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Monday, June 09, 2008

Gas Price Elasticities

A meta-analysis of "the price elasticity of petrol":

Message to the Coalition: people respond to incentives, by Andrew Leigh: I was listening the other day to Tony Abbott claiming that the price elasticity of petrol is zero... It was perhaps the first time that I had heard a politician use the word ‘elasticity’... Anyhow, this struck me as the kind of issue that people have probably researched, and sure enough a quick search turned up a nice meta-analysis by Daniel Graham and Stephen Glaister. Here’s the key graph:


As the authors conclude:

There are differences between the short- and long-run elasticities of fuel consumption with respect to price. Typically, short-term elasticities are in the region of -0.3 and long-term between -0.6 and -0.8. Therefore, it may be right to say that ”it won’t make much difference” or ”people will use their cars just the same”, but only in the short run. The evidence is clear - and remarkably consistent over a wide range of studies in many countries - that in the long run there is a significant response, albeit a less than proportionate one.

In other words, a 10% rise in petrol prices reduces petrol demand by 3% in the short-term, and by 6-8% in the long-term. (Although the study isn’t clear on this point, I’m guessing short term is <1 year, and long term is >1 year.) ...

    Posted by on Monday, June 9, 2008 at 01:08 PM in Economics, Environment | Permalink  TrackBack (0)  Comments (48)


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