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Measuring the price responsiveness of gasoline demand

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Author Info
Richard Blundell () (Institute for Fiscal Studies and University College London)
Joel Horowitz () (Institute for Fiscal Studies and Northwestern University)
Matthias Parey () (Institute for Fiscal Studies)

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Abstract

This paper develops a new method for estimating the demand function for gasoline and the deadweight loss due to an increase in the gasoline tax. The method is also applicable to other goods. The method uses shape restrictions derived from economic theory to improve the precision of a nonparametric estimate of the demand function. Using data from the U.S. National Household Travel Survey, we show that the restrictions are consistent with the data on gasoline demand and remove the anomalous behavior of a standard nonparametric estimator. Our approach provides new insights about the price responsiveness of gasoline demand and the way responses vary across the income distribution. We reject constant elasticity models and find that price responses vary non-monotonically with income. In particular, we find that low- and high-income consumers are less responsive to changes in gasoline prices than are middle-income consumers.

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Publisher Info
Paper provided by Centre for Microdata Methods and Practice, Institute for Fiscal Studies in its series CeMMAP working papers with number CWP11/09.

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Date of creation: May 2009
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Handle: RePEc:ifs:cemmap:11/09

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References listed on IDEAS
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  1. West, Sarah E., 2004. "Distributional effects of alternative vehicle pollution control policies," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 735-757, March. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
  3. James M. Poterba, 1991. "Is the Gasoline Tax Regressive?," NBER Working Papers 3578, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Jonathan E. Hughes & Christopher R. Knittel & Daniel Sperling, 2008. "Evidence of a Shift in the Short-Run Price Elasticity of Gasoline Demand," The Energy Journal, International Association for Energy Economics, vol. 29(1), pages 113-134.
  5. Hausman, Jerry A & Newey, Whitney K, 1995. "Nonparametric Estimation of Exact Consumers Surplus and Deadweight Loss," Econometrica, Econometric Society, vol. 63(6), pages 1445-76, November. [Downloadable!] (restricted)
  6. Auerbach, Alan J., 1985. "The theory of excess burden and optimal taxation," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 2, pages 61-127 Elsevier. [Downloadable!] (restricted)
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  7. Richard Schmalensee & Thomas M. Stoker, 1999. "Household Gasoline Demand in the United States," Econometrica, Econometric Society, vol. 67(3), pages 645-662, May.
  8. Adonis Yatchew & Joungyeo Angela No, 2001. "Household Gasoline Demand in Canada," Econometrica, Econometric Society, vol. 69(6), pages 1697-1709, November. [Downloadable!] (restricted)
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This page was last updated on 2009-11-27.

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