There are policies that can reduce these costs. Taxes on gasoline, although designed primarily to raise revenue, also bring the social and private costs of driving closer together. For vehicles that use gasoline — still the vast majority of vehicles — gas taxes increase the costs of driving, and make drivers pay for at least a portion of the damage they impose on others. Drivers respond to these higher prices by driving less, reducing pollution and congestion. The level of the gas tax, however, varies much less by place than the damages from driving. The federal gas tax is the same regardless of where you are in the country, and California’s gas tax is the same in San Francisco as it is in Death Valley. That means the gas tax could be more or less effective from area to area.
Could a location-specific gasoline tax be more effective? In theory, allowing greater flexibility in gasoline taxes could better account for local differences in congestion and pollution costs, as well as local differences in the way drivers respond to higher prices. Targeting gasoline taxes to reflect local conditions may produce larger impacts on driving, provide greater societal benefits, and potentially increase political support for fuel taxes as citizens in heavily congested and polluted areas see the benefits of reductions in driving.
Measuring Differences in Driving Demand and Damages
Determining the effect of more targeted gasoline taxes requires a great deal of information about local travel behavior. Do drivers in rural and urban counties change their driving habits in response to higher or lower fuel prices in the same way? What effect does reducing vehicle travel on the roads of Manhattan, Kansas, have relative to Manhattan, New York? How much do environmental damages from local pollutants, like fine particulate matter or nitrogen oxide, vary across space?
The relationship between the demand for gasoline and the price of fuel makes the first question difficult to answer. In principle, a researcher could take advantage of the nation’s vast network of traffic sensors and measure how much the count of vehicles changes when fuel prices change. But the relationship between demand and prices runs both ways: increases in the price of fuel lead people to drive less, but changes in how much people drive change the price of fuel. An increase in driving can raise fuel consumption which can also cause prices to rise. As such, it can be difficult to determine the impact of increased fuel prices on driving.
The solution to this problem involves examining only those changes in gas prices that we know aren’t caused by changes in the demand for travel. I did this by looking at changes in gas prices caused by gasoline content regulations — the rules that govern the chemical composition of gasoline. These rules vary across places and the time of the year, with stricter regulations in place during the summer. These regulations change the price of fuel — because they change the costs of refining the fuel and limit what types of fuel can be sold in certain areas — but are not at all the result of changes in the demand for driving. Instead, they are what economists call a “price shock” — a change in price arising from outside the normal interplay of supply and demand. Examining the change in driving that occurs due to regulation-induced price shocks, then, gives us a better idea of how responsive drivers are to changing gas prices.
I combined data on these seasonal price shocks with over 770 million hourly observations from the network of traffic sensors in the U.S. between 2013 and 2016, and estimated how responsive drivers were to price changes. I separately estimated this responsiveness for 380 U.S. counties (about 12% of all counties nationwide), while also accounting for other factors, such as variations in driving caused by weather, economic conditions, the day of the week, and month of the year.
I found that, on average, traffic counts fall by 3.3% when gasoline prices increase by 10%. But a great deal of variation exists within that average, and the variation strongly correlates with urbanization. In more rural areas, like Elmira, New York (population 27,000), people do drive less when gas prices rise, but traffic counts fall much less than they do in the most urban areas, like New York City. On average, a 10% increase in gas prices leads to a 1% decrease in traffic counts in rural counties, but a 4% decrease in the most urbanized counties. This difference in response may arise because travelers in urban areas have more access to high-quality public transit and a built environment more amenable to walking or bicycling.