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

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. JEL classification: D12; R41; R48; Gasoline demand; Price elasticity ∗ Hughes: Institute of Transportation Studies, University of California, Davis, One Shields Avenue, Davis, CA 95616. Email: [email protected]. Knittel: Department of Economics, University of California, Davis; University of California Energy Institute; Institute of Transportation; and NBER. Email: [email protected]. Sperling: Institute of Transportation Studies, University of California, Davis, One Shields Avenue, Davis, CA 95616. Email: [email protected]. We thank Severin Borenstein, Oscar Jorda, four anonymous referees and a variety of seminar participants for helpful comments. Hughes and Sperling thank the Hydrogen Pathways program and the UC Davis Institute of Transportation Studies for supporting this research. Knittel thanks the University of California Energy Institute for financial support.