In order to realize environmental goals, policymakers are increasingly creating measures to encourage the redesign of products to improve environmental performance. Developing an approach to evaluate the influence of these policies on firm design decisions requires modeling both the demand- and supply-side of the relevant industry well. A mature body of literature in economics focuses on modeling consumer preferences and firm decision-making, but econometrically representing engineering tradeoffs that govern design decisions remains a challenge. The engineering design literature explicitly models these tradeoffs but representations of consumer preferences and firm competition are often simplified.

This dissertation presents a quantitative methodology for analyzing the impact of policies on engineering design decisions by integrating state-of-the art approaches from engineering design and economics. A model of the U.S. automotive industry is presented, representing consumer purchase decisions and firm design and pricing decisions for the full line of vehicles produced in a year. The methodology integrating engineering design models with economic analyses produces three synergistic contributions. First, the combined model allows for policy analysis of the full-scale automotive industry accounting for design options that may be profit-optimal given a possible policy even if the design options are not observable in current data. Second, the structure of the product-development process is used to address the difficulty of econometrically identifying demand parameters for design attributes. Third, a hybrid engineering-economics cost model is presented, using the econometric demand model to derive cost parameters for which engineering estimates are unavailable.

The value of the developed methodology is demonstrated through three case studies. The combined model is used to evaluate U.S. fuel economy regulations in terms of the ability to produce gains in fuel economy and the impact on firm profits. Results illustrate that estimates of cost effectiveness are substantially sensitive to design options considered, suggesting that analyses ignoring these design changes considerably overestimate the costs of the regulations. This model is then extended to examine footprint-based fuel economy standards. Results indicate that these standards could encourage substantial increases in vehicle size that diminish gains in fuel economy. Finally, applications of the presented approach to environmental lifecycle assessment are demonstrated.