10/02/2013

Switching to a hybrid

What will it take for me to switch to a hybrid or electric car ask Richard Read in the article “If Gas Goes Up $1, What Does it Mean for Auto Sales?”  Research suggest no amount of price hike will increase the rate at which consumers switch to hybrids and electric cars. “If encouraging them to do so is a goal of the auto industry, the government, or some other authority, Experian's data suggests that it's going to take something other than gas taxes to get the ball rolling”

Right now with the average gas price in Utah at $3.523 per gallon, I have no intention of making the switch to a more fuel efficient vehicle. Gasoline is an inelastic good, meaning if the price per gallon reaches $4.50, I would still have to drive my car to work, school, supermarket, etc... The price of gasoline would have to be north of $5.00 a gallon for me to drastically adjust my driving habits or consider purchasing a hybrid vehicle; unfortunately experts believe it is only a matter of time before federal tax on gasoline increases which hasn't happened in 20 years.

With that being said, rising gas prices do effect my spending habits.  As “Gas Prices: How Real Is the Damage?”  explains that each $.01 increase in a gallon of gas redirects $1 billion of consumer spending away from other goods over the course of the year.  For example here in St. George we live a short 90 minute drive from Las Vegas. Many of us drive down there to go shopping at the many retail outlets and malls because the selection and prices are better than here in southern Utah. The higher gasoline prices have made us spend less on purchases in order to balance our budget.

6 comments:

JRich said...

The price of fuel has long been a driving force in the economy. This post identifies gasoline as having an inelastic demand. As explained in the article, for gasoline to be inelastic a change in price will cause little change in the quantity demanded. This comment caused me to ask the question, "how inelastic is the quantity demanded of gasoline?" To be perfectly inelastic, the quantity of gasoline demanded and supplied would be unaffected by a change in price. Essentially, if gasoline were perfectly inelastic the quantity demanded would be fixed. Visually, the demand curve for a perfectly inelastic good would have an undefined slope, or perfectly vertical line. As the article mentioned, gasoline prices would have to significantly change before users would change their demand. Based on this information I would project that gasoline is not perfectly inelastic. Visually, the demand for gasoline would a fairly steep negative slope.

Dr. Tufte said...

Michael Simpson: 88/100 (read your sentences through more carefully).
JRich: 50/50

Agreed. Demand for gas is inelastic, in both the short and long run.

Gasoline demand is a derived demand: we only want gas because we have gas-powered cars. Having a gas-powered car makes our demand for gasoline inelastic.

That's not going to change until there are viable alternatives to gas-powered cars. Right now, the economics suggests that this a long way off: decades, perhaps centuries.

Subsidies are not the answer for most of the problems in replacing gas-powered cars (they might be for certain aspects like providing charging stations).

And, there is an urban myth that the oil industry is heavily subsidized. In the U.S., at least, it's the other way around: the oil industry is huge cash cow for government tax collectors.

MJ said...

I found this particular blog post intriguing because fuel efficiency has a high priority regarding my transportation needs.
I also agree that demand for gas is inelastic. Regardless of the price per gallon and your choice in vehicle, consumers will continue to purchase gasoline. In fact, according to the article, "Payoff for Efficient Cars Takes Years" (NY Times), in some cases it takes over a decade to save money with hybrid vehicles over conventional engine cars. Research shows that gas would have to reach around $8 per gallon before consumers would receive a payoff within the six year average ownership of a vehicle due to the expensive up-front sticker price of these fuel efficient models.
With that being said, I believe in many cases hybrid or electric vehicle owners make that buying choice from an environmental standpoint rather than a penny saving perspective. Therefore, when the price of gasoline rises, people are better off buying a less expensive vehicle with average gas mileage rather than switching engine types.


For more information regarding the article I referenced, use this link: http://www.nytimes.com/2012/04/05/business/energy-environment/for-hybrid-and-electric-cars-to-pay-off-owners-must-wait.html?pagewanted=all&_r=0

Vader said...

Wouldn’t demand for electric cars be varied for different locations? For example, locations where substitutes for transportation are readily available would decrease the demand for electric cars and fuel. Substitutes, found in big cities, such as subways, trolley cars, and well-developed bus systems would directly impact the demand and price for fuel and the demand for electric cars. We most likely wouldn’t see any switching to hybrids in these markets as often or as quickly as we would in other areas where demand for electric cars would be higher due to lack of public transportation or substitutes for driving a fuel-driven vehicle.

In my own situation, I have been seriously considering a hybrid for my next vehicle. There is no good substitute for my fuel-driven vehicle where I live and the distance of my commute to work costs me significantly in fuel. I may be more likely to switch to a hybrid sooner because of my situation and location than someone in a different location and circumstance. Fuel may only have to go up a dollar for individuals in my area to begin making the switch.

Paulo said...

Mike mentioned that gasoline prices would have to be more than $5 in order for him to change his spending habits. It appears that he has identified his price range where his marginal cost would exceed his marginal benefit while filling up his vehicle on a tank of gasoline. Due to the demand curve for gasoline being somewhat inelastic, Mike would be one of the few that would reduce their consumption of gasoline at this price. On a different note, however, he might be aware that such a move in price would reduce his consumer surplus and give it to the producer. This, of course, would happen to all consumers when considering the market demand curve of demand. Increasing price would supply surplus of gas and dead weight loss. How much of each depends on the price elasticity of the supply curve of gasoline. The supply curve of gasoline should be more elastic than the demand of gasoline. This entails suppliers being affected at a larger rate than consumers when price changes. Questions to consider further could be “What is the equilibrium of gasoline?” and “Are we currently near the equilibrium price for gasoline?”

Dave Tufte said...

MJ: fix that link or I'll take off points!

MJ: 50/50
Vader: 47/50 (varied)
Paulo: 44/50 (the second sentence does not clearly reference the first one, "demand curve of demand").

MJ: I agree. I think a contributing factor is people's ignorance about how to properly frame financial decisions. The "money saving" advice they get about stuff like hybrid cars wouldn't pass the smell test in an undergraduate finance class.

Vader: Your point is fine, but you've missed the ManEc. What you're saying is that elasticities of hybrid car demand are location dependent.

Paulo: ooh ... economically this comment is ... umm ... a mess. Gas isn't "somewhat" inelastic; it's one of the most inelastic demands out there. No, if Mike reduced consumption, that would not shift producer surplus to the seller. Also, you seem to be forgetting that just because Mike's consumer surplus (from gas) is down, that doesn't mean Mike is worse off (because you have to give up cash to get surplus). Saying "Increasing price would supply surplus of gas and dead weight loss" sounds like you just made it up. Supply curves never "should be" anything. They just are. Also, there is no "equilibrium of gasoline". And, the only way to be "near the equilibrium price of gasoline" is to have some market interference from the government that takes us away from equilibrium. Which interference is that?