I don’t know about you, but I’ve been spending my holidays reading papers about the price elasticity of demand for gasoline. Wait, where are you going?
Listen, I’m sure you’ve heard this before: “It doesn’t matter if we tax gas, people won’t change their behavior.” Or: “Gas prices go up and down, but people keep using just as much.”
So here’s what’s interesting about my Yuletide reading: these claims just are not true—not at all! Over the long run—usually meaning longer than a year—a 10 percent increase in gas prices results in a decline in gas consumption of around 6 or 7 percent. (This is what economists call the “price elasticity of demand,” or just “demand elasticity” if they’re feeling hip.)
Now, it’s certainly not a one-to-one correlation, but the connection definitely exists and it’s much stronger than most people think. Interesting, right? I’ll get into the details below the jump.
And hey, is that mistletoe?
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I guess I should mention right now that enough ink has been spilled on the demand elasticity of gasoline to fill volumes, and probably whole shelves. But don’t worry, I’m not getting into every study here—just a few meta studies that look at the results of hundreds of analyses.
In all of the examples below, the figures refer to a 10% increase in gas prices over at least a year:
- In 1992, Phil Goodwin looked (pdf) at a large number of studies and determined that gas use declined by 7.3%.
- In 1998, Molly Espey surveyed 101 different international studies and found that demand for gas declined by 5.8%.
- A 2002 study by Graham and Glaister, also surveying numerous studies, found that gasoline use declined by 6% to 8%.
- In 2003, Goodwin teamed up with some pals for a reunion tour (pdf), this time of 175 elasticity equations published since 1990 (about half were for the U.S. or Canada), and found gasoline consumption dropped by 6.4%.
You’re hitting that drink pretty hard. Would you like another? No?
You know who I should introduce you to? Todd Litman. He runs the Victoria Transport Policy Institute and he’s done a bang-up job of summarizing gasoline elasticity equations—especially here. (And here too.) You’ll find a range of credible estimates all the way up to more than a 10% decline in gas use (over the long term) when the price goes up by 10%.
The point isn’t that we know precisely what effect higher gas prices have on consumption. We don’t. Demand elasticity is affected by a huge number of factors, including the volatility of the price and the availability of substitutes for gasoline. (There are actually quite a few substitutes, even in exurban America, but that’s for another post.) The point I’m making is that higher gas prices really do change our consumption. That old chestnut “demand for gasoline is impervious to price” is an urban legend I’d like to put to rest.
Before you go, there’s a wonderfully short and friendly article on About.com (unfortunately, one of the links goes to the wrong paper). It’s a great starting point.
By the way, there are a ton of caveats to this material, and there’s something that works at cross-purposes to rising gas prices: rising incomes. When incomes go up, folks tend to spend some portion of that new money on gas (this is “income elasticity” to economists). The figures I’ve included in this post mostly don’t deal with income changes. So my arguments should be thought of as referring to inflation-adjusted price changes.
Oh, leaving already? Okay, well, happy holidays.
Say, what are you doing for New Year’s?