Consumer value of fuel choice flexibility : a case study of the flex-fuel car in Sweden

• Purpose: This paper examines the value of fuel choice flexibility derived from a flex-fuel engine. Method: Based on the stochastic properties of fuel prices, we use Monte-Carlo simulation in order to value the option to switch fuel. Results: Our findings indicate a considerable value of fuel choice flexibility, ranging between 7,500 and 37,800 SEK, depending on the underlying stochastic process we assume that fuel prices follow. This can be compared to the state subsidy of 10,000 SEK provided until recently for buying a flex-fuel car. Conclusion: Compared to an environmentally friendly pure ethanol strategy, the switching strategy is considerably less costly, about 2,000-19,000 SEK depending on the assumed underlying stochastic process, a fact that is important to take into consideration with environmental policy.

Subject headings

TEKNIK OCH TEKNOLOGIER  -- Maskinteknik (hsv//swe)

ENGINEERING AND TECHNOLOGY  -- Mechanical Engineering (hsv//eng)

SAMHÄLLSVETENSKAP  -- Ekonomi och näringsliv (hsv//swe)

SOCIAL SCIENCES  -- Economics and Business (hsv//eng)

SAMHÄLLSVETENSKAP  -- Ekonomi och näringsliv -- Nationalekonomi (hsv//swe)

SOCIAL SCIENCES  -- Economics and Business -- Economics (hsv//eng)

Keyword

Flex-fuel car

Geometric Brownian motion

Mean-reversion

Real option analysis

Environmental policy

Flex-fuel

Monte-Carlo simulations

Stochastic properties

Switching strategies

Intelligent systems

Random processes

Fuels

02 Road: Economics

Economics

Publication and Content Type

ref (subject category)

art (subject category)