Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Friday, September 02, 2005

The Price Elasticity of Demand for Gasoline is 0.7

Some people will tell you that they "need" gasoline. Some people will tell you that the price doesn't matter -- they will still buy the same amount of gasoline. I don't always believe them.

This item in the Christian Science Monitor [h/t to Jack], written long before Katrina struck the Gulf Coast, gives many examples of how people in Europe have adjusted to higher gasoline prices.

On average, 60 percent of the price European drivers pay at the pump goes to their governments in taxes.

... "Societies adjust over decades to higher fuel prices," says Jos Dings, head of Transport and Energy, a coalition of European environmental NGOs. "They find many mechanisms."

Chief among them, say experts, is the habit of driving smaller and more fuel-efficient cars.

And here is the basis for the elasticity estimate (in absolute value):

"There is really good evidence that higher prices reduce traffic," says Stephen Glaister, a professor of transportation at London's Imperial College. "If fuel prices go up 10 percent ... fuel consumed goes down by about 7 percent, as people start to use fuel more efficiently, not accelerating so aggressively and switching to more fuel-efficient cars. It does change people's behavior."
And now, after Katrina and the big jump in gasoline prices, lets see how the quantity demanded adjusts. Even in the short run, the quantity demanded at higher prices will have to fall -- the supply curve has shifted sharply to the left.

After all, demand curves are downward-sloping; people respond to incentives.
Who Links Here