The following is part two of a guest essay from Charles Komanoff, an economist and environmental activist in New York City. For more on taxing carbon fuels, go to http://www.komanoff.net/fossil/.
For part one of this essay, go here.
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Now another question arises: so what? At the end of the day, what's the practical difference between the actual price-elasticity of 20% and the popular conception of zero elasticity if the effect of higher gas prices is only going to be offset by economic growth?
I offer two answers. Combined, they just might hold a solution to our era's twin overriding crises: the oil-dependence crisis and the climate crisis.
The first answer is that as we extend our time horizon, gasoline's price-elasticity, or price sensitivity to break free of the jargon, gets larger -- a lot larger. Going out several years or more, individuals have greater scope to take actions that economize on gasoline. They can junk the gas-guzzler, or at least not replace it with another one when the old one gives out. They might calculate the dollar tradeoffs between density (high rents but less need to drive) and sprawl (the reverse) and pick up stakes for a less car-dependent area. They may gravitate toward job opportunities closer to home. And they can make more durable commitments to behavioral changes that reduce the need to drive, like forming a carpool or buying a roadworthy bicycle or selling the far-away vacation home.
The consensus of economists who have studied gasoline use is that the "long-term" price elasticity -- the effect on demand eight or ten years hence -- is between 50% and 70%, or roughly triple the 20% "short-term" elasticity I'm seeing in my spreadsheet. That is, over the long haul, rises in the price of gas are likely to dampen demand several times as much as the modest changes we've seen in the past year or two.
