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Do Americans Consume Too Little Natural Gas? An Empirical Test of Marginal Cost Pricing

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  • Lucas W. Davis
  • Erich Muehlegger

Abstract

This paper measures the extent to which prices exceed marginal costs in the U.S. natural gas distribution market during the period 1991-2007. We find large departures from marginal cost pricing in all 50 states, with residential and commercial customers facing average markups of over 40%. Based on conservative estimates of the price elasticity of demand these distortions impose hundreds of millions of dollars of annual welfare loss. Moreover, current price schedules are an important pre-existing distortion which should be taken into account when evaluating carbon taxes and other policies aimed at addressing external costs.

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  • Lucas W. Davis & Erich Muehlegger, 2010. "Do Americans Consume Too Little Natural Gas? An Empirical Test of Marginal Cost Pricing," NBER Working Papers 15885, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:15885
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    More about this item

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L50 - Industrial Organization - - Regulation and Industrial Policy - - - General
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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