Measuring the price responsiveness of gasoline demand

Richard Blundell (), Joel Horowitz () and Matthias Parey
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Joel Horowitz: Institute for Fiscal Studies and Northwestern University

No CWP11/09, CeMMAP working papers from Centre for Microdata Methods and Practice, Institute for Fiscal Studies

Abstract:

This paper develops a new method for estimating the demand function for gasoline and the deadweight loss due to an increase in the gasoline tax. The method is also applicable to other goods. The method uses shape restrictions derived from economic theory to improve the precision of a nonparametric estimate of the demand function. Using data from the U.S. National Household Travel Survey, we show that the restrictions are consistent with the data on gasoline demand and remove the anomalous behavior of a standard nonparametric estimator. Our approach provides new insights about the price responsiveness of gasoline demand and the way responses vary across the income distribution. We reject constant elasticity models and find that price responses vary non-monotonically with income. In particular, we find that low- and high-income consumers are less responsive to changes in gasoline prices than are middle-income consumers.

New Economics Papers: this item is included in nep-com, nep-ecm and nep-mkt
Date: 2009-05
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Persistent link: http://EconPapers.repec.org/RePEc:ifs:cemmap:11/09

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