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Do Americans Consume Too Little Natural Gas? An Empirical Test of Marginal Cost Pricing

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  • Lucas W. Davis
  • Erich Muehlegger

Abstract

This paper measures the extent to which prices exceed marginal costs in the U.S. natural gas distribution market during the period 1991-2007. We find large departures from marginal cost pricing in all 50 states, with residential and commercial customers facing average markups of over 40%. Based on conservative estimates of the price elasticity of demand these distortions impose hundreds of millions of dollars of annual welfare loss. Moreover, current price schedules are an important pre-existing distortion which should be taken into account when evaluating carbon taxes and other policies aimed at addressing external costs.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15885.

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Date of creation: Apr 2010
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Publication status: published as RAND Journal of Economics, 2010, 41(4), 791-810.
Handle: RePEc:nbr:nberwo:15885

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Cited by:
  1. Nancy L. Rose, 2013. "Learning from the Past: Insights for the Regulation of Economic Activity," NBER Chapters, National Bureau of Economic Research, Inc, in: Economic Regulation and Its Reform: What Have We Learned?, pages 1-23 National Bureau of Economic Research, Inc.
  2. Flavio Menezes & Magnus Söderberg & Miguel Santolino, 2012. "Regulatory behaviour under threat of court reversal," Discussion Papers Series, School of Economics, University of Queensland, Australia 472, School of Economics, University of Queensland, Australia.
  3. Ian A. Lange & Sarah Polborn, 2012. "Can Lobbying Encourage Abatement? Designing a New Policy Instrument," CESifo Working Paper Series 3760, CESifo Group Munich.
  4. Paulo Bastos & Lucio Castro & Julian Cristia & Carlos Scartascini, 2011. "Does Energy Consumption Respond to Price Shocks? Evidence from a Regression-Discontinuity Design," Research Department Publications, Inter-American Development Bank, Research Department 4702, Inter-American Development Bank, Research Department.
  5. Hunt Allcott & Michael Greenstone, 2012. "Is There an Energy Efficiency Gap?," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 26(1), pages 3-28, Winter.
  6. Severin Borenstein, 2013. "A Microeconomic Framework for Evaluating Energy Efficiency Rebound And Some Implications," NBER Working Papers 19044, National Bureau of Economic Research, Inc.
  7. Steven L. Puller & Jeremy West, 2013. "Efficient Retail Pricing in Electricity and Natural Gas Markets," American Economic Review, American Economic Association, American Economic Association, vol. 103(3), pages 350-55, May.
  8. Delmas, Magali A. & Lessem, Neil, 2014. "Saving power to conserve your reputation? The effectiveness of private versus public information," Journal of Environmental Economics and Management, Elsevier, vol. 67(3), pages 353-370.
  9. Robert w. Hahn & Robert A. Ritz, 2013. "Does the social Cost of Carbon Matter?: An Assessment of U.S. Policy," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 1346, Faculty of Economics, University of Cambridge.
  10. Louis-Gaëtan Giraudet & Sébastien Houde, 2014. "Double moral hazard and the energy efficiency gap," CIRED Working Papers hal-01016109, HAL.

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