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Gasoline Demand with Heterogeneity in Household Responses

Abstract:
Fuel demand elasticities to determine consumer responses to tax increases or price shocks are typically based on aggregate data. The literature generally provides one elasticity estimate for each country, assuming similar response for all households. However, it is possible that different households can have different responses to the same stimuli depending on the household characteristics. Assuming a single elasticity for all households may fail to capture the detailed distributional effect on different socio-economic groups, which is often needed to fully understand the impact of fuel tax measures. This paper presents results from a household level gasoline demand model which accommodates variation in price and income elasticity with increasing income as well as for different socio-economic characteristics in the USA. We find substantial heterogeneity in price and income elasticities based on demographic groupings and income groups. Results of a distributional analysis for a gasoline tax are also presented using the heterogeneous responses.

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Energy Specializations: Petroleum – Markets and Prices for Crude Oil and Products; Energy Modeling – Energy Data, Modeling, and Policy Analysis

JEL Codes: D12: Consumer Economics: Empirical Analysis, D11: Consumer Economics: Theory, C51: Model Construction and Estimation, Q41: Energy: Demand and Supply; Prices, Q42: Alternative Energy Sources, Q52: Pollution Control Adoption and Costs; Distributional Effects; Employment Effects

Keywords: Fuel price, elasticity, income elasticity, panel data, distributional effects

DOI: 10.5547/ISSN0195-6574-EJ-Vol31-No1-3

Published in Volume 31, Number 1 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.

 

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