Finance

What's the Price Elasticity of Demand for Gasoline? (Hint: It isn't zero)

What do the studies say?

From Mike Moffatt, former About.com Guide

In response to the ideas advocated by the Pigou Club I've read a number of comments such as the following:

A rise in gas taxes won't do anything to change people's behavior. Are people going to stop driving to work if prices go up? Are they going to quit their jobs? Are they going to sell their house and move closer to work? Of course not! Higher gas prices do nothing but give the government more of our hard earned dollars.

Of course, one could illustrate all the ways that someone could cut back on fuel consumption in response to higher prices, such as carpooling, going to the supermarket and the post office in one trip instead of two, and so on. What we're really debating is - what is the price elasticity of demand for gasoline? Is it zero? That is, if gasoline rises 10%, what happens to the quantity demanded for gasoline? We do not have to just theorize about how people may respond to a rise in gas hikes, we can look at studies which determine what the price elasticity of demand for gasoline is.

It turns out that there are a lot of studies which calculate what the price elasticity of demand is. There seems to be at least 100. Fortunately there are two good meta-analyses which examine the work of many different studies on the matter.

One such study is Explaining the variation in elasticity estimates of gasoline demand in the United States: A meta-analysis by Molly Espey, published in Energy Journal. Espey examined 101 different studies and found that in the short-run (defined as 1 year or less), the average price-elasticity of demand for gasoline is -0.26. That is, a 10% hike in the price of gasoline lowers quantity demanded by 2.6%. In the long-run (defined as longer than 1 year), the price elasticity of demand is -0.58; a 10% hike in gasoline causes quantity demanded to decline by 5.8% in the long run.

Another...