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The response of gasoline demand and sales to price involves
different delays and a worse-before-better scenario.
I: if prices
rise, gas demand is initially inelastic. People can cut down
on discretionary trips somewhat, but most still have to drive
to work, school, and the supermarket. As their mileage decreases,
their demand for gasoline decreases and their expenses go down.
As people realize prices are likely to stay high they may organize
carpools or switch to public transportation, if it is available.
Again cutting down vehicle mileage, demand and gasoline expenditures.
:
Over time high prices induce other responses. First, consumers
(and the auto companies) wait to see if prices will stay high
enough for long enough to justify buying (a delay of a year
or more) or designing (a delay of several years) more efficient
cars. Even when more efficient cars are available, the vast
majority are older models which will only be replaced when they
wear out (a delay of say, 10 years). If prices stay high, eventually
the density of settlement patterns will increase as people abandon
the suburbs and move closer to their jobs. Altogether, the total
delay in the link between price and demand for gasoline is significantly
more than a decade. As the stock of cars on the road is gradually
replaced with more efficient cars, and as (perhaps) mass transit
routes are designed and built, the demand for gasoline would
fall substantially – long term demand is quite elastic.
While the initial impact is higher gasoline expenditures, in
the long run, demand adjustments more than offset the price
increase and expenditures fall. From the point of view of the
consumer, this is a worse-before-better situation.
The time delays and the tradeoffs they create help explain why
it may prove very difficult to raise gasoline taxes. Although
the long-term benefits outweigh the short-run costs, even in
net present value terms, they only begin to accrue after many
years. Government officials judge the short-run costs to be
politically unacceptable. The public is unwilling to sacrifice
a little today for larger benefits tomorrow.
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©
2002 CCS Incite Inc.