Identifying the elasticity of driving: Evidence from a gasoline price shock in California

There have been dramatic swings in retail gasoline prices over the past decade, along with reports in the media of consumers changing their driving habits - providing a unique opportunity to examine how consumers respond to changes in gasoline prices. This paper exploits a unique and extremely rich vehicle-level dataset of all new vehicles registered in California in 2001-2003 and then subsequently given a smog check in 2005-2009, a period of steady economic growth but rapidly increasing gasoline prices after 2005. The primary empirical result is a medium-run estimate of the elasticity of vehicle-miles-traveled with respect to gasoline price for new vehicles of − 0.22. There is evidence of considerable heterogeneity in this elasticity across buyer types, demographics, and geography. Surprisingly, the vehicle-level responsiveness is increasing with income, perhaps due to within-household switching of vehicles. The estimated elasticity has important implications for the effectiveness of price policies, such as increased gasoline taxes or a carbon policy, in reducing greenhouse gases. The heterogeneity in the elasticity underscores differing distributional and local air pollution benefits of policies that increase the price of gasoline.