Since 1978 the Federal government has mandated that new automobiles sold by major firms in the United States reach certain levels of average fuel efficiency. Corporate Average Fuel Economy (CAFE) standards can generate implicit taxes and subsidies for various types of cars. They also can have an impact on market structure, creating regulatory economies of scope. CAFE standards may also act to increase the profits of firms in the automobile industry, either by preventing competition among firms constrained by the standards or by creating profit opportunities for firms not constrained by the standards.

CAFE standards are shown to have had a significant effect on the price of new cars in model years 1983 through 1986, raising the price of fuel inefficient cars and lowering the price of fuel efficient cars. The gasoline savings resulting from the imposition of higher standards are computed, as well as the welfare loss they generate. It is concluded that automobile fuel economy standards can save gasoline, but only at a large loss to the economy. An empirical model of the political support for CAFE standards is developed and tested. It is shown that support for the standards comes from the one major domestic automobile company that would benefit from higher standards, as well as from those who in general prefer regulatory solutions to the free market.