implications than I was. In any case, the way to do so was to price their high mpg cars below the profit-maximizing price and to price their low mpg cars above the profit-maximizing price. The same thing is going on now for zero-emission vehicles and gasoline-powered vehicles.
A little price theory goes a long way.
