Friday, July 23, 2010

Is it a Wise Economic Decision to Purchase a Hybrid Car?

There are a lot of reasons to consider buying or leasing a hybrid car.  The obvious reason is environmental—hybrid drivers are committed to doing their part for the environment by driving a more fuel-efficient vehicle.  But as I was car shopping earlier this summer, I got to thinking: Is it a wise economic decision to purchase a hybrid car?

To answer this question, I first wanted to figure out the “hybrid premium.”  In other words, how much more expensive is a car because it is a hybrid?  The clearest way to answer this question is to compare the sticker price of standard models and their hybrid equivalents.  Here are a few examples.






Camry (2011)

Camry Hybrid (2011)

Fusion (2011)

Fusion Hybrid (2011)

Civic (2010)

Civic Hybrid (2010)








Base Price







Hybrid Premium





*Miles per gallon are typically calculated for city vs. highway driving.  For simplicity’s sake, I am using the Consumer Reports “Overall MPG” for this calculation, which is an average based on a typical driver’s combined city and highway driving.

The average American owns a car 4-6 years.  So for the sake of argument, let’s assume that you plan to own your next car for seven years.  Let’s also assume that that you drive 12,000 miles per year, and the average price of gasoline over that period is $2.80 per gallon.  Will the amount of money you save on gas exceed the hybrid premium you are paying?  As the following table shows, the quick answer is “no.”


Gas Savings – Hybrid Premium = Hybrid Cost Savings


































Since these hybrids save the consumer approximately $450/year in gasoline, at first glance the purchase of a hybrid is not a wise personal economic decision.  However, there are additional caveats to consider.  First, there are tax credit considerations.  If you are purchasing a vehicle (rather than leasing), you may be eligible for a tax credit of up to $3,400.  Additionally, if you are a high mileage driver (like me), your annual gasoline savings will be much higher than the average person who drives 12,000 miles per year.  Finally, the consumer rarely chooses between the standard model and hybrid model of the same vehicle.  So if you are choosing between a Prius and a Hummer, the hybrid gas savings calculation will look quite different.

Even when taking these additional points into account, it is still difficult to make an economic case for purchasing a hybrid over the equivalent non-hybrid model.  However, it is also important to recognize that most people make decisions that include harder to quantify “bundles of utility.”  Since a hybrid car makes people feel more socially conscious, and there is a utility to this feeling, a car purchase is about much more than dollars and cents.

By the way, I decided to lease a Honda Insight Hybrid.  I feel better about myself already.

Mike English
President & CEO
Missouri Council on Economic Education



Anonymous said...

This then begs the question for me...if you are a high mileage driver, was leasing that car wise as compared to purchasing it outright? I have always heard, per Dave Ramsey, that you shouldn't lease a vehicle.

Andrew said...

While agree with some of your points, I believe that the importance of annual mileage is understated here. Clearly, if I drive 5 miles a day the economics do not work. Additionally, the ever-present concern over gas-price stability should be included too. Someone who attaches a higher risk-premium to gas prices could incorporate that into a cost-benefit model. And the final and absolutely necessary component of an economic model of this sort is that of resale price at the end of the period you are measuring. I wish I could cite the article, but I recall reading a similar discussion a couple of years ago where the author concluded that there was a substantial (approximately $5,000.00) difference in resale value after 5 years. Even with present value adjustment to the figure, that difference plus even a modest gas-savings total can come very close if not all the way to offsetting the "hybrid-premium."