Monday, May 21, 2007
So I think Glen Whitman is focusing on the right issue here:
About a year ago, I posted a graph showing the affordability of gasoline as a percentage of household income, broken out by income quintile. The main point was that, although the price of gasoline has certainly risen dramatically in recent years, it still does not consume as much of our income as it did at its height in the early 1980s. The reason is that household income has grown since then, even for the poorest Americans.But the consumption pattern differs by age group, by income group, and by place of residence, all of which Whitman recognizes. No matter how you slice it, the share of your income you spend on travel now is much less than it was in the 1980s, and that's true no matter what your income group is. That also means, assuming no change in the taste for travel, that the average consumer has less elastic demand than before. That would also explain the willingness of state governments to tax gas more.
...But as someone pointed out in the comments, people don�t really want gasoline per se; what they want is travel. And this matters, because fuel economy has risen substantially over the time period in question, meaning that people can travel the same distance with fewer gallons. So I have now reconstructed the graph, using more recent data, on the assumption of 25,000 miles of travel rather than 1000 gallons of gas.
That lower elasticity also shows up in this more humorous story from John Whitehead:
The hotel provides liters of Evian Natural Spring Water in each hotel room for $6/liter. When I soberly arrived I thought this a ridiculous price. Odd that my demand changed after a night prowling Bourbon St [in New Orleans -- kb.] Upon awakening this morning I demanded the entire liter and just as advertised, "detox with evian," I felt much better and quite able to suffer through my 20 minute presentation (the audience suffered even more!).I suspect that price is a function of the fact that his hotel is on Bourbon Street. I see a possible student paper here: what is the gradient of prices on bottled water in hotel rooms as one moves further away from Bourbon Street?
Walking through four different airports today I notice this as well. The price of coffee rises 50% at the Portland Jetport before and after passing through security. An extra shot of espresso at the Caribou at the end of the A concourse in Detroit's airport is 60 cents versus 50 at my home Caribou; the cappuccino I normally order is 10% higher. None of this is of course surprising. So why doesn't it happen on the newspaper I want to buy before I get onto the plane, or the magazine?