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This paper examines how the CAFE regulation influences the auto firms’ behavior and the consumers’ behavior. To be specific, I examine the influence of CAFE on three groups of auto firms’ pricing and production decision as well as the influence on consumers’ consumption decision on model choice and the vehicle miles to travel. Through estimating the simultaneous production and pricing equation system for firm, the paper indicates that previous literature that estimates the supply equation separately for each firm is misleading and CAFE regulation has different effects on unconstrained group, constrained group and fine-paying group through different channels. Also the CAFE regulation affects the consumer behavior since CAFE has unbalanced effects on prices of different auto models.

HOW CAFE INFLUENCES AUTO FIRMS AND CONSUMERS? - USING EVIDENCE FROM U.S. MARKET