A decomposition of the household adjustment to gasoline price change

Designing policy which targets gasoline consumption requires an understanding of the consumer response to changes in the price of gasoline. We decompose the elasticity of gasoline demand into four components, and use seven years of micro-level data to estimate the household response to a change in the price of gasoline. As do previous studies, we find gasoline demand to be fairly inelastic. However, our decomposition reveals that inelastic demand should not be taken to suggest that households do not significantly alter behavior when prices change at the pump. A rise in the price of gas leads to a moderate decrease in vehicle miles traveled. However this decrease in vehicle miles traveled is accompanied by a decrease in household composite fuel efficiency which mitigates the reduction in gasoline consumption. The results of our decomposition are consistent with a story in which the predominant behavioral response to a price rise is a reduction in high fuel efficient vehicle miles traveled.