In an opinion piece titled “Liberation Day for Gas-Powered Cars,” published in the Wall Street Journal on May 22, 2025 (print edition), the editors articulate a compelling argument against California’s mandate that mandates an increasing percentage of automakers’ sales to consist of “zero-emission vehicles.” By 2026, this percentage is set to hit 35%. In 2023, I discussed why this target is unlikely to be met—and why that might not be such a bad thing.
However, amid their arguments, the Journal editors stumble over a fundamental principle of price theory. They assert:
Auto makers warn the quotas would force them to produce fewer gas cars. Prices would almost certainly rise to offset their EV losses.
Not quite. While they are correct that the quotas could push up prices for gasoline vehicles, their reasoning about causation is flawed. Profit-driven firms don’t typically react to losses in one segment by raising prices in another. If increasing prices were a viable solution to boost profits, they would already be implementing it.
Nonetheless, it’s true that prices for gas-powered vehicles would rise. This isn’t a strategy to recoup losses but rather a method to decrease sales. Automakers have two avenues to achieve the mandated sales targets: they can lower prices on zero-emission vehicles to boost their sales or raise prices on gas-powered cars to cool demand. Expect both tactics to be employed.
Back in 1985, I examined how similar regulatory pressures impacted vehicle sales when manufacturers were grappling with Corporate Average Fuel Economy (CAFE) standards. These regulations required firms to meet strict average fuel economy targets across all their vehicles sold in a model year. To comply, automakers had to increase the sales of smaller, fuel-efficient cars while reducing those of larger, less efficient models. I might not have emphasized the pricing strategy sufficiently back then, but the approach was clear: price high-efficiency cars below their profit-maximizing levels and price low-efficiency cars above theirs. This dynamic mirrors what we are witnessing today with zero-emission versus gasoline-powered vehicles.
A solid understanding of price theory can illuminate these complex market behaviors.
