Economists view higher gasoline taxes as one solution to reducing gasoline consumption and thus air pollution, greenhouse gas emissions, and reliance on oil, while at the same time providing revenue to the government for highway repair and construction. While in general, higher gasoline taxes can reduce the amount of vehicle miles traveled (VMT) and gasoline consumed, households vary in their ability to reduce their use of gasoline and mitigate the negative welfare impacts of higher gasoline prices, note Resources for the Future (RFF) post-doc researcher Elisheba Spiller and her colleagues in a pair of discussion papers exploring two different outcomes of higher gasoline taxes.
RFF is a nonprofit and nonpartisan organization that conducts independent research—rooted primarily in economics and other social sciences—on environmental, energy, natural resource and environmental health issues.
The first paper, “Does the Substitutability of Public Transit Affect Commuters’ Response to Gasoline Price Changes?” demonstrates that gasoline taxes can help make public transit investments more effective in metropolitan areas by leading individuals to choose public transit more often.
The second, “The Heterogeneous Effects of Gasoline Taxes: Why Where We Live Matters,” reveals that individuals outside of urban areas are less able to adjust to high gasoline prices, and thus are hurt the most by gasoline taxes. As an example, the authors find that a 10-cent increase in gasoline prices would have a 30% larger negative welfare effect on rural households versus their urban counterparts.
In the first paper, post-doctoral researcher Elisheba Spiller and her colleagues determine the extent to which gasoline price elasticity is affected by the availability of public transportation—a substitute for driving. To quantify the substitutability of public transportation, they predict individuals’ commute times by private and public transit conditional upon their observable characteristics and create a measure of substitutability between the two modes based on transit times.
This, in turn, allows them to measure the effect of public transportation on commuters’ sensitivity to gasoline prices.
The existing literature on the relationship between gasoline prices and gasoline consumption or driving consistently finds somewhat inelastic price elasticities of demand. However, many of these papers do not consider the role other transportation options may play in consumers’ decisions. This study analyzes the price elasticity of urban households when controlling for the substitutability of public transit. This substitutability is estimated as the ratio between the commute times an individual is predicted to face when traveling by private versus public transit. These predicted commute times incorporate observable attributes from detailed Census information to develop more accurate predictions and control for sorting.
The analysis supports the theory that commuters facing a better public transit system will be more responsive to changes in gasoline prices by reducing their yearly miles traveled in a private vehicle, thereby reducing their gasoline consumption. The statistical significance of the interaction term between the gasoline price and Time Ratio indicates that public transportation infrastructure has an effect on individuals’ choice of yearly miles traveled beyond the change induced by the gasoline price alone. In the theory of the model, this decrease is due to a substitution to public transit for work commutes, as these trips cannot be quickly or easily altered to avoid higher gasoline prices.
The significance of the interaction between gasoline price and the quality of the public transit system has important policy implications: a gasoline tax would have greater efficacy in reducing miles driven and gasoline consumed when public transportation is improved and thus provides a more viable transit option for workers. These findings illustrate the importance of effective use of government stimulus money, such as that included in the 2009 American Recovery and Reinvestment Act. Allocating money for public transit projects could make a gasoline tax, promoted for its benefits in reducing consumption, more effective. Our analysis indicates that the quality of public transit plays a role in commuters’ sensitivity to gasoline prices, and greater work on this issue could provide important insights into the value of constructing convenient public transit systems.—Spiller et al.
In the second paper, Spiller and colleague Heather Stephens use disaggregated confidential household data to estimate spatial variation in household-level gasoline price elasticities and the welfare effects of gasoline taxes. They find that the mean elasticity of demand for gasoline is -0.67, but with tremendous variation across location and income.
We examine several policy scenarios that the government could implement to mitigate some of these negative welfare impacts. We find that by recycling the tax revenue based on the characteristics associated with the relative welfare effects from higher gasoline prices, the government can help those most affected by rising gasoline prices and could reduce the welfare impact on average by 53 percent. Additionally, unlike a flat revenue recycling policy, this program would still generate positive government revenues from the tax.—Spiller and Stephens
Elisheba Spiller, Heather Stephens, Christopher Timmins, and Allison Smith (2012) Does the Substitutability of Public Transit Affect Commuters’ Response to Gasoline Price Changes?
Elisheba Spiller and Heather Stephens (2012) The Heterogeneous Effects of Gasoline Taxes; Why Where We Live Matters