21 June 2012

Use gallons per mile!

Via Tyler Cowen:
StrategyProfs.net | Steve Postrel | Marginalism and the Higher Ed Paradox

Typical graduate business school education has indeed become less rigorous over time, as has typical college education. But typical high school education has declined in quality just as much. As a result, the human capital difference between a college and high-school graduate has increased, because the first increments of education are more valuable on the job market than the later ones. It used to be that everybody could read and understand something like Orwell’s Animal Farm, but the typical college graduates could also understand Milton or Spencer. Now, nobody grasps Milton but only the college grads can process Animal Farm, and for employers the See Spot Run–>Animal Farm jump is more valuable than the Animal Farm–>Milton jump.

So the value of a college education has increased even as its rigor has declined, because willingness to pay for quality is really willingness to pay for incremental quality. This principle holds true in many markets. For example, a roof with mean time to failure of 5 years is a lot more valuable than one with a MTF of 2 years, but a 25-year MTF isn’t that much better than a 22-year MTF for most owners. A fuel economy increase from 12 to 15 miles per gallon is a bigger deal than an increase from 27 to 30 MPG.
Yes, yes I agree with his point. But that is a truly terrible analogy. Truly, truly, terrible.

The increase from 12 to 15mpg is not just better in some perceptual sense than the increase from 27 to 30mpg, it is larger in a literal, arithmetic way! It's not about margins or incremental quality, it's just straight up quality. This is why we should use gallons per mile. Doing so makes it immediately apparent that the first shift (12→15mpg) is bigger than the second (27→30mpg).

car miles/gallon gal/100 miles cost per 10,000 miles difference
A 12mpg 8.33 $2918.83 $585.17
B 15mpg 6.66 $2333.66
C 27mpg 3.70 $1296.48 $129.65
D 30mpg 3.33 $1166.38

(Using today's average gas price of $3.504/gal.)

Thinking about mpg makes it look like the difference between A & B and C & D is the same, but it's obvious looking at the third column that they're not. I've covered this before:
People don't realize that improving from 10 to 11 mpg saves as much gas as improving from 33 to 50 mpg. To rephrase [Fuqua's] closing argument, "Which is more useful to know: How far you can drive on a gallon of gas? Or, how much gas will you use to cover a certain distance?" MPG answers the first question. GPM answers the second question." The first question is valuable when gas stations are scarce and population thin, and you need to know if you can make it to the next stop, which is to say it's valuable if you live in the desert or the 1930's. These days we're far more interested in "How many gallons of gas (or dollars) will it take to commute X miles to work 200 times this year plus trips to grandma's house and the beach?"

I'm going to take this opportunity to bitch about something else mileage-related that's been grinding my gears.

Chevy has been running these adds for the Volt in which owners (or actors pretending to be owners?) brag about how infrequently they have to gas up. One of them ends with a woman saying she's using her savings from not buying gas to go on vacation.

I find this unbearably dishonest, preying as it does on American innumeracy and general financial kunckle-headedness. The reason is simple: she already spent her gas savings on the Volt! She spent a lot of extra money (over $10,000) to get the Volt. That's the money she isn't spending on gas right there. She can't double count those dollars to spend them on vacation too. Not until she's out of the payback period from that initial outlay, which is probably longer than she'll own the car!

If that Edmunds article is too much, I'll let Wikipedia spell it out:

According to Edmunds.com, the price premium paid for the Volt, after discounting the US$7,500 U.S. federal tax credit, takes a long time for consumers to recover in fuel savings, often longer than the normal ownership time period. Edmunds compared the Volt (priced at US$31,712) with the same-size gasoline-powered Chevrolet Cruze (priced at US$19,656) and found that the payback period for the plug-in hybrid is 15 years for gasoline prices at US$3 per gallon, 12 years at US$4 per gallon, and drops to 9 years with gasoline prices at US$5 per gallon. At February 2012 prices, the break even period is 14 years. These estimates assume an average of 15,000 miles (24,000 km) annual driving and vehicle prices correspond to Edmunds.com's true market value estimates.
To make matters worse, I think Edmunds ignored the time value of money, so the payback periods will be even longer.

The Dude is now done carping about gas.


  1. Don't forget, that before that 15 year payback, you will be forking out big bucks for a new battery in the Volt

    1. I forgot all about that!

      I also neglected to mention the seven grand of taxpayer money that woman already burned up as well.