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

33 Pages Posted: 12 Apr 2010

See all articles by Lucas W. Davis

Lucas W. Davis

University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER)

Erich Muehlegger

Harvard University - Harvard Kennedy School (HKS)

Date Written: April 2010

Abstract

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.

Suggested Citation

Davis, Lucas W. and Muehlegger, Erich, Do Americans Consume Too Little Natural Gas? An Empirical Test of Marginal Cost Pricing (April 2010). NBER Working Paper No. w15885. Available at SSRN: https://ssrn.com/abstract=1586692

Lucas W. Davis (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

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National Bureau of Economic Research (NBER)

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Erich Muehlegger

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States
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617-496-6886 (Fax)

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