Do Americans Consume Too Little Natural Gas? An Empirical Test of Marginal Cost Pricing

Lucas Davis and Erich Muehlegger

No 15885, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper measures the extent to which prices exceed marginal costs in the U.S. natural gas distribution market during the period 1991-2007. We find large departures from marginal cost pricing in all 50 states, with residential and commercial customers facing average markups of over 40%. Based on conservative estimates of the price elasticity of demand these distortions impose hundreds of millions of dollars of annual welfare loss. Moreover, current price schedules are an important pre-existing distortion which should be taken into account when evaluating carbon taxes and other policies aimed at addressing external costs.

JEL-codes: D42 L50 L95 Q48 Q54 (search for similar items in EconPapers)
Date: 2010-04
New Economics Papers: this item is included in nep-ene
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Published as RAND Journal of Economics, 2010, 41(4), 791-810.

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Journal Article: Do Americans consume too little natural gas? An empirical test of marginal cost pricing (2010)
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