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Measuring the price responsiveness of gasoline demand

Author

Listed:
  • Richard Blundell

    (Institute for Fiscal Studies and University College London)

  • Joel L. Horowitz

    (Institute for Fiscal Studies and Northwestern University)

  • Matthias Parey

    (Institute for Fiscal Studies and University of Surrey)

Abstract
This paper develops a new method for estimating the demand function for gasoline and the deadweight loss due to an increase in the gasoline tax. The method is also applicable to other goods. The method uses shape restrictions derived from economic theory to improve the precision of a nonparametric estimate of the demand function. Using data from the U.S. National Household Travel Survey, we show that the restrictions are consistent with the data on gasoline demand and remove the anomalous behavior of a standard nonparametric estimator. Our approach provides new insights about the price responsiveness of gasoline demand and the way responses vary across the income distribution. We reject constant elasticity models and find that price responses vary non-monotonically with income. In particular, we find that low- and high-income consumers are less responsive to changes in gasoline prices than are middle-income consumers.

Suggested Citation

  • Richard Blundell & Joel L. Horowitz & Matthias Parey, 2009. "Measuring the price responsiveness of gasoline demand," CeMMAP working papers CWP11/09, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    • Handle: RePEc:ifs:cemmap:11/09
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    File URL: http://cemmap.ifs.org.uk/wps/cwp1109.pdf
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    References listed on IDEAS

    as
    1. James M. Poterba, 1991. "Is the Gasoline Tax Regressive?," NBER Chapters, in: Tax Policy and the Economy, Volume 5, pages 145-164, National Bureau of Economic Research, Inc.
    2. repec:hal:wpspec:info:hdl:2441/10084 is not listed on IDEAS
    3. Dahl, Carol A, 1979. "Consumer Adjustment to a Gasoline Tax," The Review of Economics and Statistics, MIT Press, vol. 61(3), pages 427-432, August.
    4. Hausman, Jerry A & Newey, Whitney K, 1995. "Nonparametric Estimation of Exact Consumers Surplus and Deadweight Loss," Econometrica, Econometric Society, vol. 63(6), pages 1445-1476, November.
    5. Antonio M. Bento & Lawrence H. Goulder & Mark R. Jacobsen & Roger H. von Haefen, 2009. "Distributional and Efficiency Impacts of Increased US Gasoline Taxes," American Economic Review, American Economic Association, vol. 99(3), pages 667-699, June.
    6. Adonis Yatchew & Joungyeo Angela No, 2001. "Household Gasoline Demand in Canada," Econometrica, Econometric Society, vol. 69(6), pages 1697-1709, November.
    7. Jonathan E. Hughes & Christopher R. Knittel & Daniel Sperling, 2008. "Evidence of a Shift in the Short-Run Price Elasticity of Gasoline Demand," The Energy Journal, International Association for Energy Economics, vol. 29(1), pages 113-134.
    8. West, Sarah E., 2004. "Distributional effects of alternative vehicle pollution control policies," Journal of Public Economics, Elsevier, vol. 88(3-4), pages 735-757, March.
    9. Auerbach, Alan J., 1985. "The theory of excess burden and optimal taxation," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 2, pages 61-127, Elsevier.
    10. Deaton,Angus & Muellbauer,John, 1980. "Economics and Consumer Behavior," Cambridge Books, Cambridge University Press, number 9780521296762, September.
    11. Antonio M. Bento & Lawrence H. Goulder & Emeric Henry & Mark R. Jacobsen & Roger H. von Haefen, 2005. "Distributional and Efficiency Impacts of Gasoline Taxes: An Econometrically Based Multi-market Study," American Economic Review, American Economic Association, vol. 95(2), pages 282-287, May.
    12. repec:hal:spmain:info:hdl:2441/10084 is not listed on IDEAS
    13. repec:hal:spmain:info:hdl:2441/c8dmi8nm4pdjkuc9g8go564kn is not listed on IDEAS
    14. Richard Schmalensee & Thomas M. Stoker, 1999. "Household Gasoline Demand in the United States," Econometrica, Econometric Society, vol. 67(3), pages 645-662, May.
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    Cited by:

    1. Jerry A. Hausman & Whitney K. Newey, 2016. "Individual Heterogeneity and Average Welfare," Econometrica, Econometric Society, vol. 84, pages 1225-1248, May.
    2. Rahul Deb & Yuichi Kitamura & John Quah & Joerg Stoye, 2017. "Revealed Price Preference: Theory and Stochastic Testing," Working Papers tecipa-582, University of Toronto, Department of Economics.
    3. Hoderlein, Stefan, 2011. "How many consumers are rational?," Journal of Econometrics, Elsevier, vol. 164(2), pages 294-309, October.

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