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

  • Lucas W. Davis
  • Erich Muehlegger

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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File URL: http://www.nber.org/papers/w15885.pdf
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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
Note: EEE IO PE
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