Consumer response to environmental standards: Evidence from gasoline regulation in China

In this paper, we study the effects of gasoline content regulations on consumers’ product choices in China. Our empirical design leverages a unique market structure and policy-induced changes in gasoline standards. Using detailed station-level data, we compare sales volumes of gas stations located near city borders before and after one side’s government implements stricter gasoline standards, which raise both the price and quality of gasoline. We find that the relative market share of stations located on the side implementing stricter standards increases, and we recover consumers’ underlying preference for higher fuel quality. Based on the estimated demand, the marginal willingness to pay (MWTP) for the upgrade from China III to China IV gasoline standards is approximately 5.2% of the retail price. Our simulation shows that government subsidies for the upgraded gasoline product create unintended behavioral distortions, which diminish the overall environmental benefits and welfare gains.