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Consumer Heterogeneity and Gasoline Price Response: Implications for Optimal Tax policy

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  • Okwelum, Edson

Abstract

Measuring consumer response to gasoline price changes is a fundamental issue in the design and regulation of environmental externalities. In this paper, we document the importance of accounting for heterogeneity in consumer utilization of durable goods in explaining the apparent undervaluation of future fuel costs. We develop a Bayesian method within the context of heterogeneous discrete choice model paired with pricing equations derived from Bertrand competition to estimate heterogeneous demand elasticity for gasoline price changes, and use our results to conduct counterfactual analyses of alternative tax policies. We find that accounting for heterogeneity in utilization and other dimensions all but eliminates undervaluation of future operating costs. Results from our counterfactual analyses imply that gasoline taxes lead to welfare increases that are 20% higher than those obtained under a fuel economy regime.

Suggested Citation

  • Okwelum, Edson, 2015. "Consumer Heterogeneity and Gasoline Price Response: Implications for Optimal Tax policy," 2015 AAEA & WAEA Joint Annual Meeting, July 26-28, San Francisco, California 205897, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaea15:205897
    DOI: 10.22004/ag.econ.205897
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    File URL: http://ageconsearch.umn.edu/record/205897/files/Presentation_Edson.pdf
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    References listed on IDEAS

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    1. Daniel A. Ackerberg & Marc Rysman, 2005. "Unobserved Product Differentiation in Discrete-Choice Models: Estimating Price Elasticities and Welfare Effects," RAND Journal of Economics, The RAND Corporation, vol. 36(4), pages 771-788, Winter.
    2. Anderson, Soren T. & Kellogg, Ryan & Sallee, James M., 2013. "What do consumers believe about future gasoline prices?," Journal of Environmental Economics and Management, Elsevier, vol. 66(3), pages 383-403.
    3. Susan Athey & Guido W. Imbens, 2007. "Discrete Choice Models With Multiple Unobserved Choice Characteristics," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(4), pages 1159-1192, November.
    4. Hunt Allcott, 2013. "The Welfare Effects of Misperceived Product Costs: Data and Calibrations from the Automobile Market," American Economic Journal: Economic Policy, American Economic Association, vol. 5(3), pages 30-66, August.
    5. Hunt Allcott & Nathan Wozny, 2014. "Gasoline Prices, Fuel Economy, and the Energy Paradox," The Review of Economics and Statistics, MIT Press, vol. 96(5), pages 779-795, December.
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    Resource /Energy Economics and Policy;

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