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More on gas prices: why will Americans pay any amount for gas?

gasoline-elasticity.gifIt has long been noted that consumers are curiously indifferent to gasoline prices. When gas is cheap, people buy fuel-guzzling cars and drive them a lot. When gas is dear, people…continue to buy fuel-guzzling cars and drive them a lot.

A recent study suggests that this price indifference has gone up in recent years. Using various statistical methods to compare consumer behavior in the late ’70s to behavior in the early ’00s, the authors suggest that Americans seem less affected by gas prices than ever.

Although the data doesn’t tell us why this might be the case, the authors offer a few possible explanations. The first is related to land use. Suburbanization, lengthy work commutes, the rise of big-box retailing, etc., might restrict our ability to reduce our road miles. Put simply, driving isn’t discretionary for many.

A second possible explanation is technological. Drivers today face a more limited set of vehicle choices than drivers in the ’70s. When the CAFE standards were first implemented, each successive generation of cars was more fuel-efficient than the last. But CAFE standards have been stagnant for about 20 years. Now if you want a more fuel-efficient car, you either have to downgrade to a smaller vehicle class or buy a more expensive hybrid.

Both explanations center on the dwindling of alternatives. People fail to respond to gas prices because it’s harder to do so these days, not (necessarily) because they are truly indifferent.

In support of this view, the study revealed one intriguingly counterintuitive finding: drivers with higher income tend to be more sensitive to fluctuations in gas prices than those with lower income. Although the effect isn’t strong, it does bolster the notion that price insensitivity is the result of a lack of alternatives. People with lower incomes have probably already eliminated much of their discretionary driving, so they have limited flexibility in responding to gas price spikes. Likewise, high-income households often own multiple cars, so they can shift their fuel consumption quickly by favoring the car with better mileage.

The study suggests that better mileage standards may be a useful counterpart to gasoline taxes. Policy types are generally critical of CAFE standards, with good reason — forcing auto makers to build efficient cars is a fairly backwards way to address the problem of fuel consumption. But whatever its theoretical flaws, CAFE did basically do its job. Pushing on supply and demand simultaneously is likely the fastest way to achieve emissions reductions. Drivers need an incentive, but they also a choice.

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