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Evidence of a Shift in the Short-Run Price Elasticity of Gasoline Demand

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  • Christopher Knittel
  • Daniel Sperling

    (Department of Economics, University of California Davis)

Abstract

Understanding the sensitivity of gasoline demand to changes in prices and income has important implications for policies related to climate change, optimal taxation and national security, to name only a few. While the short-run price and income elasticities of gasoline demand in the United States have been studied extensively, the vast majority of these studies focus on consumer behavior in the 1970s and 1980s. There are a number of reasons to believe that current demand elasticities differ from these previous periods, as transportation analysts have hypothesized that behavioral and structural factors over the past several decades have changed the responsiveness of U.S. consumers to changes in gasoline prices. In this paper, we compare the price and income elasticities of gasoline demand in two periods of similarly high prices from 1975 to 1980 and 2001 to 2006. The short-run price elasticities differ considerably and range from -0.034 to -0.077 during 2001 to 2006, versus -0.21 to -0.34 for 1975 to 1980. The estimated short-run income elasticities range from 0.21 to 0.75 and when estimated with the same models are not significantly different between the two periods. One implication of these findings is that gasoline taxes would need to be significantly larger today in order to achieve an equivalent reduction in gasoline consumption. This, coupled with the political difficulties in adopting gasoline taxes, suggests that policies and technologies designed to improve fuel economy are likely becoming relatively more attractive as a means to reduce fuel consumption.

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Bibliographic Info

Paper provided by University of California, Davis, Department of Economics in its series Working Papers with number 625.

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Length: 32
Date of creation: 05 Sep 2006
Date of revision:
Handle: RePEc:cda:wpaper:06-25

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Keywords: Gasoline demand; Price elasticity ; energy; oil;

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  1. Kayser, Hilke A., 2000. "Gasoline demand and car choice: estimating gasoline demand using household information," Energy Economics, Elsevier, vol. 22(3), pages 331-348, June.
  2. Dahl, Carol A, 1979. "Consumer Adjustment to a Gasoline Tax," The Review of Economics and Statistics, MIT Press, vol. 61(3), pages 427-32, August.
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  10. Ramsey, J B & Rasche, R & Allen, Bruce T, 1975. "An Analysis of the Private and Commercial Demand for Gasoline," The Review of Economics and Statistics, MIT Press, vol. 57(4), pages 502-07, November.
  11. Espey, Molly, 1998. "Gasoline demand revisited: an international meta-analysis of elasticities," Energy Economics, Elsevier, vol. 20(3), pages 273-295, June.
  12. Dahl, Carol & Sterner, Thomas, 1991. "Analysing gasoline demand elasticities: a survey," Energy Economics, Elsevier, vol. 13(3), pages 203-210, July.
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  14. Alves, Denisard C. O. & De Losso da Silveira Bueno, Rodrigo, 2003. "Short-run, long-run and cross elasticities of gasoline demand in Brazil," Energy Economics, Elsevier, vol. 25(2), pages 191-199, March.
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