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

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 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.

Longitudinal trends in gasoline price and physical activity: The CARDIA study

“…Since gasoline consumption is responsive to price changes (Harrington et al, 2008; Hughes et al, 2008; Leigh and Geraghty, 2008), increasing gas price could theoretically reduce driving and possibly increase PA and decrease obesity (Edwards, 2008; Wen and Rissel, 2008; Zheng, 2008). While one European study showed that gasoline price and prevalence of obesity were inversely associated (Rabin et al, 2007), this association is indirect since the most likely pathway would be through PA. To date, one cross-sectional study suggests higher cycling in areas with higher gasoline prices (Rashad, 2009), and a recent surveillance study shows an association between increasing gas prices and walking (Courtemanche, 2010).…”

Travel mode choice and impact of fuel tax in Beijing

“…In contrast, Hughes et al (2008) find that the short-run price elasticity of gasoline demand has decreased in magnitude over time, ranging from −0.21 to −0. 34 from 1975to 1980, versus −0.034 to −0.077 for 2001-2006.…”

Economic Activity and Trends in Ambient Air Pollution

“…One plausible explanation for the declining impact of unemployment is related to changing patterns of consumer spending over time, and in particular evolving attitudes and price sensitivity toward gasoline prices. Hughes et al (2008) noted that although a 20% increase in gasoline prices in 1975–1980 resulted in a 6% decline in consumption nationwide, the same relative price increase in 2001–2006 resulted in a more modest 1% decline. This suggests that consumer spending on pollution-generating transportation fuel was more responsive to changing economic conditions in the past, which is reflected by the relatively strong relationship between unemployment and COH in the 1970s.…”