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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 article 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 preexisting distortion which should be taken into account when evaluating carbon taxes and other policies aimed at addressing external costs. Copyright (c) 2010, RAND..

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  • Lucas W. Davis & Erich Muehlegger, 2010. "Do Americans consume too little natural gas? An empirical test of marginal cost pricing," RAND Journal of Economics, RAND Corporation, vol. 41(4), pages 791-810.
  • Handle: RePEc:bla:randje:v:41:y:2010:i:4:p:791-810
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    Cited by:

    1. Zhang, Jun, 2016. "Carbon Tax Incidence and Household Energy Demand in the U.S," 2016 Annual Meeting, July 31-August 2, 2016, Boston, Massachusetts 235569, Agricultural and Applied Economics Association.
    2. Todd D. Gerarden & Richard G. Newell & Robert N. Stavins & Robert C. Stowe, 2015. "An Assessment of the Energy-Efficiency Gap and Its Implications for Climate Change Policy," Working Papers 2015.28, Fondazione Eni Enrico Mattei.
    3. Nancy L. Rose, 2014. "Learning from the Past: Insights for the Regulation of Economic Activity," NBER Chapters,in: Economic Regulation and Its Reform: What Have We Learned?, pages 1-23 National Bureau of Economic Research, Inc.
    4. Flavio Menezes & Magnus Söderberg & Miguel Santolino, 2012. "Regulatory behaviour under threat of court reversal," Discussion Papers Series 472, School of Economics, University of Queensland, Australia.
    5. Louis-Gaëtan Giraudet & Sébastien Houde & Joseph Maher, 2016. "Moral Hazard and the Energy Efficiency Gap: Theory and Evidence," CIRED Working Papers hal-01420872, HAL.
    6. Todd D. Gerarden & Richard G. Newell & Robert N. Stavins, 2017. "Assessing the Energy-Efficiency Gap," Journal of Economic Literature, American Economic Association, vol. 55(4), pages 1486-1525, December.
    7. Ian A. Lange & Sarah Polborn, 2012. "Can Lobbying Encourage Abatement? Designing a New Policy Instrument," CESifo Working Paper Series 3760, CESifo Group Munich.
    8. repec:eee:resene:v:48:y:2017:i:c:p:19-29 is not listed on IDEAS
    9. Ariel Casarin, 2014. "Regulated price reforms and unregulated substitutes: the case of residential piped gas in Argentina," Journal of Regulatory Economics, Springer, vol. 45(1), pages 34-56, February.
    10. 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.
    11. Severin Borenstein & Lucas W. Davis, 2012. "The Equity and Efficiency of Two-Part Tariffs in U.S. Natural Gas Markets," Journal of Law and Economics, University of Chicago Press, vol. 55(1), pages 75-128.
    12. Catherine Hausman & Ryan Kellogg, 2015. "Welfare and Distributional Implications of Shale Gas," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 46(1 (Spring), pages 71-139.
    13. Hunt Allcott & Judd B. Kessler, 2015. "The Welfare Effects of Nudges: A Case Study of Energy Use Social Comparisons," NBER Working Papers 21671, National Bureau of Economic Research, Inc.
    14. repec:pal:compes:v:59:y:2017:i:3:d:10.1057_s41294-017-0027-3 is not listed on IDEAS
    15. Louis-Gaëtan Giraudet & S. Houde, 2013. "Double moral hazard and the energy efficiency gap," Post-Print hal-00799725, HAL.
    16. Hunt Allcott & Michael Greenstone, 2012. "Is There an Energy Efficiency Gap?," Journal of Economic Perspectives, American Economic Association, vol. 26(1), pages 3-28, Winter.
    17. 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 1346, Faculty of Economics, University of Cambridge.
    18. Polemis, Michael & Eleftheriou, Konstantinos, 2015. "To Regulate or to Deregulate? The Role of Downstream Competition in Upstream Monopoly Vertically Linked Markets," MPRA Paper 68726, University Library of Munich, Germany.
    19. Sexton, Steven & Eyer, Jonathan, 2016. "Leveling the playing field of transportation fuels: Accounting for indirect emissions of natural gas," Energy Policy, Elsevier, vol. 95(C), pages 21-31.
    20. Severin Borenstein, 2014. "A Microeconomic Framework for Evaluating Energy Efficiency Rebound and Some Implications," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1).
    21. Paulo Bastos & Lucio Castro & Julian Cristia & Carlos Scartascini, 2015. "Does Energy Consumption Respond to Price Shocks? Evidence from a Regression-Discontinuity Design," Journal of Industrial Economics, Wiley Blackwell, vol. 63(2), pages 249-278, June.
    22. Mar Reguant, 2018. "The Efficiency and Sectoral Distributional Implications of Large-Scale Renewable Policies," NBER Working Papers 24398, National Bureau of Economic Research, Inc.
    23. Avalos, Roger & Fitzgerald, Timothy & Rucker, Randal R., 2016. "Measuring the effects of natural gas pipeline constraints on regional pricing and market integration," Energy Economics, Elsevier, vol. 60(C), pages 217-231.
    24. Meredith Fowlie & Michael Greenstone & Catherine Wolfram, 2015. "Do Energy Efficiency Investments Deliver? Evidence from the Weatherization Assistance Program," NBER Working Papers 21331, National Bureau of Economic Research, Inc.
    25. Steven L. Puller & Jeremy West, 2013. "Efficient Retail Pricing in Electricity and Natural Gas Markets," American Economic Review, American Economic Association, vol. 103(3), pages 350-355, May.

    More about this item

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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