Tuesday, April 22, 2008

Inelastic demand for gasoline or driving?

This story from the LA Times quotes a couple of people who seem surprised that there is less outrage about the price of gas than they might expect. The lack of outrage doesn't seem so surprising when you account for the elasticity of demand for gas. As an automobile dominated society, people have little recourse when the price of gas goes up except to pay the higher cost. I suspect that most people realize that they made some choices about what they drive and where they drive that have put them in the bind of forking over a lot of money to fill up the tank. I do wonder just how price sensitive people are, and how price sensitive they are expected to be, considering that high fuel economy cars have never been popular. It's not like fuel efficient cars are hard to get. They are often cheaper to buy, certainly cheaper to own and maintain, and quite well equipped.

The Toyota Prius is an obvious example of high demand for a fuel efficient car, but there are many confounding factors to understanding it's popularity. First, there was the ridiculous HOV exemption in California. Second, and probably most important, Prius' look unique. This allows people to show their greenness to the world. The Honda Civic hybrid has never been as popular as the Prius, and I suspect the reason is strangers don't know you're saving the world without looking carefully. I also suspect that Honda inadvertently set the stage for hybrid's to look weird with their unpopular early effort. The failure of the Insight probably led the company to think that refitting their existing models was the way to go, while Toyota thought they were competing with the Insight, so they made it look strange.

Perhaps the electric Think City will become the next big thing if the demand for driving remains in elastic.
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