Government to release proposed fuel economy rules
These rules implement the law that requires Corporate Average Fuel Economy (CAFE) standards of 35 mpg by 2020.
Historically CAFE standards seem to correlate with progress in fuel efficiency, rising from 12.9 MPG for new cars in 1974, though the present standard has been unchanged since the early 1980s and as a consequence, with the shift from passenger cars to light trucks, the combined fleet fuel economy has dropped slightly from a peak in 1987 of 26 mpg to about 25 mpg presently.
See Automobile and Light Truck Fuel Economy: The CAFE Standards for more background information and discussion as of 2006. See especially Figure 1.
For some historical reason CAFE standards were the provenance of NHTSA, the safety agency. (probably because the agency regulated vehicles).
I suspect the CAFE standard could be raised higher, which would push technology faster, and more toward battery-based and hybrid systems. It is too bad the market can't do this on its own, (i.e. why don't people buy their own fuel efficient vehicles rather than relying on govt. standards and forced cross-subsidies by automakers between gas guzzlers and gas sippers) and this is a very inefficient way of internalizing externalities, but it is apparently politically easier to regulate automakers than to raise gas taxes.
Regarding your question about the market: my answer is "imperfect market information" due
to the size and concentration of the Oil and Auto industries and their policy goals in the area of CAFE. There is no comparable concentrated consumer-interest and environment-interest. That may be changing.