Run Price Elasticities Research Articles

A Single-Equation Study of U. S. Petroleum Consumption: The Role of Model Specification

The price responsiveness of U.S. petroleum consumption began to attract a great deal of attention following the unexpected and substantial oil price increases of 1973-74. There have been a number of large, multi-equation econometric studies of U.S. energy demand since then which have focused primarily on estimating short run and long run price and income elasticities of individual energy resources (coal, oil, natural gas & electricity) for various consumer sectors (residential, industrial, commercial).' Following these early multi-equation studies there have been several single-equation studies of aggregate U.S. petroleum consumption [4; 3; 9; 5; 6]. These singleequation studies have found that U.S. demand for petroleum products can be quite price inelastic in the short run (estimates range from -0.04 to -0.08) but exhibits long lags of anywhere from 6 to 10 years that yield long run price elasticities ranging from -0.25 to -0.56. Income or GNP elasticities are usually found to be much higher (0.69 to 1.13) with the complete response often assumed to occur in the current period. Single-equation studies are often justified as efficient shortcuts, or reduced forms for identifying the central behavioral aspects of a particular market. The main issue addressed in this paper is the extent to which the existing empirical results from single-equation studies of aggregate U.S. petroleum consumption have been influenced by the researchers' choice of dynamic model specification. This question is relevant because the econometric methodology usually followed in such studies is to start with a relatively simple specification, such as a partial adjustment model or some kind of a distributed lag structure on price alone. This initial specification choice is rarely justified, except possibly to cite its previous success in similar work. Given that models which produce insignificant or perverse coefficient estimates are not usually publishable, the reported specification is almost certain to provide reasonable, statistically significant estimates with the signs. The primary diagnostic test of the chosen specification is the Durbin-Watson test statistic, or perhaps Durbin's h statistic in the presence of lagged dependent variables. When this test gives evidence of serial correlation in the residuals, the usual response is to correct for this by estimating a first or second-order autoregressive model (AR(1) or AR(2)). Should this easilyimplemented correction not solve the problem, there is a tendency to chalk it up to some kind 1. An excellent survey of these results may be found in Bohi [2, 159].

Gambling as a rational addiction

This paper applies the Becker-Murphy model of rational addiction to gambling and tests the hypotheses of the model empirically using data on pari-mutuel betting at horse tracks from 1950 through 1987. Gambling demand equations which explicitly account for the fact that gambling is an addictive behavior are derived from the Becker-Murphy theoretical model of rational addictive behavior. The effectiveness of changing the takeout rate, the price variable, on gambling behavior, is examined within the addictive framework. Using instrumental variables techniques, gambling demand equations are estimated, with the results supporting the hypothesis of model of rational addictive behavior. In particular, significant inter-temporal linkages are found in gambling consumption, confirming the assumption that gambling is addictive. Future events are found to have a significant impact on current consumption, implying that individuals are not behaving myopically. The long run price elasticities of demand implied by the estimates obtained for the addictive demand equation for handle per attendee is approximately −0.68, significantly larger (by approximately a third) than those obtained from demand equations estimated under the hypothesis of nonaddictive behavior (with an elasticity of −0.454). This reaffirms that the takeout rate is an effective policy instrument for state governments as they set the price of gambling.

Assessing the impact of economic reform in medical services in the Netherlands

Price and income elasticities for medical services are estimated with annual data of the Netherlands. A zero labour productivity growth in medical services is assumed which allows a simple specification and avoids use of a questionable price deflator. Long run income and price elasticities are resp. around 1.25 and –0.15. Other variables (collective finance of medical services, collective burden of the economy and the population by age) have a negligible impact. With the currently suggested reform in medical services complete realization of the planned 1% annual rate of growth is unlikely. Substantial cost reduction and improved allocation, however, seem feasible.

The price elasticity of export demand for US agricultural commodities reconsidered

In this paper, the question of whether the export demand for three agricultural commodities (corn, soybeans and wheat) in the United States has structurally changed over the 1971 to 1986 period is examined. The export demand specification considered in the analysis is one that has been used extensively in the empirical literature. The stability question is explored. The results suggest that both the export demand for corn and the export demand for soybeans destabilized over the sample period. When corrected for this instability, the estimated long run price elasticities do not allow for a definitive conclusion with regard to the question of whether the demand for exports of agricultural commodities is now elastic. This means that agricultural policy alternatives become obfuscated.

State Taxation of the Iron Ore Industry in Western Australia

AbstractAs a contribution to the debate over the taxation of the extractive industries, this article provides estimates of the short run and long run price elasticities of supply for iron ore in Western Australia. Using these estimates, an increase of 1 per cent in the average royalty rate on iron ore is shown to result in a short run decline of 0.61 per cent in the output of iron ore, and a long run decline of 4.36 per cent.It is concluded that raising tax revenue by ad valorem royalties on iron ore leads to a substantial distortion of output, especially after accounting for indirect effects.

A derived demand model of regional highway diesel fuel use

A regional, econometric model of heavy truck diesel fuel use is derived based on the theory of production. Input demand functions for new trucks and diesel fuel are specified and estimated. A simple, logistic scrappage model is estimated and used to estimate total heavy truck stocks and diesel-engine heavy truck stocks. Demand equations based on the AIDS almost ideal demand system flexible form cost function are estimated for new heavy truck demand and regional highway diesel fuel demand. New heavy truck demand is found to be elastic with respect to GNP, inelastic with respect to own price, and appears extremely sensitive to short term GNP trends. The short run price elasticity of diesel fuel demand is found to be very small.

DISTRIBUTED LAGS AND BARLEY ACREAGE RESPONSE ANALYSIS

The need to incorporate production response lags in agricultural supply models is established, and two such lags are considered: the familiar adaptive expectations geometric lag, and a more general polynomial lag. These distributed lag supply response models are applied to Australian barley data for the period 1946‐47 to 1968‐69. A number of statistical problems associated with the adaptive expectations model are discussed, and in particular it is concluded that lags both in the formation of price expectations and in acreage adjustment should be considered when using geometric lag models. While the polynomial lag model does not provide useful results in the present study, its simplicity and flexibility suggest it may be useful in other studies requiring distributed lag models. The short run and long run price elasticity of barley supply estimates are compared with Gruen et al. [14] supply elasticities for the other major rural commodities, from which it appears that barley has a higher short run elasticity but a lower long run elasticity than wheat, wool and meat.