This paper seeks to replicate and expand on ‘Gasoline Prices and Consumer Behavior’ (Li et al., 2014), analysing the effects of gasoline taxes compared with tax-exclusive gasoline prices on consumer behaviour. A review of the literature surrounding this topic reveals additional econometric models that can be of use. We implement some of these in our supplementary analysis, namely a ‘long differences’ model (Burke and Emerick, 2016).
In addition to this, we also expand on Li et al.’s three-year-lagged model, extending it to ten years to investigate further lagged response of gasoline price and tax changes on consumption. Besides finding that Li et al.’s analysis is robust, our analysis also finds that taxes have a more significant effect on consumption than tax-exclusive prices. Adding lags of both variables reduces the point estimates on the current tax and tax-exclusive variables, showing the persistence of tax changes on consumer behavior.
The ‘long differences’ model investigates whether agents' capabilities to adjust to changes are uniform over different time frames. We find a significant negative average decrease in consumption in the long run, and we further prove the asymmetric effect of long-run tax and price increases. This long-run negative effect of tax increases on gasoline consumption is larger and more significant than the short-run negative effect, demonstrating the adaptive capacity of consumers.