Gasoline, Part Two
Using the equation I estimated yesterday, I decided to calculate the price elasticity of demand for gasoline.
Price elasticity of demand is basically the responsiveness in a good’s consumption to a change in price. This number is (nearly) always negative, because the more expensive a good becomes, the less of it people buy. As the the elasticity, ε, approaches negative infinity, the good is elastic: people consume much less than before when price increases. When ε approaches 0, the good is inelastic: people buy about the same amount, no matter what the price increase. Inelastic goods include things like insulin, water in the desert, or heroin. And, as it turns out, gasoline.
Here is my estimation of ε for gasoline in Oakland, CA this April:
This value of -.033 is very similar to an elasticity calculated by some folks at UC Davis. Apparently, this is a fairly recent phenomenon. This elasticity is extraordinarily low (in absolute value terms), indicating that America’s addiction to gasoline is at dangerously high levels. There is very little flexibility in gasoline demand, even when prices rise to unsustainable levels.
Gasoline demand and vehicle miles driven actually did decrease for the first time ever when prices spiked back in 2008. However, it is astonishing that prices had to spike above $4.00/gallon to induce this decline.
One good implication of this elasticity value: it should be fairly easy to raise a lot of revenue from imposing extra taxes on gasoline. More on that later.
