The Economics of Vehicle Driving: A General Equilibrium Analysis in a Dynamic Two-Period Vintage Model

My thesis aims to explore the relationship between public policies and vehicle driving from three aspects. First, we examine two policy options for the government to address pollution externality caused by vehicle driving: gasoline taxes and clean vehicle subsidies towards clean technology. We introduce vintage vehicles into our model to measure the impact of policies on households' vehicle driving choices. We show that all policies are effective in reducing pollution and improving the environmental quality. However, they have distinctively different distributional impact on the production side and social welfare. Second, we derive the optimal environmental tax structure in the presence of externalities caused by vehicle driving in the first-best scenario. Analytical results show that the optimal gasoline taxes are composed of two opposing factors and depend on the household's preferences for environmental factors. Our calibration based on the U.S. economy shows that the optimal gasoline taxes should be higher for old cars while the optimal road taxes should be higher for new cars. Third, we formulate the optimal environmental tax structure in the presence of other distortionary taxes. We find that the optimal environmental taxes constitute both the efficiency part and the Pigovian part. Optimal taxes depend not only on the household's preferences for the environmental factors but also on the degree of complementarities with normal consumption goods.