IDEAS home Printed from https://ideas.repec.org/a/bla/randje/v41y2010i4p791-810.html
   My bibliography  Save this article

Do Americans consume too little natural gas? An empirical test of marginal cost pricing

Author

Listed:
  • 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.

Suggested Citation

  • 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, December.
    • Handle: RePEc:bla:randje:v:41:y:2010:i:4:p:791-810
    DOI: 10.1111/j.1756-2171.2010.00121.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1756-2171.2010.00121.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1756-2171.2010.00121.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Muller Nicholas & Tong Daniel & Mendelsohn Robert, 2009. "Regulating NOx and SO2 Emissions in Atlanta," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(2), pages 1-32, March.
    2. Richard Schmalensee, 1981. "Monopolistic Two-Part Pricing Arrangements," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 445-466, Autumn.
    3. Joskow, Paul L, 1974. "Inflation and Environmental Concern: Structural Change in the Process of Public Utility Price Regulation," Journal of Law and Economics, University of Chicago Press, vol. 17(2), pages 291-327, October.
    4. Barnett, A H, 1980. "The Pigouvian Tax Rule under Monopoly," American Economic Review, American Economic Association, vol. 70(5), pages 1037-1041, December.
    5. Lucas W. Davis & Lutz Kilian, 2011. "The Allocative Cost of Price Ceilings in the U.S. Residential Market for Natural Gas," Journal of Political Economy, University of Chicago Press, vol. 119(2), pages 212-241.
    6. William J. Baumol & Alvin K. Klevorick, 1970. "Input Choices and Rate-of Return Regulation: An Overview of the Discussion," Bell Journal of Economics, The RAND Corporation, vol. 1(2), pages 162-190, Autumn.
    7. Severin Borenstein, 2012. "The Redistributional Impact of Nonlinear Electricity Pricing," American Economic Journal: Economic Policy, American Economic Association, vol. 4(3), pages 56-90, August.
    8. Olley, G Steven & Pakes, Ariel, 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry," Econometrica, Econometric Society, vol. 64(6), pages 1263-1297, November.
    9. Roger Sherman & Michael Visscher, 1982. "Rate-of-Return Regulation and Two-Part Tariffs," The Quarterly Journal of Economics, Oxford University Press, vol. 97(1), pages 27-42.
    10. Ng, Charles K & Seabright, Paul, 2001. "Competition, Privatisation and Productive Efficiency: Evidence from the Airline Industry," Economic Journal, Royal Economic Society, vol. 111(473), pages 591-619, July.
    11. Oates, Wallace E. & Strassmann, Diana L., 1984. "Effluent fees and market structure," Journal of Public Economics, Elsevier, vol. 24(1), pages 29-46, June.
    12. W. Kip Viscusi & Joseph E. Harrington & John M. Vernon, 2005. "Economics of Regulation and Antitrust, 4th Edition," MIT Press Books, The MIT Press, edition 4, volume 1, number 026222075x, December.
    13. Kira R. Fabrizio & Nancy L. Rose & Catherine D. Wolfram, 2007. "Do Markets Reduce Costs? Assessing the Impact of Regulatory Restructuring on US Electric Generation Efficiency," American Economic Review, American Economic Association, vol. 97(4), pages 1250-1277, September.
    14. William D. Nordhaus, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 686-702, September.
    15. Buchanan, James M, 1969. "External Diseconomies, Corrective Taxes, and Market Structure," American Economic Review, American Economic Association, vol. 59(1), pages 174-177, March.
    16. Peter C. Reiss & Matthew W. White, 2005. "Household Electricity Demand, Revisited," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 853-883.
    17. Severin Borenstein & Meghan Busse & Ryan Kellogg, 2007. "Principal-agent Incentives, Excess Caution, and Market Inefficiency: Evidence From Utility Regulation," NBER Working Papers 13679, National Bureau of Economic Research, Inc.
    18. Baumol, William J & Bradford, David F, 1970. "Optimal Departures from Marginal Cost Pricing," American Economic Review, American Economic Association, vol. 60(3), pages 265-283, June.
    19. Klein, Christopher C. & H. Sweeney, George, 1999. "Regulator preferences and utility prices: evidence from natural gas distribution utilities," Energy Economics, Elsevier, vol. 21(1), pages 1-15, February.
    20. Nicholas Z. Muller & Robert Mendelsohn, 2009. "Efficient Pollution Regulation: Getting the Prices Right," American Economic Review, American Economic Association, vol. 99(5), pages 1714-1739, December.
    21. Christopher R. Knittel, 2003. "Market Structure and the Pricing of Electricity and Natural Gas," Journal of Industrial Economics, Wiley Blackwell, vol. 51(2), pages 167-191, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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.
    2. Di Maria, Corrado & Lange, Ian & Lazarova, Emiliya, 2018. "A look upstream: Market restructuring, risk, procurement contracts and efficiency," International Journal of Industrial Organization, Elsevier, vol. 57(C), pages 35-83.
    3. Fullerton, Don & Metcalf, Gilbert E., 2002. "Cap and trade policies in the presence of monopoly and distortionary taxation," Resource and Energy Economics, Elsevier, vol. 24(4), pages 327-347, November.
    4. Joshua Linn & Erin Mastrangelo & Dallas Burtraw, 2014. "Regulating Greenhouse Gases from Coal Power Plants under the Clean Air Act," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 1(1), pages 97-134.
    5. Xavier Vives, 2008. "Innovation And Competitive Pressure," Journal of Industrial Economics, Wiley Blackwell, vol. 56(3), pages 419-469, December.
    6. Richard S. J. Tol, 2021. "Selfish Bureaucrats And Policy Heterogeneity In Nordhaus’ Dice," World Scientific Book Chapters, in: Robert Mendelsohn (ed.), CLIMATE CHANGE ECONOMICS Commemoration of Nobel Prize for William Nordhaus, chapter 6, pages 77-92, World Scientific Publishing Co. Pte. Ltd..
    7. Chan, H. Ron & Fell, Harrison & Lange, Ian & Li, Shanjun, 2017. "Efficiency and environmental impacts of electricity restructuring on coal-fired power plants," Journal of Environmental Economics and Management, Elsevier, vol. 81(C), pages 1-18.
    8. Sharat Ganapati & Joseph S. Shapiro & Reed Walker, 2020. "Energy Cost Pass-Through in US Manufacturing: Estimates and Implications for Carbon Taxes," American Economic Journal: Applied Economics, American Economic Association, vol. 12(2), pages 303-342, April.
    9. Xuejuan Su, 2015. "Have customers benefited from electricity retail competition?," Journal of Regulatory Economics, Springer, vol. 47(2), pages 146-182, April.
    10. Sharat Ganapati & Joseph S. Shapiro & Reed Walker, 2016. "The Incidence of Carbon Taxes in U.S. Manufacturing: Lessons from Energy Cost Pass-through," Cowles Foundation Discussion Papers 2038R3, Cowles Foundation for Research in Economics, Yale University, revised Mar 2018.
    11. Requate, Till, 2005. "Environmental Policy under Imperfect Competition: A Survey," Economics Working Papers 2005-12, Christian-Albrechts-University of Kiel, Department of Economics.
    12. Cropper, Maureen L & Oates, Wallace E, 1992. "Environmental Economics: A Survey," Journal of Economic Literature, American Economic Association, vol. 30(2), pages 675-740, June.
    13. Sharat Ganapati & Joseph S. Shapiro & Reed Walker, 2016. "Energy Prices, Pass-Through, and Incidence in U.S. Manufacturing," Working Papers 16-27, Center for Economic Studies, U.S. Census Bureau.
    14. Linn, Joshua & Muehlenbachs, Lucija, 2018. "The heterogeneous impacts of low natural gas prices on consumers and the environment," Journal of Environmental Economics and Management, Elsevier, vol. 89(C), pages 1-28.
    15. Corrado Di Maria & Ian A. Lange & Emiliya Lazarova, 2014. "A Look Upstream: Electricity Market Restructuring, Risk, Procurement Contracts and Efficiency," CESifo Working Paper Series 5124, CESifo.
    16. Hancevic, Pedro, 2015. "The impact of environmental regulation on productivity: the case of electricity generation under the CAAA-1990," 2015 Conference, August 9-14, 2015, Milan, Italy 211704, International Association of Agricultural Economists.
    17. Agnolucci, Paolo & Arvanitopoulos, Theodoros, 2019. "Industrial characteristics and air emissions: Long-term determinants in the UK manufacturing sector," Energy Economics, Elsevier, vol. 78(C), pages 546-566.
    18. Vetter Henrik, 2009. "Product Variety, Scale Economies, and Environmental Taxes," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-18, May.
    19. José Moraga-González & Noemi Padrón-Fumero, 2002. "Environmental Policy in a Green Market," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 22(3), pages 419-447, July.
    20. Abdul Baki, Ghina & Marrouch, Walid, 2022. "Environmental taxation in the Bertrand differentiated duopoly: New insights," Resource and Energy Economics, Elsevier, vol. 70(C).

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:randje:v:41:y:2010:i:4:p:791-810. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/randdus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/randdus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.