Price Elasticity of Demand for Gasoline

Price Elasticity of Demand for Gasoline One could think of a number of ways that someone could cut back on fuel consumption in response to higher prices. For example, people can carpool when going to work or school, go to the supermarket and the post office in one trip instead of two, and so on. In this discussion, the factor being debated is the price elasticity of demand for gasoline. Price elasticity of demand for gas refers to the hypothetical situation if gas prices rise, what will happen to the quantity demanded for gasoline? To answer this question, lets delve into a brief overview of 2 meta-analyses of studies of the price elasticity of gasoline. Studies on Gasoline Price Elasticity   There are many studies that researched and determined what the price elasticity of demand for gasoline is. One such study is a  meta-analysis by Molly Espey, published in  Energy Journal,  which explains the variation in elasticity estimates of gasoline demand in the United States. In the study, 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. Meaning, a 10% hike in gasoline causes quantity demanded to decline by 5.8% in the long run. Review of Income and Price Elasticities in the Demand for Road Traffic Another terrific meta-analysis was conducted by Phil Goodwin, Joyce Dargay and Mark Hanly and given the title Review of Income and Price Elasticities in the Demand for Road Traffic. In it, they summarize their findings on the price elasticity of demand for gasoline. If the real price of fuel goes, and stays, up by 10%, the result is a dynamic process of adjustment such that the following 4 scenarios occur. First, the volume of traffic will go down by roundly 1% within about a year, building up to a reduction of about 3% in the longer run (about 5 years or so). Second, the volume of fuel consumed will go down by about 2.5% within a year, building up to a reduction of over 6% in the longer run. Third, the reason why fuel consumed goes down by more than the volume of traffic, is probably because price increases trigger more efficient use of fuel (by a combination of technical improvements to vehicles, more fuel conserving driving styles, and driving in easier traffic conditions). So further consequences of the same price increase include the following 2 scenarios. The efficiency of use of fuel going up by about 1.5% within a year, and around 4% in the longer run. Also, the total number of vehicles owned goes down by less than 1% in the short run, and 2.5% in the longer run. Standard Deviation Its important to note that the realized elasticities depend on factors such as the timeframe and locations that the study covers. Taking the second study, for example, the realized drop in quantity demanded in the short run from a 10% rise in fuel costs may be greater or lower than 2.5%. While the short-run the price elasticity of demand is -0.25, there is a standard deviation of 0.15, while the long rise price elasticity of -0.64 has a standard deviation of -0.44. Concluded Effect of Rise in Gas Prices While one cannot say with absolute certainty what the magnitude rise in gas taxes will have on quantity demanded, it can be reasonably assured that a rise in gas taxes, all else being equal, will cause consumption to decrease.