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The Declining Price Elasticity of Gas

From Alexander Hart at TNR’s nifty new “The Study” blog:

According to research by UC Davis’s Jonathan Hughes, Christopher Knittel and Daniel Sperling, Americans are now less responsive to increases in gas prices. In the late 1970s, a ten percent rise in the cost of gas would lead to about a three percent decline in the amount of gas consumed. In the early 2000s, on the other hand, gas prices would have to rise about 60 percent to provoke a similar decline in gas consumption. The researchers theorized that this might be because spending on gas is now a smaller fraction of total monthly income or because cars get better mileage now, meaning that cutting back on driving saves less gas than it would have in the 1970s. But either way, their research suggests that even if gas prices go higher, we’re unlikely to see Americans buying less gas.

To be precise, it doesn’t say people won’t buy less gas even if prices rise, it says that the impact on driving will be relatively small. And since households are income constrained, that means the impact on spending on everything that’s not gasoline will be relatively large. I would flag as a causal factor here the fact that residential patterns have shifted in favor of a larger share of the population living in places where there are fewer good alternatives to car commuting. You might respond to higher prices by driving to the commuter rail station instead of driving all the way to the office, but you can only do that if you live in a metro area with a commuter rail network.

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