Estimating the cost of regulation is difficult. Firms sometimes reveal costs indirectly, however, when they exploit loopholes to avoid regulation. We apply this insight to fuel economy standards for automobiles. These standards feature a loophole that gives automakers a bonus when they equip a vehicle with flexible-fuel capacity. Profit-maximizing automakers will equate the marginal cost of compliance using the loophole, which is observable, with the unobservable costs of strategies that genuinely improve fuel economy. Based on this insight, we estimate that tightening standards by one mile per gallon would have cost automakers just 9–27 per vehicle in recent years.

We show that oil production from existing wells in Texas does not respond to oil prices, while drilling activity and costs respond strongly. To explain these facts, we reformulate Hotelling’s classic model of exhaustible resource extraction as a drilling problem: firms choose when to drill, but production from existing wells is constrained by reservoir pressure, which decays as oil is extracted. The model implies a modified Hotelling rule for drilling revenues net of costs, explains why the production constraint typically binds, and rationalizes regional production peaks and observed patterns of prices, drilling, and production following demand and supply shocks.

This paper analyzes the predictive power of a new data set of consumer gasoline price forecasts taken from the Michigan Survey of Consumers (MSC). MSC data generally perform as well as a no-change forecast in predicting future gasoline prices, and they substantially out-perform the no-change forecast during the recent economic crisis, during which time they track futures market prices. Finally, the cross-respondent dispersion of the MSC forecasts increases substantially during the economic crisis, paralleling the large increase in price volatility at this time.