Coase and Car Repair: Who Should Be Responsible for Emissions of Vehicles in Use?

This paper examines the current assignment of liability for in-use vehicle emissions and suggests some alternative policies that may reduce the cost and increase the effectiveness. We first discuss the cost, performance and incentives under current Inspection and Maintenance (I/M) programs, using the recently implemented Arizona "Enhanced I/M" program as an example. These programs were designed to identify and repair vehicles with malfunctioning emission control systems. Since their inception, however, I/M programs have been plagued by transaction costs that have drastically raised the cost of I/M as well as limited its effectiveness. These transaction costs fall into three categories: emission monitoring, repair avoidance, and non-transferability of emission reductions. We argue that most of these transaction costs can be attributed to the current assignment of liability for I/M to motorists, and we examine the potential for other liability assignments to reduce transaction costs and improve program efficiency. Among the alternative institutional arrangements discussed are greater imposition of liability on manufacturers, emission repair subsidies, repair liability auctions, and vehicle leasing.