Popular Opinion Suggests Price Elasticity Is Zero

¶ … Economists Have to Say About Gasoline Price Elasticity In contemporary society, the price of gasoline often appears to change in a fickle manner and most often seems unrelated to any real world global events as might be expected. Charging higher taxes for gasoline is considered a dubious strategy by many people since not everyone affected by the tax increase can elect to stop buying gasoline or buy less fuel for their cars in response to the tax change.

Moreover, it is not feasible for everyone who currently drives to work to move closer to their place of employment, schedule carpooling, or arrange to telecommute. For a fairly substantial demographic, gasoline cannot be considered a normal good, as demand for it will not increase if income increases -- unless the increased incomes is truly substantive -- as they quite simply need and purchase fuel in order to get to work and continue employment (Rittenberg, 2009). Some moderate changes can be made by most people to reduce their consumption of gasoline.

Regardless, popular opinion holds that the gas taxation is not intended to change consumer behavior, but is instead a device for adding to governmental coffers. Moffatt (2015) takes these popular arguments into consideration and discusses the price elasticity of the demand for gasoline and summarizes a number of studies to demonstrate his argument. While the popular line of thinking suggests that the price elasticity of the demand for gasoline is zero, Moffatt explains why this is not so.

Moffatt cites two key meta-analyses that have demonstrated the price elasticity of demand for gasoline (Moffatt, 2015). Following the discussion of the findings from the two meta-analyses, Moffatt concludes that it is not possible to be absolutely confident when predicting the magnitude change on quantity demand for gasoline will be when gas taxes are increased, but it is fair to say that economists and others may certain -- all else being equal -- that when gas taxes rise, consumption of gasoline will decline (Moffatt, 2015).

Espey (1996) reviewed 101 research studies to examine the average price-elasticity over the short-run, which was determined to be one year or less. Her meta-analysis established the price-elasticity demand of gasoline as -0.26. According to Espey's research, if the price of gasoline is increased by 10%, the quantity of demand for gasoline is lowered by 2.6%. Notably, in the long-run, which is considered to be more than one year, the price elasticity of demand is greater at -0.58.

That is to say that if the price of gasoline is increased by 10%, the quantity of demand for gasoline will decrease by 5.8% in the long run. To be clear, the quantity demanded is the quantity buyers are willing to pay and able to pay at a particular price at a certain period of time, ceteris parabis or all other things unchanged (Rittenberg, 2009). Goodwin, et al.

(1992) conducted a meta-analysis of empirical research published between 1990 and 1992 in order to update the effects of price and income on the consumption of gasoline, the levels of traffic, car ownership, and fuel efficiency. Goodwin, et al. (1992) summarize the price elasticity of the demand for gasoline in a manner that takes a number of factors into consideration that are vital to the dynamics of change in demand and price elasticity.

When considering the information in the following paragraph, it is important to recognize that mitigating variables, such as locations studied and study timeframes, may change the reported percentages considerably. When the price of gasoline increases to and stays at about 10%, the amount of traffic that results will decrease by about 1% in the short-run and by about 3% in the long-run (Goodwin, et al., 1992). During these same periods, gasoline consumption will decrease by roughly 2.5% in the short-run and reach over 6% in the long-run (Goodwin, et al., 1992).

Behavioral and technological changes are believed to account for the reduction in fuel consumption that exceeds the traffic volume (Goodwin, et al., 1992). That is to say that vehicles are built to be more fuel efficient, drivers adopt more fuel efficient approaches to driving, and the reduction in traffic volume reduces fuel inefficiencies caused by traffic congestion, commuting patterns, and the like.

The price increase of gasoline in these instances results in an overarching increase in efficient use of fuel by about 1.5% in the short-run and about 4% in the long run (Goodwin, et al., 1992). Moreover, the number of vehicles is reduced by just under 1% in the short run and by 2.5% over the long run (Goodwin, et al., 1992). Interestingly, given the different methods used by Goodwin, et al. (1992) and Espey (1996), the resultant price elasticity of demand figures for both short-run and long-run.