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http://ssrn.com/abstract=930730
 
 

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Evidence of a Shift in the Short-Run Price Elasticity of Gasoline Demand


Jonathan E. Hughes


University of Colorado at Boulder - Department of Economics

Christopher R. Knittel


Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Daniel Sperling


University of California, Davis - Institute of Transportation Studies

September 5, 2006


Abstract:     
Understanding the sensitivity of gasoline demand to changes in prices and income has important implications for policies related to climate change, optimal taxation and national security, to name only a few. While the short-run price and income elasticities of gasoline demand in the United States have been studied extensively, the vast majority of these studies focus on consumer behavior in the 1970s and 1980s. There are a number of reasons to believe that current demand elasticities differ from these previous periods, as transportation analysts have hypothesized that behavioral and structural factors over the past several decades have changed the responsiveness of U.S. consumers to changes in gasoline prices. In this paper, we compare the price and income elasticities of gasoline demand in two periods of similarly high prices from 1975 to 1980 and 2001 to 2006. The short-run price elasticities differ considerably and range from -0.034 to -0.077 during 2001 to 2006, versus -0.21 to -0.34 for 1975 to 1980. The estimated short-run income elasticities range from 0.21 to 0.75 and when estimated with the same models are not significantly different between the two periods. One implication of these findings is that gasoline taxes would need to be significantly larger today in order to achieve an equivalent reduction in gasoline consumption. This, coupled with the political difficulties in adopting gasoline taxes, suggests that policies and technologies designed to improve fuel economy are likely becoming relatively more attractive as a means to reduce fuel consumption.

Number of Pages in PDF File: 32

Keywords: Gasoline demand, Price elasticity

JEL Classification: D12, R41, R48

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Date posted: September 18, 2006  

Suggested Citation

Hughes, Jonathan E. and Knittel, Christopher R. and Sperling, Daniel, Evidence of a Shift in the Short-Run Price Elasticity of Gasoline Demand (September 5, 2006). Available at SSRN: http://ssrn.com/abstract=930730 or http://dx.doi.org/10.2139/ssrn.930730

Contact Information

Jonathan E. Hughes (Contact Author)
University of Colorado at Boulder - Department of Economics ( email )
Campus Box 256
Boulder, CO 80309
United States
Christopher R. Knittel
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
77 Massachusetts Ave.
E62-416
Cambridge, MA 02142
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Daniel Sperling
University of California, Davis - Institute of Transportation Studies ( email )
One Shields Ave
davis, CA 95616
United States
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