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Rational Habits and Uncertain Prices: Simulating Gasoline Consumption Behavior

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  • K. Rebecca Scott

Abstract

When consumers are forward-looking with respect to their demand for a habit-forming good, traditional measures of price elasticity are misleading. In particular, such measures will underestimate sensitivity to long-run shifts - and therefore underestimate the potential effect of policy instruments that act through price. Correcting elasticities for the behavior of the price process requires a model with forward-looking consumers, a habit-forming good, and uncertain relative prices. With appropriate restrictions on the type of price uncertainty, this paper shows that it is possible to solve for the optimal consumption path under any price process. Simulations then sketch out how habits and the price process shape demand. Gasoline demand motivates the model and illustrates its implications.

Suggested Citation

  • K. Rebecca Scott, 2012. "Rational Habits and Uncertain Prices: Simulating Gasoline Consumption Behavior," Economics Series Working Papers 596, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:596
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    File URL: http://www.economics.ox.ac.uk/materials/working_papers/paper596.pdf
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    References listed on IDEAS

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    Cited by:

    1. Rebecca K Scott, 2014. "Tax Salience vs. Price Uncertainty: Disentangling the Effects of Attention and Rational Habits," Economics Series Working Papers 736, University of Oxford, Department of Economics.
    2. Scott, K. Rebecca, 2015. "Demand and price uncertainty: Rational habits in international gasoline demand," Energy, Elsevier, vol. 79(C), pages 40-49.

    More about this item

    Keywords

    Gasoline demand; Rational habits; Price elasticity;

    JEL classification:

    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • R40 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - General

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